Hungary Marches Down Hyperinflation Path; What About the US?

As I watch political events in Hungary, I cannot help but think Hungary is on a path towards hyperinflation.

Please consider Der Spiegel report 'Democracy Is Being Trampled On in Hungary' and see if you agree.

The European Commission on Tuesday announced that it was combing through both the new constitution, which took effect on Jan. 1, and a new law pertaining to Hungary's central bank, the Magyar Nemzeti Bank (MNB), to determine if they adhere to European Union treaties. Furthermore, the Commission said on Tuesday that the EU and the International Monetary Fund (IMF) have not yet decided whether to resume negotiations over much-needed financial assistance for Budapest.

It didn't take long for markets to react. Yields on 10-year Hungarian bonds spiked to 10.7 percent on Wednesday, continuing a sharp rise since the talks over a €20 billion ($26 billion) EU/IMF aid package for Hungary collapsed in December. The country's currency, the forint, plunged to an all-time low against the euro on Wednesday morning. Both Standard & Poor's and Moody's slashed Hungary's credit rating to junk status in the weeks before Christmas. Hungary needs to refinance debt worth €4.8 billion in the coming months.

The aid talks were broken off due to concerns about new laws regulating the central bank, pushed through by Orban's center-right Fidesz party, which controls two-thirds of the seats in parliament. Of particular concern are provisions which allow the government to appoint the bank's vice presidents, thus infringing on MNB's independence. Furthermore, the law increases the number of vice presidents from two to three, allowing Orban to appoint one immediately.

In addition, the committee which sets monetary policy has been expanded, with new members to be appointed by the Fidesz-run government.

Weakens Legal Protections

Potentially more damaging, however, is the fact that the new constitution grants parliament the right to merge the central bank with a financial oversight authority, the head of which would then be appointed by the government. Were the Orban government to take advantage of the provision, it would mean that the supposedly independent central bank president would have to answer to an Orban-appointed superior.

Hungarian Protests over Constitutional Changes

The Spiegel headline "Democracy Is Being Trampled On in Hungary" is accurate. For another opinion please consider Hungary set for protests over constitution.

Supporters of the opposition green-liberal party LMP protest in Budapest on 23 December. Photograph: Zsolt Szigetvary/EPA

Thousands of people were expected to protest in Budapest on Monday night after the government made sweeping changes to the Hungarian constitution that opposition figures say are an attack on democracy.

The demonstration near the city's opera house comes amid rising anger with the ruling Fidesz party, which critics – including the US secretary of state, Hillary Clinton – fear is eroding individual liberties and media freedom while undermining the independence of the judiciary and other state institutions.

Although Fidesz won enough votes in the last elections to command a super-majority, polls suggest its support has plunged over the last year and a half. Peter Kreko, research director at the Budapest-based thinktank, the Political Capital Institute, said: "In May 2010, 45% of voters chose Fidesz. But polls now show just 20% of people still support the party. There is a huge disillusionment with politics in Hungary now."

Hungary Currency Hits Record Low, Bond Auctions Cancelled

Bloomberg reports Forint Hits Record Low as Default Swaps Soar

The forint fell to 321.1 against the European common currency at 5 p.m. in Budapest. The previous record was 317.92 on Nov. 14. The cost of insuring Hungarian bonds using credit- default swaps climbed to a record 708 basis points from 650 yesterday, data provider CMA said.

Hungary, the EU’s most-indebted eastern member, received its second sovereign-credit downgrade to junk last month when Standard & Poor’s followed Moody’s Investors Service in taking the country out of the investment-grade category on Dec. 21.

Hungary’s state debt management agency rejected all bids at a government bond exchange auction today as the increase in yields rendered “an extension of the maturity not worthwhile,” the agency said in an e-mailed statement. The auction offered the chance for investors to swap government securities due in 2013 for 10-year notes.

Hyperinflation a Political Event

Hyperinflation is a complete loss of faith of currency.

Misguided souls preaching hyperinflation in the US for years on end have yet to grasp the fact that hyperinflation is not really a monetary event as much as a political event.

For a discussion, please see Hyperinflation Nonsense in Multiple Places.

In the above link, I provide explanations of Weimar Germany, Argentina, Zimbabwe, and numerous other countries showing the hyperinflation process is political not monetary, and also reasons why hyperinflation in the US is is extremely unlikely.

In contrast to the US, Hungary, via political actions is now on path that can lead to government takeovers of the printing presses and a loss of faith in the Forint (Hungary's currency). If voters retake control before it's too late or the government does not take over the printing presses (and constitutional freedoms are restored), a meltdown may be avoided. Unfortunately the political signs are not encouraging.

If I Only Had a Bank!?

As much as I despise the Fed, an independent Fed is better than having government bureaucrats, President Obama, or public unions in California determine monetary policy.

Please consider this scary video by Ellen Brown.



The idea that North Dakota, a small loosely-populated farm state is in good shape only because it has a state bank is preposterous. Worse yet, Brown takes that absurd position to the extreme, with a proposal to end the Fed and put California politicians (state politicians in general) in charge of printing money to support union causes.

Note that if Ellen Brown got her way, it would take a political event, not a monetary one to change direction.

Moreover, should populist Ellen Brown get her way, I would have to rethink my US hyperinflation position. She is another one of those who understands various problems with the Fed, but proposes a solution that is worse, putting state politicians in charge of printing presses.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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