Saturday, August 16, 2014

Positive Feedback Theory of Hyperinflation

I contend that Hyperinflation is a set of Positive Feedback loops.   There are many different ways to describe these loops.  One is that after a government has a large debt and a large deficit that it can get into a loop where the more people stop rolling over their bonds the more the central bank has to make new money and buy bonds, so the government has cash to operate.  But the more new money it makes the more inflation there is and the less anyone wants to hold bonds.    So the phenomenon can feed on itself and grow.  There are more loops, but this gives you one way of explaining one part of hyperinflation.

In comments on the previous post Tom said this was circular reasoning.  A good example of circular reasoning is:

       "The Bible is the Word of God because God tells us it is... in the Bible."

In the above the reasoning is circular.  If the Bible is the word of God, then in the Bible God tells you so.   But if it was not the word of God, then God did not say it was.  It is not a good logical argument.

In a positive feedback phenomenon there is a feedback loop made up of real things.   It is not just circular reasoning.   You can watch and measure what is going on in the real world.  You can see how one part pushes another, and that pushes so that it comes back around magnifying the phenomenon.

I think it may help readers to think about some other examples of positive feedback loops, so I have collected a few here.


A bunch of snow can be sitting on a steep mountain so that it is almost ready to slide.  If something, say a little rabbit, then causes some of it to move, then that can cause more, which causes more, etc.  A small trigger can set off a chain reaction that causes a huge amount of snow to slide down the mountain.

Forest Fire

If there is a high enough density of burnable material in the forest, then a single ignition can set of a chain reaction where a whole forest burns down.


There are two plates of earth touching each other.  But they are slowly pushing past each other.  For many years the ground just slightly flexes under the strain.  However, at some point part of the ground rips.  After the first part rips the strain is too much for the next part and it also rips. This chain reaction continues down the fault line often for miles.


Water is mixed in the lava but under such pressure that it does not turn into steam even though it is very hot.  However, if some of the lava on top breaks through the earth dam around the lava and spills out then there is less pressure on the lava below.   If there is enough less pressure that the water turns to steam it can throw off the top of the lava.  This then reduces the pressure on the lava further below which then also releases steam.  This chain reaction can continue till huge quantities of lava are thrown into the air as volcanic ash.

Blood Clotting

The loop is initiated when injured tissue releases signal chemicals that activate platelets in the blood. An activated platelet releases chemicals to activate more platelets, causing a rapid cascade and the formation of a blood clot.

Hurricane Formation

The faster the wind goes the more heat is transferred from the ocean to the air. 
The more heat there is in the air, the faster the wind blows.  So you get a positive feedback loop leading to really strong winds.

Ice Age

The more snow the more sunlight is reflected back into space and the colder it gets.  The colder it gets the more snow accumulates.   You can get a positive feedback loop where much of the Earth ends up covered with snow.

Not only is there a feedback loop as the snow advances, there is also one as it recedes.   The warmer it gets the less land is covered with snow.  The less land covered with snow, the warmer it gets.   So the snow marches forward as far as it can and then it marches backward.

Domino Avalanche

Set up dominoes so that the first one will knock over 2 others, and each of those will knock over 2 more, etc.   So with each time increment there will be twice as many dominoes falling.   One little push can then cause many dominoes to fall over.

Common Characteristics for these and Hyperinflation

In each case there is some set up condition.  Something that has to be in place for a growing chain reaction to be possible.   Under the right conditions, a small thing can set off a large chain reaction.  Once the chain reaction starts it is very hard to stop it.  Eventually it will burn itself out and stop on its own.   Under the "proper conditions", we say there is a risk of this chain reaction.  Even if the reaction has not yet happened, we can still see that there is a risk of it happening.   Because a small input can move things to another state, the initial state can be viewed as unstable.

The best prediction you can give for most of these is "a high risk" and not an exact date.   Earthquakes, volcanoes, forest fires, avalanches, etc. are things where we can tell there is a danger, but not tell exactly when the trigger will be.    I think it is the same with hyperinflation.

It would make as much sense to accuse each of these real world phenomenon of circular reasoning as it does to claim this of my explanation of hyperinflation.

Tuesday, August 12, 2014

Lack of avalanche does not prove lack of risk of avalanche

Hyperinflation is like an avalanche, forest fire,  earthquake, or volcano eruption. Conditions for a chain reaction build up and then things happen fast. But the build up time can be very long. It is not really possible to predict exactly when the chain reaction will start. The best you can do is say that conditions for the chain reaction are such that there is a high risk. Certain types of things can transition from stable to destruction very quickly with very little provocation.

