 All righty. So our topic this afternoon is hyperinflation. And I'm excited to talk about this topic, perhaps even hyper to talk about this topic. Because I have certain natural, I think, supervillain tendencies. So I think about things like, if I wanted to destroy an economy, how would I do it? Austrian economics is very useful for this. So I have two plans. So one is to engage in widespread central socialism, very, very good way to destroy the economy. But I'm also not just going to have these destructive supervillain tendencies, but I'm also very lazy. Centrally planning an entire economy feels like a lot of work. I'd rather just mess up one piece of the economy and have the whole thing fall apart. That's what hyperinflation does for me. So it's a very useful topic for anybody that shares these supervillain tendencies. So let's talk a little bit about hyperinflation. I want to start by looking a little bit at the case of Venezuela being one of the most recent cases we've experienced. So the Venezuelan hyperinflation, instead of started around November of 2016. Now there are varying estimates of the degree of price increases that were experienced in Venezuela over the years following that. But the official estimates from the Banco Central de Venezuela say that in 2016, there was a 274% increase in prices. 2017, 863% increase in prices. 2018, a 130,060% increase in prices. But it got better in 2019 when it was just a 9,586% increase in prices. And naturally, I'm going to try to be at least a little bit of a good Austrian, we should take these numbers with a grain of salt. But if the central bank of Venezuela tells me prices are going up by 130,000%, they're probably going up pretty fast. The exact number might be off, but they're going up really, really fast. So I think we can call this a hyperinflation. Now there are other estimates out there, as I mentioned. The Venezuelan National Assembly, for example, they didn't really trust these numbers. They came up with their own. They suggested, if you look at the 2018-2019 period, that the peak was a 2.6 million percent in rate of price inflation. There are also other estimates out there as well. At the very least, prices went up very, very quickly in this time period in Venezuela. But it's not just price increases. And in fact, I'd suggest it's not the worst part about hyperinflation. We can deal with high prices. Just add zeros to your currency. And that's something we know that central banks like to do. Brought along. I think that at this point, Venezuelan dollars are mostly held by economics professors, or the primary source of demand for these notes. So I bought these back when the Venezuelan hyperinflation was going on. I got this nice set. So I, in fact, have $180 trillion in my hands right here. I paid $15 for them on eBay. And I was surprised to learn when they came in the mail that included these very nice plastic sleeves, which I would guess are more valuable in money terms than what's inside. It's kind of amazing. So we can always add zeros. All right. Anyway, so it's not that prices are high. That's the problem. It also creates disruptions in the way we have to behave. So for example, in 2017, looking at Venezuela again, Bloomberg reported that some Venezuelans had turned to video games to earn money, selling in-game currency or characters in RuneScape for real currency. I admit, RuneScape has a special place in my heart. One of the many great things the Mises Institute has introduced me to was RuneScape. When I was a fellow here, there was one day I was just walking through the bookstore. And one of the employees, I think it was a son of one of the full-time people here, was playing RuneScape on the computer because he didn't have any other work to do in the library. And I said, oh, what is that? So that's how I found RuneScape. It was right here in the library of the Mises Institute. And in the evenings, whenever I'd go home from my office, I spent probably too much time on that. But anyway, so people would play RuneScape, would level characters up, and then sell them to other players for real money. Because after all, it's not making much. Just a few dollars per day. But better to make a few dollars than far more bolivares, which are losing value very quickly. So that's what people would do. Also, another adjustment that we saw in Venezuela around this time, and this is still before things got the worst from 2017. This is before 2018, when things were really, really bad. In Christmas season of 2017, according to La Región, some stores stopped posting prices. Prices were changing so quickly, they wouldn't even put price tags on things. So you'd just have to ask, what is the price at this point of the day? Because it might be different if you come back in a few hours. Imagine trying to make any kind of economic plan at all over more than a few minutes in this type of structure. So I want to then demonstrate that hyperinflation does crazy things to prices, but it does even crazier things to the economy as a whole. Now, one of the first points I'm going to make as we now move into the theory of hyperinflation is that hyperinflation is very difficult to define with any kind of precision. But just to draw some lines, I would not, at this point, say that what the US is currently experiencing, the price increases we've seen that have been significant over the past year, I would not yet call this hyperinflation. I'm not seeing people having to do crazy things to adjust to what's happening with prices. Mostly we complain about gas being expensive, which we do anyway. We aren't seeing these enormous adjustments like we've seen in Venezuela. So we're not quite there at this point. So then how can we define hyperinflation? So being a good Austrian, let's go and look at what do Mises, what did Rothbard say about giving me definitions that I might possibly use? So hyperinflation itself is going to be difficult. So let's just look at the definition of inflation. So I start by opening Mises. Turns out Mises uses different definitions of inflation depending on the context. And he explains to