Plus, some thoughts on equities and inflation.
Venezuela remains at the summit of my monthly list of the world’s top inflators—those countries in which I measure the annual rates of inflation to exceed 25 percent per year. The country is still firmly in the grip of hyperinflation, with an annual inflation rate of 2,436 percent by my measure. That sky-high rate shows little sign of abating. Indeed, from November 12 until December 17, Venezuela registered 34 consecutive days in which the monthly inflation rate exceeded 50 percent.
Faced with hyperinflation, Venezuelans prefer the greenback over the bolívar. As a result, I estimate that 80 percent of all transactions in Venezuela take place in U.S. dollars. Since the country has spontaneously “dollarized,” President Nicolás Maduro has begun to seriously consider official dollarization, something I recommended way back in 1995 when I was President Rafael Caldera’s adviser. If only Venezuela had dollarized then, Venezuelans would never have suffered from the plague of hyperinflation.
Zimbabwe, a country that has suffered two episodes of hyperinflation in the past 13 years, holds down the second spot in my rogues’ gallery of inflators. I measure its annual inflation rate at 343 percent per year.
The third spot on “Hanke’s Inflation Dashboard” belongs to Lebanon, a country that entered an episode of hyperinflation in July. At present, I measure Lebanon’s annual inflation rate at 286 percent. While that’s bad news, the good news is that elements in the Lebanese parliament are considering the installation of a currency-board system. That would require the Lebanese pound, which has lost 75 percent of its value against the greenback this year, to be fully convertible and trade at a fixed exchange rate with the U.S. dollar. The fixed rate would be credible because the pound would be fully backed by dollar reserves.
Such a currency-board system in Lebanon would end Lebanon’s currency crisis and smash inflation immediately. I know. I designed and assisted in the installation of Bulgaria’s currency board in 1997, when I was President Petar Stoyanov’s chief adviser. When we installed the currency board in July 1997, the annual inflation rate was 1,230 percent. By the end of 1998, it had plunged to 1.6 percent. Its GDP swung from negative 10.1 percent to positive 3.5 percent; its fiscal balance went from negative 12.7 percent to positive 1.0 percent; and its foreign reserves surged from $864 million to $3.1 billion. Also, at the time the currency board was installed, Bulgaria’s debt-to-GDP ratio was 147.5 percent, while today it is 18.6 percent, the second lowest in the European Union.
Beginning with Mauritius in 1849, there have been over 70 currency boards established to date. Today, there are 14 currency boards. Perhaps the most notable is Hong Kong’s. It is as solid as a rock and has withstood Hong Kong’s political troubles of the past few years without problems. Indeed, the Hong Kong dollar is just a clone of the greenback. Not surprisingly, there has never been a currency board that has failed. That includes the North Russian currency board that was designed by John Maynard Keynes and installed in 1918 in the midst of the Russian Civil War.
Rounding out the top five on the dashboard are two countries suffering with inflation rates that exceed 200 percent per year: Sudan at 231 percent and Syria at 202 percent.
This brings me to a question that is often posed: Are equities a good hedge against the ravages of inflation? That question is being raised more frequently in the United States, a country that isn’t even close to an entry on “Hanke’s Inflation Dashboard,” where a minimum rate of 25 percent per year is required for admission. Indeed, the U.S. consumer price index (CPI) is only tipping the scales at 1.2 percent per year.
But, as Milton Friedman correctly told us back in 1963: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” If we look at the growth in the U.S. money supply measured by Divisia M4, a precise metric developed by William A. “Bill” Barnett and reported monthly by the Center for Financial Stability in New York, we see that it is surging at a stunning 27.7 percent per year. That’s one of the highest rates on record. And, it’s a rate that means more inflation is around the corner.
Given the ominous inflation outlook, people are asking me whether stocks will provide protection against the anticipated uptick in inflation that’s already baked in the cake. For the answer, I had to look no further than the research of my colleague John A. “Jack” Tatom, who is a fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, which I founded and co-direct. In an oft-cited review article, Jack Tatom found that “inflation tends to raise investors’ required real rate of return on equity and to lower real capital income for tax-related reasons. As a result, there is a strong negative correlation between inflation and real and nominal stock prices.” Tatom’s findings make clear that, contrary to popular opinion, equities are not a good hedge against inflation.
So, at present, where might one safely go for an inflation hedge? Gold, which is the king of bad-news goods, remains a safe harbor. In addition, residential real estate looks like a safe bet. Don’t forget that “bricks in mortar” retain their value when paper monies lose their purchasing power.