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Kansas City Fed chief: Hyperinflation could happen here

I started working for Larry Burkett in 1990, about the time he was beginning work on a book called The Coming Economic Earthquake. Larry wasn't an economist. He was just an extraordinarily insightful, common-sense guy who had the uncanny ability to see around corners.

Although some criticized The Coming Economic Earthquake (I think unfairly) as alarmist and economically unsophisticated, Larry's point was simply this: a government that takes on obligations it can't pay for will eventually face a time of reckoning.

Today, who can deny that this is true? Just read the newspapers. Greece. Dubai. California.

I suppose what made The Coming Economic Earthquake controversial is that Larry argued that even the strongest nation with the largest economy — i.e., the United States of America — was not immune from the principle that too much debt and too many unfunded obligations will ultimately lead to financial upheaval.

If you remember the book, or recall hearing Larry talk about these issues on the radio, a speech delivered last week by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, will seem eerily familiar.

Congressional Budget Office (CBO) projections have the federal debt reaching an unsustainable level of two to five times our total national income within the next 50 years, which leads us to an inescapable conclusion — U.S. fiscal policy must focus on reducing this debt buildup and its consequences....

[I]t strikes me that we have only three options. First...: We can knock on the central bank’s door and request or demand that it "print" money to buy the swelling amounts of government debt. Second..: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level....

Throughout history, there are many examples of severe fiscal strains leading to major inflation. It seems inevitable that a government turns to [the first option; it calls on] its central bank to bridge budget shortfalls, with the result being too-rapid money creation and eventually, not immediately, high inflation....

German hyperinflation [in the 1920s] is one classic and often-cited example, and with good reason. When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a 500,000 Mark German note. He had been in Germany during its hyperinflation and told me that in 1921, the note would have bought a house. In 1923, it would not even buy a loaf of bread. He said, "I want you to have this note as a reminder. Your duty is to protect the value of the currency." That note is framed and hanging in my office....

Many say it could never happen here in the U.S.... [But] the unthinkable becomes possible when the economy is under severe stress....

[T]he fiscal projections for the United States are so stunning that, one way or another, reform will occur. Fiscal policy is on an unsustainable course. The U.S. government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis.

Back in early 1990s, some of our elected leaders read Larry's book and took heed. I know because I accompanied Larry on a trip to Washington (made at the invitation of a Congressman) where he spoke to many members of the U.S. House about the direction of the nation's finances. For a time, in the mid- to late-1990s, the situation improved. Spending increases were slowed and some of the national debt was retired.

Today, the government's economic picture is far worse than when Larry wrote the Earthquake book. Let's hope and pray that today's leaders will listen to Mr. Hoenig, and to the hundreds of thousands of citizens who are rising up to say, "Enough is enough."

The full text of Thomas Hoenig's address to the Peterson-Pew Commission on Budget Reform Policy Forum is here (PDF).

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