us why. So here is a passage from theory of money and credit, chapter 13, section 7. I like to read Mises online, so page numbers don't help me. It's page 153. How am I going to find that online? But chapter 13, section 7, that's easy to find the way things are paginated on Mises.org. He says, observant readers may perhaps be struck by the fact that in this book, no precise definition is given of the terms inflation and deflation or restriction or contraction, that they are, in fact, hardly employed at all. And then only in places where nothing in particular depends much upon their precision. So Mises is very clear that he's not attaching a precise definition to inflation up to that point in the book, but he goes on. And he says, in theoretical investigation, there's only one meaning that can rationally be attached to the expression inflation. An increase in the quantity of money in the broader sense of the term that is not offset by a corresponding increase in the need for money, again, in the broad sense, so that a fall in the objective exchange value of money must occur. So summing this up, it's an increase in the supply of money that's beyond any increase in the demand for money, so the purchasing power of money must fall. Then he goes on to say, it follows that either inflation or deflation, being the opposite, is constantly going on for a situation which the objective exchange value of money did not alter, could hardly ever exist for very long. But he doesn't particularly find this useful in most discussions about inflation for this reason, which he tells us, so quoting again. So taking this definition, he says, it would be a ridiculous pedantry to attempt to provide an economist's contribution to the controversy as to whether this in this country or other inflation has occurred since 1914 by saying, excuse me, there has probably been inflation throughout the whole world since 1896, although on a small scale. In politics, the question of degree is sometimes the whole point. But once the economist has acknowledged that it's not entirely nonsensical to use the expressions inflation and deflation to indicate such variations in the quantity of money as evoke big changes in the objective exchange value of money, he must renounce the employment of these expressions in pure theory. For the point at which a change in the exchange ratio begins to deserve to be called big is a question for political judgment, not for scientific investigation. So he's very clear, he steers away from this term inflation, because he doesn't think it's necessarily scientifically useful, it's not really gonna help us. He says something similar, so okay, theory of money and credit, he's very intentional in explaining why he doesn't try to use this term much. A human action, he takes a similar stance in chapter 17, section six, he says the notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power, and that sound money should be neutral in stable and purchasing power. From this point of view, the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, so a very similar definition to what he gave in theory of money and credit, and the term deflation, cash-induced changes resulting in a rise in purchasing power. But then he goes on, he recognizes even at the point that he's writing here around the middle of the 1900s, that already the way these terms had been used and by the public have started to shift. And he says the semantic revolution, which is one of the characteristic features of our day, also perhaps even more so our day now, 70 years later, has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in supply of money, but it's inexorable consequences, the tendency toward a rise or fall in commodity prices and wage rates. So he's already recognizing there's this shift in the definition, the way that it's commonly used to talk about price increases as being inflation. Now he gives another definition though, and it's a much shorter definition, and I think this was originally at the talk of our call correctly, but it was collected, it's called inflation and unworkable fiscal policy, it's in the collection of economic freedom and interventionism, which he says inflation, an increase in money and credit. This is slightly different than the definition he had previously given, even the one that he thought was best. Slightly different between theory of money and credit and this one from this essay. So I turned to Rothbard then. What definition then does Rothbard use? Well, so I flipped open man economy in state, chapter 12, section 11a, and there Rothbard tells us, the process of issuing money beyond any increase in the stock of specie may be called inflation. So he's imagining we're on a commodity based standard, if we're increasing the money supply beyond any increase in the availability of gold say, then that would be inflation. Then I checked the history of banking, chapter two close to the end of that chapter, where he says inflation, that is a persistent rise in overall prices, a dramatically different definition, two works by the same author. So at this point, having looked at two major Austrian authors, Mises and Rothbard, probably the most significant the institute I would suggest, I now have four definitions to work from. So Mises gives us that first definition that's increase in the supply of money that exceeds the increase in the demand for money, so you get a drop in purchasing power. This is a second definition, just broadly an increase in money and credit. Rothbard's first definition, the process of issuing money beyond any increase in the stock of specie, and Rothbard's second definition, which I think fits the popular one, a persistent rise in overall prices. I would suggest that if Mises and Rothbard, the two of them come up total with four different definitions, it's a hard thing to define. It's not going to be particularly precise, so there's going to be some vagueness involved. So one thing when we talk about hyperinflation specifically, I would say that Mises's point that he made that I quoted earlier about big changes in purchasing power being what people are looking at becomes all the more relevant. We wouldn't call it hyperinflation if prices go up 2% a year, typically. Well, maybe we might, but certainly nobody else would. 