Thursday, April 9, 2015

The Keynesian economist's useless task

Disagreements between different groups of economists often boil down to one group focusing on the short term effects and another group focusing on the long term effects.
"But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again."  - John Maynard Keynes

The GNP is defined as:
  
GNP = C + I + G + X - M

where

C = Private Consumption
I = Private Investments
G = Government Spending
X = Exports
M = Imports 


Transfer payments, where the government simply takes money from one group and pays it to another, are not included in the definition of government spending for calculation of GNP.  However,  if the government pays some people to dig a ditch and then pays them to fill it back in, the defined GNP goes up.  Really this is just another transfer payment that should not be included because there is no real improvement in the economy.  Sadly, much of government spending amounts to hidden transfer payments that don't really increase the size of the economy.   This is like a loophole in the definition of GNP that many use to argue for more government spending.  

Keynesians predict that if government spending goes up then the GNP will go up.   By the formula defining GNP, and because the other variables are slower to change, the immediate impact of a sudden boost in government spending is a boost in GNP.   Predicting this increase is too easy and too useless a task.   It is nearly "by definition".  In this case, it is the short run short run prediction that is trivial and the long run prediction that is interesting, hard, and important.   

In the long run, the larger the government is as a percentage of the economy, the slower the economy grows.   The government is an overhead that the productive private part of the economy must pay for one way or another.   They may pay taxes, or loan it money, or pay an inflation tax.   The more economic resources the government controls the less resources are available to grow the real economy.

If you keep applying the Keynesian prescription of more government spending, year after year,  the government keeps getting bigger and the real economy suffers.   Sadly, today Keynesians are the dominant economists and they have been focusing on the short run far too long.


Thursday, February 26, 2015

Gleeful Money Printers

Krugman has written arguments justifying the use of snark.   It seems appropriate to address some of his snark and even snark back a bit.

The longer we have gotten away with printing crazy amounts of money without inflation, the more ridiculing and gleeful the money printing enthusiasts have become.  They think that because we have gotten away with it for 6 years they have been proven right.  This is the kind of thinking that is part of any Ponzie scheme or bubble and so loud now we may be near the peak.  They also think that if inflation started the central bank could take steps to immediately stop it.

However, if it takes 6+ years of crazy money printing to start inflation, it is foolish to think the central bank could immediately stop inflation once it starts.  Clearly their control is not nearly so precise. 

In fact, run-away inflation is a problem a professional economist should know about.  High inflation is due to a set of  positive feedback loops.  For years debt, deficit, and money printing just add to the  potential for a chain reaction.  Then something triggers the chain reaction and suddenly things flip from normal to high inflation.

I can warn you now that after this happens the  money printing enthusiasts will locate the small trigger for the chain reaction and blame the whole thing on that, holding the years of deficit spending and money printing build-up blameless.  This is like putting an open bucket of gasoline next to a fire made of pine cones which is sending off sparks and then blaming the random spark for the resulting explosion (another positive feedback loop).  The real blame should go to those who setup the potential chain reaction and not the random triggering event.

When they make fun of the idea of sudden inflation by saying,  The Spontaneous Combustion Theory of Inflation, they are actually very close to the truth.   Just like a fire, hyperinflation is a positive feedback loop.  Once started it feeds on itself and gets out of control.

When they say macroeconomic quantum tunnelling or Phantom Phiscal Crisis in attempting to ridicule they are again close to the truth.  Ahead of time you don't see the crisis and then things almost jump from normal to high inflation.

They use derogatory terms like inflation cult but won't address the sound arguments for the risk of runaway inflation.

Imagine an expert says that a particular location is due for a big earthquake.  Imagine some people ridicule this person for 6 years with things like "Spontaneous Earth Rip Theory" and "Phantom Earth Movement".  Then on the 7th year there is a big earthquake.  At that point it becomes clear who is right and who is foolish.   Earthquakes are also positive feedback loops.    After the inflation positive feedback loop hits, it will then become clear who is right and who is foolish.

This past week Ukraine and Venezuela both have had huge drops in the value of their currencies.  The high inflation positive feedback loops have clearly kicked in for these countries.  Fortunes are being lost and lives are being ruined.  Because both governments spend much more than they get in taxes they are forced to keep printing huge amounts of money even as the value of their currency crashes.

