Hungary on Path Toward Hyperinflation?

LvMIC:

That is what prominent financial blogger Mike “Mish” Shedlock is asking.  See some of his evidence:
From Spiegel Online:

Public anger over Hungary’s new constitution and a raft of other new laws may be the least of Prime Minister Viktor Orban’s problems. Financial markets, it turns out, are just as wary — and could drive the country to the brink of insolvency.
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 to be appointed by the Fidesz-run government.  (my emphasis added)

Though there are protests over the unilateral change in the country’s Constitution, I am doubtful that Hungarians are aware of the monetary danger posed by new regulatory and appointment powers the government just gave itself in regards to extending its control over the Magyar Nemzeti Bank .  Yes, the eroding civil liberties and press manipulation toward a more pro-government stance is disturbing and worthy of protest.  But the danger posed to the country’ respective currency, the forint, is arguably greater.

Even central banking apologists are in agreement that if politicians had full control of any nation’s central bank, the money would flow faster than the Atrato river.  After all, they make a living by making promises of economic prosperity to whoever is naive enough to buy into such pandering.  Seniors want an increase in their social pension?  Print off a few million dollars (or euros, yen, yuan, etc.).  Need to pay for a war that was started for the sake of enriching military contractors and expanding the state’s dominance over civil life?  Turn the press on high!  How about catering to the wealthy elite who make up the financial sector for the next election?  Nothing a large fiat injection can’t handle!

Politicians are self-interested men and women like everyone else- they pursue economic ends.  But unlike the private sector, they derive their funds from the forceful acquisition of income.  In the case of central banking, they come together to monopolize currency creation by granting the privilege to a cartelized banking system.  This system is often presented to the public as “independent” of the whims of lustful elected officials for the sake of maintaining confidence in the currency.  Who in their right mind would trust a currency in the hands of men whose greatest accomplishment was deceiving more gullible voters than their opponent on election day?

In The Case Against the Fed, Murray Rothbard tackles the absurd praise lauded upon central banking independence:

The standard reply of the Fed and its partisans is that any such measures, however marginal, would encroach on the Fed’s “independence from politics,” which is invoked as a kind of self-evident absolute. The monetary system is highly important, it is claimed, and therefore the Fed must enjoy absolute independence.

“Independent of politics” has a nice, neat ring to it, and has been a staple of proposals for bureaucratic intervention and power ever since the Progressive Era. Sweeping the streets; control of seaports; regulation of industry; providing social security; these and many other functions of government are held to be “too important” to be subject to the vagaries of political whims. But it is one thing to say that private, or market, activities should be free of government control, and “independent of politics” in that sense. But these are government agencies and operations we are talking about, and to say that government should be “independent of politics” conveys very different implications. For government, unlike private industry on the market, is not accountable either to stockholders or consumers. Government can only be accountable to the public and to its representatives in the legislature; and if government becomes “independent of politics” it can only mean that that sphere of government becomes an absolute self-perpetuating oligarchy, accountable to no one and never subject to the public’s ability to change its personnel or to “throw the rascals out.” If no person or group, whether stockholders or voters, can displace a ruling elite, then such an elite becomes more suitable for a dictatorship than for an allegedly democratic country. And yet it is curious how many self-proclaimed champions of “democracy,” whether domestic or global, rush to defend the alleged ideal of the total independence of the Federal Reserve.

Absolute power and lack of accountability by the Fed are generally defended on one ground alone: that any change would weaken the Federal Reserve’s allegedly inflexible commitment to wage a seemingly permanent “fight against inflation.” This is the Johnny-one-note of the Fed’s defense of its unbridled power.

As economist Bryan Caplan points out, independent central do have a better record of controlling inflation.  None of this is an endorsement of central banking, independent or firmly in the control of public officials, but just a recognition of the fact that central bankers not looking to appease voters are more hesitant to inflate.  As was proven in the latter 19th century in the U.S., the absence of central banking tend to result in deflation as economic growth and production increase at a faster rate than monetary expansion.

So I have to agree with Mish that Hungary is on the path toward hyperinflation and destruction of the forint.  Along with a currency that is already losing value, the country is seeing pressure in regards to its ability to raise money to meet its financing obligations.  There is only one option to keep making debt payments and that is default: whether it be through making payments with a currency worth less and less or the outright refusal to pay and impose bond losses.  With more government appointments to their central banking system, the appointees with have more of an incentive to please those who gave them the job.  This means monetizing government debt to prevent an outright default and maintain the welfare checks in the mail to keep the citizenry pacified even though the loaf of bread at their local grocery store keeps going up in price.  Imposing bond losses can wreak havoc on any country’s financial system that is heavily invested in government debt.  Hence the avoidance of haircuts and embrace of money printing.

Unlike the positivism and economic modeling used by orthodox Keynesianism, making precise predictions about future human behavior is often a fruitless endeavor.  However trends in human action can be observed and applied to speculate what may develop sometime in the future.  Hyperinflation may or may not occur in Hungary, but with dire economic conditions, one should never doubt the extent politicians will go to in order to maintain the status quo no matter how unsustainable.