2% a year, that's not big. 100% a year, maybe, 130,000%, definitely. So where exactly is the line that's going to be unclear? So where do we have this very high rate of price inflation if we want to use the price-based term? So I'm going to just say, let's all take a deep breath. It's not going to be totally clear what the definition is. Now we can move on with life. All right, at the very least, we can agree that things like what Weimar Germany experienced between the World Wars, that was hyperinflation. What Zimbabwe experienced that led to these $100 trillion bills that I bought on eBay, that was a hyperinflation. What Venezuela experienced starting around 2016, that was a hyperinflation. So these particular cases are pretty obvious, right? We're not going to find much debate about that because we're not going to be looking at hyperinflation from an empirical standpoint. It's not going to be that important whether a particular country experienced a hyperinflation or not. We're going to think of it from a theoretical standpoint. What happens in a hyperinflation leads to these types of things happening. So now there is an arbitrary standard out there which I only may as well adopt it. It doesn't make that much difference. Is that hyperinflation occurs and there's a 50% increase in some reasonably broad price index over the course of a single month. As we're talking about very, very large increases in prices happening very, very quickly. It's what we have in mind. So as we're now moving further into the theory of hyperinflation, acknowledging there's some vagueness involved here, one thing we need to do is actually develop the theory of the demand for money a little bit further. It's really the demand for money that's going to play a huge role. Now we often start by talking about the money supply when we tell stories about hyperinflation and that is the way things work in time. Money supply has to do something first. But it's really the reactions on the demand side that are going to determine a lot of the dynamics that we see. So let's look at the demand side. So what is it that determines our demand for money holding? So in the mystery of banking, Rothbard describes five different factors that affect the demand for money. The first of these is the supply of goods and services in the economy. So if a very prosperous economy with lots of stuff out there, then I'm going to know that I want to buy lots of stuff, lots of stuff available, so I need to have fairly large cash balances to be able to buy that stuff. So more stuff we have out there, the greater the supply of goods and services, the greater demand for money holding we would find. Another factor will be the frequency of payment. So how often do we receive our income? So I know when I was in grad school, I don't know what it is, universities love to torture grad students along any possible line they can. So you don't get paid a whole lot. Based on the number of hours I worked, it wasn't bad. But you don't get paid a whole lot. And where I went to graduate school at Ohio State, we got paid once a month. You can bet I held on to that paycheck as long as I possibly could. I held a large percentage of my cash holdings for a very long time because it had to last me 30, 31 days. You're always very thankful for February. Didn't have to last quite as long. Oh, good, my car broke down, but it's February, I'm good. It's a few fewer days that I have to make it through. It's kind of amazing. But now, I'm part of the upper class or something and then I get paid twice a month. Which means I don't cling as much to those paychecks. I spend it all by the 15th, that's fine. I get my other paycheck on the 15th and I can spend it all then by the end of the month. So while it is probably strictly true that I do have more money sitting in my bank account than I did before, relative to my income, I certainly hold less cash than I did previously. And so how frequently we're paid? Pay people daily, they're not going to hold onto money very long, pay people yearly, they're going to hold onto it for quite a long time and hold large cash balances. I also points to clearing systems. If you have a developed economy with very good clearing systems, then we tend to see the banking system in particular hold less money proper. That's if we have this ability for us to cancel debts against each other, we don't have to have actual cash sitting in vaults to move from one bank to another. And then the last two are really the most relevant for us when we're considering hyperinflation. That is confidence in the money. Will the money continue to be used as money? Will it continue to be generally acceptable as a medium of exchange? The more confidence we have in the money, the more we're willing to hold. On the other hand, if I think people aren't going to accept it anymore, I'm going to move out of whatever was previously used as money and move towards something else. And finally, our inflationary and deflationary expectations using this price-based definition. So if I expect that prices are going to go up significantly in the future, then what that means is that my cash holdings are going to lose value very quickly. I don't want to hold onto an asset that's losing value. So I'll hold less of it. I'll minimize my cash holdings in that inflationary environment. On the other hand, if I'm expecting a deflationary environment where prices are going to fall, then I'm going to be willing to hold more cash. It's going to gain value over time. So I'm going to be holding larger amounts of cash. So having filled all that in, let's get into the three phases of hyperinflation that Mises describes. So the first phase is we have an increase in the supply of money, paired with deflationary expectations, and therefore at least a slight increase in the demand for money. Now usually the way this works historically is that this new money comes into being to help