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Tom Pattantyus: My life as a 12-year-old billionaire, Part 2 of 2

A World View

Posted: August 23, 2009 8:51 p.m.
Updated: August 24, 2009 4:55 a.m.
 

In Part 1, published in Sunday's opinion section, I described how I became a Hungarian billionaire at the age of 12 due to record-setting hyper-inflation in post-World War II Hungary, where I was born and partly raised, because currency wasn't worth the paper on which it was printed.

Now, I will pick up the story, and show the similarities in what happened then and how history may soon repeat itself this time in the United States.

Inflation, in general, is a monetary phenomenon often the result of large government debt, or as in case of post-WW II Europe, a sudden need to increase public expenditures to rebuild. Inflation hit most of the war-ravaged countries. In fact, in France and Italy it lasted longer than in Hungary.

The big difference between their inflation and the Hungarian type of hyper-inflation is that the latter was artificially fueled to record-breaking levels to hasten the introduction of a new statist social order.

Some economists argue that after the World War I, "the hyper-inflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists (Nazis) to gain power," according to the Concise Encyclopedia of Economics.

The Communist economic czar may also have learned that lesson. The secret of the "Communist miracle" ending the hyper-inflation in Hungary was that the state only had to terminate the limitless money-printing. All the other inflationary causes were manageable.

The higher rate of inflation is the most cruel tax levied on all classes: The most vulnerable ones, who suffer the most, are the poor people who neither have any reserve wealth nor the material means to seek shelter in inflation-proof areas or investments.

A high rate of inflation is also detrimental to normal businesses because of the implicit insecurity it creates and the various hedges people invest in (gold, foreign securities, and so forth) instead of their own national businesses.

It appears that a necessary condition of any inflation is excessive public spending and/or ever-increasing budget deficits.

What can we conclude from all of this?

Neither the start of inflation nor the halting of inflation is accidental. Inflation is a "man-caused" disaster. In some cases, like the one in post-WWII Hungary, inflation and hyper-inflation can be used to political advantage. It is actually a tax, but one that is not readily recognized as a tax, so it is easy for the politicians to hide and claim themselves blameless.

Hyper-inflation can be used to level the playing field by wiping out wealth, thus making everyone equally poor. Add a few more zeros to the big number above, and what does it matter?

And how does this apply to what's happening now in America? What makes me think history may soon repeat itself?

Recent increases in government expenditures, like the first (Bush) bailout package, the stimulus package, the 2010 budget and the proposed energy and health care bills, have increased or will increase the U.S. debts and obligations to foreign countries by trillions of dollars.

The huge sums, to my uninformed eyes, can only be delivered by printing money at a high rate or increasing the interest rate or both. That process is known as inflation.

Presently, other forces are also acting on the national economy such as rising unemployment, a depressed housing market, reduced utilization of national production capacity and reduced spending by the private sector and individuals.

The result of that process is deflation, causing prices to drop. According to the latest Bureau of Labor statistics, the Consumer Price Index began decreasing in March 2009 at .038 percent, and by July it had decreased to a rate of 2.10 percent.

There are seven indicators leading to hyper-inflation:
1. Creation of paper money;
2. Easy availability of credit;
3. Bursting of the credit bubble;
4. Sharp contraction of available credit;
5. Deflation of asset prices;
6. Rapid printing of money out of thin air;
7. Acceleration of money into the market.

We have seen the first six. Now, if the balance shifts more toward inflation by some unforeseen external effect, the inflation rate and acceleration of money into the market may increase to the point where it will feed on itself in a self-perpetuating fashion, causing a German-type, or, heaven forbid, a Hungarian-type of hyper-inflation.

The best ways to protect one's assets before such a scenario unfolds are to invest in tangible assets such as property and precious metals including silver and gold, and consider converting assets to currency more stable than the U.S. dollar.

Tom Pattantyus is a retired electrical engineer and independent contractor. E-mail him at tom.pattantyus@sbcglobal.net. His column reflects his own views and not necessarily those of The Signal.

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