Euro vs. the Dollar

My graduate professor of international economics, George N. Halm, used to illustrate the phenomenon of runaway inflation (hyperinflation) by telling what life was like when he was a teenager in Germany after World War I.

Professor Halm's mother, a widow, lived on a government pension. Each category of pension was paid on a different day of the week, with widows coming on Friday. By Friday, the value of the pension, which was set on Monday, had dropped out of sight. Even so, he hopped on his bicycle, collected his mother's pension at the pension office and raced around town buying as many household necessities as he could before the value of the money dropped too much farther. The operative principal was to spend the money before it disappeared.

How could shopkeepers know how much to charge? They created an informal price index system. For example, the price of a haircut was indexed to the price of breakfast rolls each morning.

Clearly it was impossible to live that way, and understandably Germans remain paranoid about inflation.

Still, they overdo it. A modest amount of inflation allows price adjustments without triggering deflation. Because of the way the Euro zone was established, the interest rate for the zone is set by the European Central Bank, which is essentially the German Central Bank. They are about to raise the interest rate in the Euro Zone to make sure there is zero inflation in Germany, despite the high probability that this will destroy economic activity in several smaller countries.

It will also place added pressure on the US economy by, among other things, driving up the international price of oil.