fund the government. The government's running significant deficits. It can't tax enough or whether politically, it can't tax enough or practically, it can't tax enough to cover its expenses. So we have to make up the difference. We make it up by creating additional money. Historically this is the way this is tended to work. So we have this increase in the supply of money. And we know from what Dr. Klein said in her lecture earlier this week, when new money comes in, it comes in at a specific point in the economy. It's driving up then certain prices. So the first reaction that we will often see people have is we see these prices go up. We go, that's weird. Everything else is looking fine. This handful of goods suddenly became much more expensive. Well, sometimes weird things happen in the economy. I don't know everything that's affecting every price. So I'm just gonna wait. These prices will probably come back down to normal because everything else looks normal. So we have this expectation that overall prices are actually going to drop a little bit from this unusually high level driven by it looks like just a few goods to start. So as a result we see some increase in the demand for holding money. This in turn is going to dampen the effect that that increase in the money supply has on the loss of the purchasing power of money. It's the first stage, things don't look too bad. Then we get to the second stage where we have a continuing increase in supply of money. Often this is because the government hasn't solved its fiscal issues. It's continuing to spend more that it can bring in in taxes. And it is now also facing the problem and the things that it's spending money on are getting much more expensive. So if we're going to continue buying the same stuff we're going to need to create more money to buy that same stuff. So we have an increase typically in the rate of money supply growth. But now this becomes paired with inflationary expectations. That people realize that this increase in prices is not temporary. It's going to continue. That's what happens then. Prices continue rising in part because we have an increase in the supply of money happening. And in part because people don't want to hold that money like they used to. They understand it's a depreciating asset. You don't want to hold on to this thing anymore than you have to. So better to buy now before prices get worse. And this especially happens with one of the big triggers is that we see these high prices. It's no longer concentrated in just a small set of goods. These higher prices have started to spread throughout the rest of the economy. And that's often a trigger psychologically for people to realize, come to their senses and see what is actually happening and to adjust their cash balances accordingly. So at this point we have an increase in prices that is actually faster than you would expect just from looking at the increase in supply of money since people are also trying to get rid of the money they're holding. Then we have the final phase. It's the most exciting phase for the supervillain. A flight to real values. This is where people totally lose confidence in the money. We don't want to hold it anymore. We realize it is losing value extremely quickly. So I would rather hold literally anything else than this money that is losing values. Immediately as soon as you get it, you run out to the store, buy whatever happens to be on the shelf if anything is there. And take that home because it's better to have a toaster that is gaining in monetary value over time than to have money that's buying less and less over time. So at this point, we can effectively say the demand for money is basically zero. Nobody wants to hold it anymore. But then we have a serious problem. If nobody wants to hold money, who is going to accept money? Nobody. What do we call a money that is not generally acceptable as a medium exchange? It's not money anymore, right? The economy just demonetized. So we lost the monetary basis. So what does that mean? Well, there are alternatives to having a monetary system. We could have a barter system if you know it's not particularly efficient. We could have an autarkic system where each person just produces for their own consumption, which is even worse. And so if you want to destroy the economy, I highly recommend hyperinflation. Simple to do, just increase the money supply, keep increasing it. If that's not working, increase it faster. Eventually people will realize and you're going to succeed at totally destroying the economy. However, I say this, I hope that the people watching on YouTube know that I'm joking. I'm not actually a super villain. I'm way too lazy for that. I'm even too lazy to try hyperinflating the currency. Nor am I in favor of destroying economies because I kind of like people, at least in theory. I want people to do well. Okay. All right, so anyway, but one thing that I think is important to point out is that this process is not inevitable. It's not like as soon as we see the Federal Reserve or the Central Bank of Venezuela or wherever start creating more money quickly, but oh no, hyperinflation must happen at some point. It doesn't have to. They can stop increasing the money supply. This is an option. It's a story is told, which I later found out this is actually not strictly true, or perhaps I should say strictly factual though I think I like to say there's truth in this fictional story. The story is told of Ludwig von Mises during the Austrian inflation, which was happening at the same time as the German inflation. We don't hear much about the Austrian one. There's a good reason for that. And so the way the story goes is that Mises was called up by one of the government officials. Oh, we're facing this serious inflationary problem. We'd like you to help us solve it. And he says, okay, well I want you to meet me outside of the printing office at midnight. The printing office is in charge of printing all of this currency. It's okay. So as they meet at midnight, it's crazy economist having these weird requests, but he seems like a smart guy. So