If conditions are right, a small rabbit jumping across the snow could set off a  huge avalanche.   Conditions in Japan are such that some small event could trigger hyperinflation at any time.   Maybe China sinking a Japanese boat or a pension fund getting out of JGBs.  We don't know what the equivalent of the rabbit will be for Japanese hyperinflation, but we can tell Japan has the setup for this type of chain reaction.  

Again and again there are blog posts where people say the fact that Japan or the USA has not had hyperinflation so far proves that the theories saying there is a risk of hyperinflation are wrong.   This is just not true.  That an  avalanche has not happened yet is in no way proof that there is no risk of avalanche.  Such logic is flawed.   It ignores the fast moving chain reaction that is fundamental to the nature of the problem.   The same is true for hyperinflation.  That it has not happened yet does not in any way prove that there is not a high risk of hyperinflation.  Many countries went from normal inflation to hyperinflation rather quickly.

I have yet to have any really strong logical attack on my hyperinflation explained or hyperinflation faq posts.   More than 100 times I have tried to engage other bloggers posting about hyperinflation.

The lack of any serious intellectual challenge to my "positive feedback theory of hyperinflation" is more of a confirmation of my theory than the lack of hyperinflation in Japan or the USA is any sort of refutation.  

Cnningham's Law says, "the best way to get the right answer on the Internet is not to ask a question, it's to post the wrong answer.".     If I was wrong, I really think someone would have been able to point this out by now.

The xkcd Duty Calls sort of sums this up:

I think it is safe to say there is nothing obviously wrong with my theory of hyperinflation. 

Dear reader, if you think there is anyone that could refute my theory of hyperinflation please send them a link to this post.

Tuesday, July 15, 2014

Spontaneous Combustion Theory of Inflation

There have been many posts trying to ridicule the Spontaneous Combustion Theory of Inflation.  The name is to make it seem ridiculous that inflation could just suddenly take off.  However, in the real world hyperinflation does just suddenly take off.   There is good theory as to how inflation suddenly takes off.  Making a silly name for something is a debating technique but it is not a sound logical argument.  Hyperinflation is a real thing.

Friday, April 11, 2014

Problem with central banks making it up as they go along

I highly recommend this speech that Dallas Fed President and FOMC voting member Richard Fisher gave in Hong Kong.  I think he does a good job of explaining the reality of central banking.  It really boils down to making it up as they go along.

The problem with this is the risk of getting sucked into a hyperinflation feedback loop.   If you are wondering around and making things up as you go along, and happen to step into the hyperinflation death spiral, you will not be able to just step back out.

The politicians, with their large debt and deficit spending, are really a key part of the setup for hyperinflation.   I think the politicians and central bankers do not yet understand hyperinflation well enough to take the difficult choices needed to avoid stepping into the hyperinflation trap.  

Wednesday, March 19, 2014

Living Like Parasites

Putin said of America, "They are living like parasites off the global economy and their monopoly of the dollar."

Putin understands something that few do.

Imagine half the dollars are outside the USA and half are in.  Then imagine $1 trillion new dollars are made and owned by the USA.  No real new value is made when this new $1 trillion in money is created.  Eventually all the existing money will be reduced in value because of this new money.  Half of this stolen value comes from reducing the value of the money outside the USA.  So in effect the USA has sucked $500 billion out of the rest of the world.  Living like parasites is a good description.

Sunday, March 9, 2014

The Threat of Dumping Bonds

When the British, French, and Israelis attacked in the 1957 Suez Crisis, America was able to put financial pressure on Britain. It held many British bonds and threatened to start selling them if the British did not stop the attack. From the Wikipedia article:

"Britain's then Chancellor of the Exchequer, Harold Macmillan, advised his Prime Minister Anthony Eden that the United States was fully prepared to carry out this threat. He also warned his Prime Minister that Britain's foreign exchange reserves simply could not sustain a devaluation of the pound that would come after the United States' actions; and that within weeks of such a move, the country would be unable to import the food and energy supplies needed simply to sustain the population on the islands."

Some say this marked the end of the British imperial power and the start of America as a "superpower".

Now Russia is threatening to dump US bonds if the US imposes sanctions on Russia for Crimea.  


Friday, March 7, 2014

Scientific Theories Make Testable Predictions

A common criticism of "people who believe in hyperinflation" (as if it was like the Tooth Fairy) is that we can not reliably say when it will start.   You can see this at Cullen Roche,  Scott Sumner, Mike (Mish) Shedlock, and Paul Krugman.   Several of these have had many posts of the form, "ha, ha, I have been right so far".  However, I have not been able to any real debate from these people over the theory of hyperinflation as in  Hyperinflation FAQ and also Hyperinflation Explained in Many Different Ways.