Japan is spending nearly twice what they get in taxes and has huge quantities of bonds coming due.  After Japan's inflation starts they will not be able to control it there either.  When they finally realize that Japan's money printing enthusiast was wrong it will be too late.   The theory of high inflation is serious business.  It is no laughing matter.

The money printing enthusiasts go on and on about the dangers of a deflationary death spiral even though this never happens in the real world.   They see a bit less than 2% inflation and yell "deflation", which is silly.   Inflationary death spirals happen all the time with hundreds and thousands of percents but the money printing enthusiasts can't seem to comprehend these.

The money printing enthusiasts would have you just look at the "no inflation so far" result for 4 currencies (Japan, UK, USA, Eruo) for the last 6 years to "prove" their case.   They would have you ignore hundreds of years of experience from more than 100 countries.  You can look at Ukraine, Venezuela, and Argentina right now or China a thousand years ago or hundreds of other examples where lots of money printing resulted in lots of inflation.  Extrapolating from 4 cherry picked bits of data and ignoring all the rest of the data is not science, it is foolish.

Krugman keeps incorrectly saying that the fear of inflation side does not have an economic model of how debt and deficit cause things to go bad for a country that prints its own money even though for years I have pointed him to an excellent model.

The Phillips Curve theory was from data under a gold standard. If there is full employment under a gold standard then wage prices will be higher. It is a simple supply and demand observation. Taking this data and thinking that if you print more money so wages go up you will get full employment is either stupid or dishonorable.  Using data from a period with no inflation to justify inflation is wrong.  Really what is going on when they print more money, as explained on page 6 of Keynes book, is that you are tricking people into working for a lower real salary which makes it easier to get full employment.   But if you talk about it this way it does not sound like you are trying to help the common man when you advocate money printing. So the Phillips Curve makes a better sounding cover story.
A commenter on Krugman's blog said that "money printing enthusiasts" is not a fair name for Krugman's side of the debate.    Krugman makes up all kinds of unfair names for our side of the debate, so even an unfair name for him would only be fair.  :-)   However, it really is a very accurate name for his position.   Kruman posts about economics, politics, and music.   More than half of his economics posts are either ridiculing those who are worried about inflation or making a case for "stimulus" which is just code for printing money.   So his economics position mostly boils down to advocating money printing and attacking anyone worried about money printing.  He really is a "money printing enthusiast".

Here is an intellectual challenge from the "fear of inflation" side for the "money printing enthusiasts". Can you find a theoretical explanation that fits a high percentage of cases of runaway inflation (explaining why it is "out of control") which does not make Krugmans advice to Japan seem irresponsible?   If you come up with something like war, or shock to tax base, or corrupt government, that is just one of many reasons  for a government budget deficit to get out of control, note that it will not cover nearly as high a percentage of cases as if you just say "deficit out of control".

Monday, February 16, 2015

Rush out of JGBs starting?



Over the last month JGB rates and prices have been on the move:


In the last month the yield on 10 year bonds has doubled from 0.22% to 0.44%.   This means half the interest earned over the next 10 years just covers the drop in bond price over the last month.

The 5 year has gone from 0% to 0.13%.   This means that all the interest earned over the next 5 years just equals the drop in bond price over the last month.   Whatever the yield is next month for 5 years will still just equal the drop since January.   Risk reward balance is not good and does not improve even as yields go up.


The Bank of Japan is buying bonds really fast.  If the yield is going up and bond prices are going down then the selling must be even stronger.

I am expecting a panic out of JGBs and wonder if it is starting.   I am  interested to see the next 10 day report on Bank of Japan assets.  The last two 10 day periods they increased base money by 3% and 0.6%.  Those are not annual rates.  That 3% in increase in 10 days looks crazy, and it is.  Will also be interesting to keep watching the JGB yields.

With them printing so fast, who would want to hold JGBs at what are still crazy low rates?  But if everyone is getting out of JGBs, then they will have to print faster.   These two things can result in a death spiral.    Really seems like it is  not a good time to be holding either JGBs or Yen.




Tuesday, December 30, 2014

8 to 12 trillion new Yen per month? Stick a fork in it.