we'll go ahead and meet him. So they meet outside the printing presses running in the background in the printing office. And Mises says to the official there, he says, well, you hear that sound. Make it stop. And then the Austrian government takes his advice and goes on and stops the hyperinflation. So we don't talk about the German hyperinflation. The Austrian hyperinflation, the same way we do the German one. So I did some research because I love this story. It's a great story, right? Yeah, Mises is a real hero here. This is the kind of thing that monetary theorists can do to save the world or at least Austria. Well, I found out the story isn't strictly true, but lots of elements are. So Mises apparently, when he was giving a talk, I got this information Richard Ebling wrote a piece called The Great Austrian Inflation for the Foundation for Economic Education. So he reports that Mises was giving a talk and the story about walking past the printing office, hearing the printers running in the background, that part is true, except that Mises was walking along with some people from the German Reichsbank. This is prior to the Nazis taking over as they were facing these problems as well. So they were walking by and he heard that. It's also true that Mises did play a significant role in the end of the Austrian hyperinflation as he played a significant role in reforming the central bank of Austria as they passed a new law in 1925 to re-establish the gold standard, which ended up ending their inflation. So it was not nearly as severe as North and Germany. It's not nearly as good a story. Mises heard the printer printing press and then later on, three years later, he helped rewrite this. It's not very exciting. So keep that story going. It's a great fable, even if it's not strictly true. So what are the consequences of hyperinflation? We've gotten through the process. We've increased the money supply and then eventually people losing confidence in that money and giving it up. And we can stop this by stopping the increase in the money supply potentially. So I would suggest that by itself, just the price level is not really a problem. And like if I go to Costa Rica, like all of the numbers on price tags are, I'm not sure off the top of my head, but several times higher than the price tags I see in the US, because one Costa Rican colon is not the same as $1 in terms of its value. Having high numbers on price tags is not a big problem. Instead what I would suggest is the bigger problem is redistribution and discoordination. The first, the redistribution process, this is something that Dr. Klein mentioned, counterfeiters creating additional money, what does this do? It's not good for the economy, but it's good for the counterfeiter. And the exact same thing happens, though in an extreme way during a hyperinflation, those that receive the money first can benefit substantially. So you have this huge redistribution that happens and that creates huge changes in the way that people think about the economy, the way that people think about their ability to plan their lives, and the way people think about the society in which they live. So all of these are going to be significant social problems we're going to have to face. Secondly, we have the discoordination problem, which arises from the fact that rapidly increasing prices really messes with our ability to use economic calculation accurately. So imagine there's going to be a fairly mild case. So I suppose that you're a small business person and you have a very simple process. You say you buy $100 worth of product and you do some work on this, then you can sell a product worth $120, say. You have what looks like a $20 profit. Well, now as long as the value of the money is fairly stable over that time, then you can accurately say I created value and I can perhaps grow my business over time. On the other hand, what happens if instead say that overall prices have increased by 30%? So you paid $100 for whatever inputs you needed. It takes you time to transform that into whatever the product is worth 120. I just made $20. And it's not that that $20 is worth less than before. It's that full $120 can't actually buy the inputs you started with anymore. They cost 130. So you actually are, you can't grow your business, even though you feel like you're profitable, you can't grow your business anymore. So we end up with this really serious issue because if we have significant price inflation paired with that time gap that always exists with any production process, it can really mess up our ability to use economic calculation. So as a result, we end up destroying that basis that allows us to use the division of labor in our modern economy. Without economic calculation, operating according to the division of labor is exceptionally difficult. So eliminating the social division of labor, now we're going to spread poverty. That's a problem to me. A couple of extra zeros on a price, not a huge deal. Spreading poverty because people can't actually engage in the social division of labor effectively to be productive. That's a serious issue. But I'd also add to this, it's not just these economic problems, but hyperinflation is actually an attack on our own personalities. And this is a point that was made by Dr. Salerno, which I'll actually have to thank two people in the room, Dr. Salerno for writing this paper, and also Dr. Neumann, Dr. Jonathan Neumann pointed this paper out to me. Not intentionally, it wasn't to me personally, just mentioned it on Facebook while I was preparing this lecture, look at all. Yes, I remember hearing Dr. Salerno talk about that a few years ago, I should talk about this, because it's so good. So the paper was called Hyperinflation in the Destruction of Human Personality. Great title, wonderful title. So what does Dr. Salerno tell us? He tells us that the private property order in the social division of labor encouraged the development of certain personality traits, what I think we might call habits of thought and action. Things that are successful in this kind of system, in a market-based