The average paper money seems to last about 25 years. Big developed countries pull this average up, but even America has had hyperinflation a couple of times.   But for discussion, lets assume hyperinflation happens 1 out of every 25 years in the average country.  This means that 24 out of 25 years there is no hyperinflation.   Someone who just says, "no hyperinflation this year" is like a stopped clock that is right 96% of the time.  And still they are so proud.  :-)

Just to be very clear, if these people don't switch to "there will be hyperinflation this year" right before the hyperinflation starts, then I claim that in all their previous predictions of "no hyperinflation this year", they were just being stopped clocks.

I also like to point out that when you go from 2% inflation to 26% inflation, 30 year bonds will lose 99%  of their real value.  So it is better to be many years early than one year late in getting out of bonds if hyperinflation is coming.

Still, there is some truth to this criticism.     A scientific theory makes testable predictions.  A good theory should make predictions that turn out right.  Not looking to debate if The Dismal Science is a real science.

With my many explanations of hyperinflation we have many good theories of how hyperinflation works.  In general there is a feedback loop.  But most of these theories don't give us much clue about  when the feedback loop will start.   The timing is not really part of these theories.

However, one of these does have timing information.   The backing theory of hyperinflation.   This says that the central bank has to have reserves to support the value of the currency.   If the central bank is burning through these reserves at a rate where they run out after a certain time, we have some handle on the timing.  They may prop up the value of their currency till they are almost out of reserves, but that  is it.  There will be a  day of reckoning.   We can estimate when by how long till they run out of reserves.

When the Argentine government took much of their central bank's reserves, I said to myself that they were headed for hyperinflation.   A reader of this blog pointed out that the Ukraine's central bank did not have enough backing and so seemed headed for hyperinflation.   Both of these were based on the backing theory of hyperinflation.   So to me the backing theory of hyperinflation seems a very good way to predict timing for hyperinflation.   So I would like to try to do this in a public way.  Clearly predictions made in public are far more impressive.

For me the interesting prediction is when a currency will go from something normal like 2% inflation to 26% or higher yearly inflation.  There are also many more making this transition than those that go all the way to 50% per month.

Do any readers have an ideas for countries that now have moderate inflation but where the central bank reserves per note issued are far below the current value of the note?   A government running a big deficit has a harder time bailing out the central bank, so that is an important factor as well. In fact, it is prbably reasonable to just look at foreign reserves if the government has a large deficit, ignoring government bonds.

 I will update this post trying to make an ordered list of hyperinflation candidates.

The central banks in the big reserve currency countries seem to have lots of long term bonds in their own currency.  It would be nice to  know how much these  would drop in value as interest rates went up.   Like if Japan's interest rates go up 2% what does that do to the value of the central bank's reserves?

I have an earlier post on ideas for predicting the timing of hyperinflation.

Thursday, February 13, 2014

Preventing Crises

If since the USA was founded they had required banks to sell 10 year bonds to get the cash to use for 10 year loans (banks can't use demand deposits, must have matched duration bonds and loans, so no fractional reserve banking or "bank made money") and never went off a gold/silver coin money (no paper money or central bank) then I think that there would not have been anywhere near the number of inflations/booms/busts/deflations/financial-crises between then and now. If regular banks and central banks can increase or decrease the money supply, then the money supply is not stable, and you get booms and busts and crisis after crisis.

This is sort of my version of the Austrian Business Cycle Theory.   I think it is easier to think about in terms of central bank made money and private bank made money not being stable, so nothing is.   Fractional reserve banking is the core cause of financial crises and the reason people think they need a central bank to act as a lender of last resort.   If you did not have fractional reserve banking, then you would not need a central bank and could have a much more stable money supply and financial system.

For more than 2,000 years an ounce of gold has been about the value of a nice suit, shoes, and belt.   This is amazing stability.  The median life expectancy for defunct paper currencies is only 15 years.   Even in the big stable countries paper money loses more than 90% of its value in under 100 years.  In the 1950s a silver dime was about the value of a gallon of gas and 1/10th of an ounce of silver is still around the value of a gallon of gas but the US dollar does not buy anywhere near as much gas it could 60 years ago.  Paper money does not come close to the stability of gold and silver.  Paper money and fractional reserve banking together is a recipe for financial disaster.

Keynesians think that if we just make more money we could avoid the pain of the bust.  However, this can lead to hyperinflation and far more pain.   I think it is much better to understand the cause for the boom and bust and how to avoid these.   

This post comes from a conversation with Tom that deserves its own post and thread.

Monday, February 3, 2014

Phillips Curve Fallacy

There is a good article in Forbes about the Phillips curve fallacy that most economists seem to operate under.

Phillips studied wages under a gold standard and found that when labor was in tight supply that wages went up.  This is just saying that when supply is tight the price goes up.  This is basic economics and common sense.  

But most modern economists take this study and think that if they print money that employment will go up.   This study does not show that at all.