Stagflation or something more?

World War I ended in 1918. Of course they didn't call it that back then. It was simply known as "The Great War." To call it World War I would carry the ominous connotation that there would be more world wars. Then World War II occurred, and the formerly Great War was deemed to be not so great in comparison, so the name had to be changed.

Similarly, the economic upheaval that began in 1929 was named the Great Depression, a name that has lasted to this day. So far. But given the fiscal and monetary policies of the past few months, I am beginning to wonder. We could be on the road to what may be called "The Greater Depression."

At first the economists said the current economic downturn would be V-shaped. A brief spike downward, followed quickly by a recovery. Then they said it would be U-shaped. It looks like it might stay down for a while before it recovers. Now some are saying it could be L-shaped. it goes down and stays down, for a long, long time. They mention Japan, 1989 as an example. The 1990's were Japan's lost decade, a recession that lasted more than ten years. To put this in perspective, in 1989 the Nikkei average topped out at almost 39,000. Last week the Nikkei closed below 8,000. If you bought Japan at the top, you've lost 80% of your money, and nineteen years is a long time to be on the wrong side of a trade.

The real problem is that America's current situation isn't as good as Japan was in 1989, or America in 1929. Those countries were creditor nations, and we are a debtor now. Our manufacturing base is mostly gone, outsourced to countries where the labor is cheaper. The problem is that we have overspent, we have no savings to invest, and we are loaded with debt. So our government's solution is to spend more to keep the economy going.

There is a certain logic that getting drunk is a way to fight a hangover, but in the long run that doesn't work. But it hasn't stopped our government from committing $8.5 trillion (again, so far) that it doesn't have in bailouts and rescues. I used to think we were going down the road to 1970's style stagflation, a nasty mix of unemployment with high inflation. Now I am beginning to wonder is something more sinister is lurking. The dreaded hyperinflation, as practiced in Weimar Germany, and several years ago in Argentina.

A case in point is Zimbabwe, whose annual inflation rate is now more than 200 million per cent. The latest sign of the coming Apocalypse is that The Reserve Bank of Zimbabwe just commended the world's central bankers (including the US and UK) on their policies. This is the text:

Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander....As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.

So, if it's working this well in Zimbabwe, the rest of the world may as well try it. Hyperinflation - it's not just for banana republic any more!