system. So things like having a goal orientation. You're going to be more successful if you make goals, if we live in a market-based system. Or thinking about our own self-interest, but not selfishly. We also have to have an other oriented interest. I'm only going to succeed in a market economy if I can serve other people well. So my self-interest is tied up with understanding what other people want and serving other people, which is an awesome thing at a market-based economy. So we have this combination of self-interest balanced by having to have an other orientation as well. Thrift, this was something that a few years ago, actually over the course of several years, I was trying to read Marx's Capital. I don't recommend it. It's not necessarily the best use of your time. But one thing that he understood about the capitalist system is that we don't like waste. We don't just waste resources in a capitalist system. Instead, we have good incentives to be thrifty, to save resources, to use everything we have in a productive fashion. And this includes treating time as a scarce resource. We don't just waste time. I'm either going to use it effectively for leisure or effectively for productions that I am making my leisure more, all the more effective at improving my well-being. And so we treat time as a scarce resource. We have a future orientation. So our goals, many of them, are oriented toward the future. So we have to think about the future and plan for the future. All of these are things that become personality traits that are encouraged by a market-based system of private property and the social division of labor. So what does hyperinflation do? It destroys the social division of labor. It destroys the private property order as we basically end up with random stuff during this flight to real values. And as a result, discourages the development of all these habits. It makes us much more animalistic. We don't have that future orientation. We're just trying to survive day to day, rather than being able to plan for a better tomorrow. I would also suggest the property in the social division of labor are central to the external expression of our place, of our plans and of our preferences. We tie our identities in part to our employment. I am a professor. My wife is an author. When people ask my kids, what do you want to be when you grow up? They give answers like architect, slash YouTuber. Animal researcher, slash YouTuber. Teacher. He hasn't figured out slash YouTuber yet. I'm very thankful my five-year-old hasn't quite hit that point. And then my three and a half-year-old cowgirl. Good plan, right? So we talk about like, how are we going to fit into the social division of labor? That's part of who we are. I would also add that those of us who have time for leisure have part of our identity tied up in leisure time. And the way we use that leisure time, whether it be spiritual pursuits, hobbies, fandoms, but all of these tend to be tied in some way to the use of property. A religious congregation needs a place to meet. Even if nothing else, right? My own religious tradition is fairly simple in our worship. We still need a meeting house. We have to meet somewhere. Or a gardener, right? Needs seeds and soil. A trekker nowadays needs a Paramount Plus subscription. A powerlifter needs a bar, a bench, and plates. A D&D player needs dice, books, dice, and more dice. Okay, so now I'm starting to identify who plays D&D. Good to know, good to know, right? But all of these are tied up with the notions of property and the social division of labor. So hyperinflation doesn't just mess up the economy, it messes up who we are and our ability to express who we are. I suggest that it's not an accident that the more prosperous an economy is, the more diversity we see amongst people's interests. Because it's possible to express diversity and interests when we are a prosperous economy. It's not possible to do that when we're all on the brink of poverty or then we can all express our desire to survive not much else. So, another point that Dr. Slarnow makes in this paper is that economic calculation allows us to envision our futures. He says, knowing what my net worth is, allows me to know what my retirement's going to look like. Am I going to be spending it on the golf course? Personally, I wouldn't, I don't like the heap. But am I going to be spending it in leisure or doing something I enjoy? Or am I going to have to have a part-time job to make ends meet? Having a sensible measure of my net worth, being able to see what my net worth is allows me to make these plans. By messing up economic calculation, hyperinflation makes it impossible for us to really make good plans about the future. So then, hyperinflation attacks aspects of our personality by compromising the division of labor and destroying economic calculation. And as hyperinflation makes our economic life more difficult, the great irony is it makes economic life consume more of our time at attention as we've lost productivity. So we have to spend all of our time trying to survive. I occasionally liken my lectures to give a garden update. I think I may be one of the few people on earth who gardens ironically at this point because I'm not very good at it. So I mostly do it so I can tell stories about how bad I am at it. So this year, I think I have time for this. So this year, we decided we were going to do a three sisters bed. So the idea of the three sisters bed, it comes from American Indian tradition. First you plant corn, and then the corn stalks provide a structure for you to then plant pole beans that would want to climb up that structure. Pretty cool, right? So we have this symbiosis going on. And then you also plant squash, which has these nice, wide, low leaves that then helps to protect the ground and the moisture in the ground to preserve it from the heat of the sun. So we have this nice reinforcement, kind of a division of labor of sorts right amongst the plants you put in your garden. So I decided, yeah, let's try it this year. I bought some corn seeds. I put them in the ground at the time I was