On Dec 30th the Bank of Japan announced that it will start making 8 to 12 trillion new Yen per month.  To get an idea of the scale of this, the Government of Japan averages less than 5 trillion per month in taxes collected.

On Apr 4th 2013 the BOJ announced it would double the monetary base in 2 years.      This came to around 50-70 trillion Yen per year for 2 years.  The monetary base seemed to go up about 0.6% every 10 days.

However, as we started to near the end of the 2 year time period a new policy was  announced on Oct 31st of 80 trillion Yen per year with no end date.   This was 10 to 30 trillion Yen per year more than previously.  The monetary base seemed to go up around 1% every 10 days.

If the Dec 30th rate stays fixed for the whole year, then multiplying by 12 gives a new yearly target of 96 to 144 trillion Yen.  After the initial 2 year period is over, in Apr 2015, instead of stopping it now seems they will be printing about twice as fast.  The monetary base should go up well over 1% every 10 days.

However, one familiar with how these things work, or able to spot a trend, should not expect a fixed 8 to 12 trillion Yen per month for the whole year but instead to see more increases in the rate of Yen printing.  If you did not spot the trend, read the previous 3 paragraphs again.  :-)

Thursday, December 25, 2014

No, Japan Cannot Stop Printing Yen


The official story is that Japan is printing like crazy just because they want more inflation and that they will stop when they get to 2% inflation.   The story makes it seems like the government and central bank have things under control.   Like they are making the markets do what they want.   The vast majority of articles I read on the net seem to accept this official story as truth, but it is not true.

With 5 year bonds paying 0.03% interest, the rational investors are getting out of JGBs.   The central bank is probably the only net buyer.  The central bank is making about 80 trillion new Yen per year and buying bonds when total taxes collected are about 50 trillion yen per year.  This is an enormous amount of new money.

They have been increasing the base money supply by around 1% every 10 day reporting period.  You have to be a fool to buy bonds paying 0.03% interest per year in a currency where the base money supply is going up around 1% every 10 days.

If we average over the last 4 months, the Yen is losing around 1% per week compared to the dollar.  You have to be a fool to buy a 5 year bond paying 0.03% interest in a currency losing about 1% per week.

The Japanese government is spending about twice what they get in taxes.    Nobody likes spending cuts and nobody likes tax increases.  Not enough voters or politicians will view this as a problem as long as they can print money for the difference.   You have to be a fool to buy bonds in a country that spending twice what they get in taxes and running the printing presses to cover the difference.

However, if they let interest rates go up in an attempt to attract bond buyers the interest on the debt would be more than the taxes collected.   This makes it clear they are going to have to print money and so the money that you get back when the bond comes due will not be worth as much as the money you bought the bond with.  You would have to be a fool to buy bonds from a government where the interest on their debt was more than their total taxes.

Not only do you have to be a fool to buy JGBs, you have to be a fool to hold them or roll them over.   So not only do they have to print Yen to cover the deficit, but also the bonds coming due.   The government has previously issued bonds more than twice the total GNP and much of it is short term.  As it comes due they have to pay the bond holders.   The only way they can get money to pay previous bonds is by first selling a new bond, since taxes don't even cover spending.  The only way they can sell a new bond is if the central bank prints Yen and buys the bond.   Governments never default on debts in a currency they can print.  They print.

Japan has entered a death spiral where the more people that get out of JGBs the more Yen they have to print but the more Yen they print, the more people get out of JGBs.  This death spiral is a positive feedback loop that once started is very hard to stop.

Recently Krugman got in a limo with Abe and advised him to delay a tax increase and do more money printing (he would really have said "stimulus").  Krugman may soon wish he had not gotten his name attached to the mess that is coming.

Even at 120 Yen per dollar, we are talking trillions of dollars worth of bonds.   Fools with money will hardly make a dent in this.   The central bank will keep being the buyer of only resort.  The central bank must keep printing no matter if it lets interest rates go up or if they keep interest rates down.    They have past the point of no return.  They can not stop at 2% inflation.  Yen printing is out of control.   It is no longer possible to halt it.   

Saturday, December 20, 2014

Payment for Additional Hyperinflation Explanations


I count 49 different explanations for hyperinflation in my collection as of Sat Dec 20th, 2014.