supposed to, according to the company I bought the seeds from. And so I don't have a very big bed. It's like four feet by four feet. So I'm not wasting a lot of our yard on my very poor gardening skills. But I put in a room here for 16s, four by four, right? Four by four, 16 stalks of corn will go in there. I wait, corn is kind of slow to come out of the ground. It takes about two weeks. So I wait two weeks, and I think I have three or four stalks have come up. Not a very good success rate. Maybe the weather hasn't been good, so I try to water well, that kind of thing. Wait another week, no better. Three to four stalks came up. This isn't gonna work, right? They're not even going to pollinate each other. So I pull them all out, I say, okay, I have a trellis. So I failed there, but I at least have a trellis. Pole beans can climb the trellis. So I put out the trellis, I plant my pole beans right next to it, and then I have to go away for a week as my family took a vacation. I come back, and I have rabbits that live in my backyard. I no longer have beans, but I still have rabbits that live in my backyard. Okay, well maybe they'll recover. I can still, fortunately, zucchini, it's almost impossible to screw up zucchini. I have managed to get some zucchini that was the squash that I chose. So what happens then if we destroy the division of labor to somebody like me? I can have my ironic garden now, or all it really does is give me stories from Isis U. If we destroy the division of labor, I'm no longer a professor. I need to think about how I'm going to actually feed my family because driving around the corner at all days is no longer possible. I need to spend a lot of time actually getting good at gardening. I like gardening as a leisure activity that I don't have to worry about, but suddenly now I have to spend a lot of attention, a lot of time on economic pursuits that I didn't previously have to do. And that is one of the great ironies of hyperinflation. As it makes economic life more miserable, it makes it consume our lives all the more. And then I'd also add to this political problems. So what happens when you take a group of people and you destroy their identities? Well, suddenly they are ripe for someone to come along and provide them with a new identity. So we have strong authoritarian leaders that can come in and suggest that, well, you know, you could always serve the purposes of the state of your people and so on. Dr. Salerno goes into great detail of how this process played a role in the rise of Hitler in Germany after their hyperinflation. Or I like to also look at the, this was a great quote from a very important scholar. The quote says, people who have no hope are easy to control. The scholar was Gamork, a character in The Neverending Story. So, yeah, it's a great movie, it's great stuff. Not great effects, but you know, it was the 80s, early 80s of that. All right, so anyway, so we get political problems as well arising as now we have room for tyrants to take over and people are happy to receive some kind of purpose to their lives. So let's get to talking a little bit more about Venezuela and their experience. So how did things start in Venezuela? They had a budget deficit in 2016 of about 11% of their GDP. This is big, not enormous. Come forward two years, it was nearly 30%. Venezuela was depending heavily upon oil revenues, the price of oil fell. Now they still have all these promises they've made in terms of social services and the like. We can't just cut back government spending because our oil isn't selling very well. So we print the difference. We have this enormous increase in the money supply in order to fund the government, which is the typical thing we see happen in hyperinflations. So what actually happens then to the money supply? This is again based on the official numbers from the Banco Central de Venezuela. There are measures of M2. If you look in December 2015, they say there were 40 million bolivares in existence at that point in time. Come forward to December 2016, it was 104 million, so an increase about two and a half times. It's more than a doubling of the money supply over that year. During that time, prices increased basically in line with what was happening with the money supply. Two and a half time increase in the money supply, two and a half time increase in prices. Then from December 2016 to 2017, we went from 104 million bolivares to 1.3 billion bolivares, an increase about 13 times. Interestingly, according to the official numbers, prices are lagging behind this. So prices are going up a bit, but not as much as you'd expect, right? Just from the money supply alone, stage one hyperinflation. People are saying, okay, this is weird. We're gonna hold back a bit, see what happens. From December 2017 to December 2018, we went from 1.3 billion to 804 billion bolivares. 620 times increase in the money supply by the official numbers from the Banco Central de Venezuela. At this point, prices are starting to run ahead. People have realized, right? Prices are not gonna come back down. They're gonna keep rising. We need to get rid of the money we're holding. And then come from December 18 to December 2019, we go from 804 billion bolivares to 20 points, I'm sorry, 40.6 trillion bolivarius, an increase about 50 times. So things are calming down. Instead of the money supply growing by 620 times, it's only growing by 50 times, and prices are still running ahead. People are still expecting things are going to continue to get worse. Come forward then, from 2019 to 2020, we go from 40.6 trillion to 563 trillion bolivari. It's an increase about 14 times. So things are calming down. They're taking that kind of misadvice or slowing down the printing prices even if we're not stopping them. But the prices are still running ahead. People are still expecting things to get worse. And then come forward to December of 2021, so fairly recently, and we have, we went from 563 trillion to 4.1 billion bolivaris, an increase about seven times or so. I might say trillion to billion, how can you say it's an increase of seven times? They