I think it is fun that there are so many different, yet reasonably, ways of thinking about how hyperinflation works.   Given how many I have found so far, I am sure there must be more good explanations out there.  If there are other economic theories with different explanations for hyperinflation I would really like to add them to my collection.

I have decided I will pay $30 by paypal or BitCoin to someone who comments here with a new explanation that in my judgement is different from any in the existing collection but is as good or better than the average explanation so far.   It should fit the experimental evidence for at least many historical hyperinflations.

I am not looking for different reasons that governments spend more than they get in taxes and will not pay for such things.  Saying "supply shock", "war", "corruption", "external debt",  "drop in taxes", "incompetence", "madness", etc does not earn anything. 

I am looking for more good theory for the mechanics of how hyperinflation works.  The why, the how, the process of hyperinflation.    See existing explanations for an idea of the type of thing I am looking for and to be sure you are not submitting something already in my collection.

Please forward this offer to anyone you think might be willing and able to submit an explanation.

This offer starts today, Dec 20, 2014.    I can afford at least 10 new explanations and even 5 good explanations every month.  I may reduce this offer for future submissions if they come much faster than that.  If I don't get many I may up the offer and if so the increase in payment will also be retroactively extended to previous winners.    

To submit an explanation just comment below.   The full explanation must be in the comment but it is good to also include a link to a source if you have one.

Wednesday, December 17, 2014

This is Not Natural

For the last 3 months the Yen is losing on average around 1% per week:


Yet the yield on 2 year Japanese Government Bonds (JGBs) is negative.  You have to pay the government to take your money.   The 5 year yield is 0.05%.   This means after 5 years you get a total of about 0.25% interest.   This is about what the Yen loses in the average day recently.


They are printing at a rate of 80 trillion yen per year and buying mostly JGBs, much more than the total taxes collected.   This has driven up JGB prices far into bubble territory.  These yields are absolutely nuts.  It is not natural.   Only massive central bank money creation and bond buying makes these kinds of numbers possible.   These are not free market rates.  Sane people are not buying JGBs at these yields with the value of the Yen falling fast.   The insane central bank must be the only buyer.

 Bubbles always fail somehow.   Since the Japanese government could not afford rational interest rates on their debt, I expect the central bank to keep interest rates down.   However, to do this they have to make new Yen so fast that they will destroy the currency.

Saturday, November 8, 2014

Greenspan on Inflation and Gold


Interesting recent interview with Greenspan.  Some parts:

But the fact the fiat currency expansion got very tarnished with -- you know, in 1775, we printed a whole bushel full of continentals. And one of the fascinating things about that period is the fact, for the first year or two, there was very little evidence that that had any effect on prices, meaning that that paper currency circulated with the same value as specie.

And there is an extraordinary -- there's an extraordinary lag which exists between actions of that type and consequences. Now, eventually the continental was not worth a continental. But it took a long while. And I think that we're looking at very similar things now. This, again, is a human propensity.

The Continental currency had hyperinflation.   It is interesting that Greenspan says, "I think that we're looking at very similar things now".   He is directly talking about the long delay between printing money and high inflation, but it sure seems like he is hinting at high inflation this time too.

Greenspan also thinks gold is a good investment:


Tett: Do you think that gold is currently a good investment?

Greenspan: Yes... Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.


First Exchange Rate Drops Then Hyperinflation


In Weimar Germany the exchange rate adjusted well before inflation started.


In Zimbabwe the exchange rate collapsed 72% on November 14 1997.  After that inflation really started picking up.

I believe the normal case for hyperinflation is that the exchange rate drops first and then the inflation picks up after.  The exchange rate reacts quickly while the huge number of prices that make up inflation indexes take longer to adjust.


I expect that Japan will see the Yen exchange rate drop much more before they start getting high inflation.






Wednesday, November 5, 2014

2.6% in 11 days

From Oct 20 to Oct 31 the Central Bank of Japan increased their balance sheet and the base money supply by 2.6%.   The last day of this period was their big announcement that they would be making 80 trillion yen per year.   I wonder if the current 10 day period will be even higher, since all of these days will be after the big announcement.  Will be very interesting to see the next report.

I don't expect the demand for Yen is going up as fast as the supply.  In fact, with all this printing I would expect the demand to go down.