rebased, they cut off a number of zeros from their currency. So that actually would be equivalent to 4.1 quadrillion bolivaris the year before. It's still just a seven times increase. So things are slowing down there. Now another thing we see in Venezuela are some of the standard tricks. The governments try to fix this problem. So what do we do? Region domination is a very common thing. So like I just mentioned, let's cut off a few zeros. It's a very common thing you'll see governments do when they're experiencing this hyperinflation. I guess the idea is if people see zeros, they think things are hyperinflating. If they don't see those zeros, they stop thinking that or something like that. And so their original region nomination actually happened long before this hyperinflationary episode. It actually goes all the way back to 2008. So what I have here, I don't know if you can see the number on that, it's a two. This is dos bolivaris from 2007. When I first started teaching, I had a money in banking class and a student came up to me and said, oh, I've been to Venezuela and we talked about different currencies. I said, oh, so here's a dos bolivaris note. And I said, oh, that's really cool. And I tried to hand it back to him. He said, oh, it's not worth that much. Go ahead and keep it. This was in 2007. Somebody asked me, what is this worth now? Well, they rebased. So these dos bolivaris would be worth, you'd have to divide it by a thousand the year following when this was printed. So you add a couple of zeros and put a decimal place in front of this. Then come forward 10 years after that, they converted from, converted from the, that was the bolivar fuerte, it was when they cut off three zeros. Then they converted to the bolivar subadano where they cut off another five zeros. So divide this first by a thousand, then by a hundred thousand. And then they just recently in 2021 converted to the bolivar de Tietal where it cuts off another six zeros then divide by another million. So what is this worth? I'm gonna round to zero. I'm not gonna go past six or seven decimal places of zeros. This is no longer worth anything in terms of money. Instead, it's worth a great thing in terms of the propremises you. So this is a standard trick. Let's cut off a bunch of zeros and then issue new money with fewer zeros on it. This doesn't work. This is what matters is the increase in the money supply not just how many zeros are there, not the level so much. Another trick that they tried which is also not uncommon is withdrawal limits. So this was introduced late in 2016. So very early in the hyperinflationary episode, they started placing limits on how much people are allowed to withdraw from their bank accounts each day. So recently, I forget exactly the date on this, the equivalent in American currency is that people can basically withdraw about 20 cents a day from their bank accounts at this point. It's a really interesting article that I read about this and I found out physical currency in Venezuela only accounts for about 5% of their M2 money supply. So by comparison in the US, which we think of as a fairly digitized economy, it's 10% of our M2 is physical currency. So they're more digitized in Venezuela than here and a big part of that is that they literally cannot get physical currency out of the bank. Instead, most of what happens is that people line up outside the bank at the beginning of the day, we'll make the withdrawal and then use the physical currency to pay transit fares because the transit system, at least at the time I read this article, couldn't handle digital payments. So it's kind of an amazing thing. You also have political turmoil, the ongoing presidential crisis where we have the New National Assembly led by Guaido against Maduro and the two of them fighting over who has controlled the country and the international community, they're being a significant disagreement as to who exactly is considered to be in charge of Venezuela at this point. Even have at the moment, I believe the EU doesn't actually recognize either of these governments as legitimate. So nobody is in charge of Venezuela according to the EU. So political turmoil as well. Unemployment, estimates from Armando, Pernia of Banca de Negosia suggests that the unemployment rate in Venezuela, we don't have official numbers, so we have to estimate these things is around 35% as of late 2019, which then I suggest is probably tied to significant emigration we've seen out of Venezuela. Venezuela has a population of just under 30 million people and has seen just under five million people leave the country over the past few years. It's an enormous portion of the country just leaving. Well, one in six people roughly gone, amazing. Now, what is happening in Venezuela? How do we deal with this? Well, one thing that we do often see in modern times is that rather than devolving to barter, we start adopting other currencies. Monetary systems are helpful in having an economy work, so we switch to something else and we do see that happening in Venezuela. In 2019, that same author, Armando Pernia, Banca de Negosia reported that 90 to 95% of companies in the private sector had paid bonuses denominated in foreign currencies. So almost all private companies are paying at least partially in a currency other than Bolivares. Even Maduro himself has been very clear that the Bolivar isn't always will be the official currency, he accepts. This is a good escape valve that strengthens the economy to allow dollars and euros to be used in parts of it. We even have Venezuelan banks as of January of last year, 2021, offering dollar-denominated debit cards. And also Al Jazeera recently reported that as of March, 2021, 56% of transactions in Venezuela were carried out in dollars or in euros. Just given up on the local currency, over half of transactions moved right to other currencies. So I think if I'm going to sum up here, which I should, negative two minutes remaining, money is important. And if money goes wrong in an economy, everything else is going to go wrong too. So we need to get that right. Thank you.