There are many many many many people who say that hyperinflation is not a real risk for countries like Japan, USA, or the UK. Some people even say deflation is the real risk. I challenge anyone like this to debate hyperinflation with me. Mostly I am thinking of a blog to blog debate but I don't rule out a face to face video debate. My Hyperinflation FAQ is my opening salvo, so anyone can respond to that. I think I really understand how hyperinflation works but want people to try to poke holes in my logic. I want a clean debate with no name calling, just good logical arguments.
My Hyperinflation FAQ is long and many of the points are related, so I recommend you start with the points you think are easiest to refute.
If you post a reply to my Hyperinflation FAQ please comment below and I will link to your post at the end of this post and the end of the Hyperinflation FAQ post (assuming it is polite).
I have over 17,000 views on my Hyperinflation FAQ so far and not a single post replying to mine and linking to mine.
I have been a bit obsessive compulsive about hyperinflation for years now, using Google to find discussions all over the net. I have answered just about every reasonable question on hyperinflation that I have seen. It is like I have run out of good new questions. I miss the challenge. I am looking for a worthy adversary. If you can step up to the plate, please do. If you know someone who might be able, maybe send them a note.
I challenge anyone who thinks that hyperinflation is not a real risk for Japan to try to poke holes in my Hyperinflation FAQ. Where exactly did I say something that is not correct? Please quote the sentence and explain the error.
If someone would like to moderate a blogging debate I would be happy to participate. If someone wants to moderate a video debate I am even up for that.
If you agree with my Hyperinflation FAQ and would be willing to mention it that would be welcome too. Or if you mostly agree but differ on a few points, that is fine too.
List of Replies
8/11/13 Armstrong Economics - I sent an email and then this post showed up which seems to be a response to my FAQ but he does not mention or link to my FAQ. He wants hyperinflation to mean "inflation ending in the death of a currency" but that is not the standard definition. It also does not allow you to tell at the time if you are in hyperinflation or not.
I may not qualify as a "good opponent" but I did respond to your latest comment in your FAQ. I'm ALL FOR a "clean debate" ... that's a great idea. I hope my last comment didn't cross the line somehow... I don't imagine it would have, but I'd love to see you post it and then your response. Thanks!
ReplyDeleteI did and did this morning. It is on the Hyperinflation FAQ post. You are fine, I just want even more. :-)
DeleteBut, I did two posts: the original, and a response to your response. You didn't get the 2nd one? I don't see it on the FAQ page.
DeleteMaybe it's in your spam? I did include a link in it.
DeleteOh, it was set to moderate comments on old posts. I have turned that off now. And that second comment should show up too.
DeleteI agree with most of the things in your FAQ. I don't consider myself very knowledgeble though. But without going into detail I think the focus on "money printing" is the wrong one. The feedback loop focus makes more sense to me. If central bank prints money then casinos prints chips. No one gets upset about the latter. Both exchange assets for tokens. More people going into the casino to exchange cash for chips does not make the chips worth less vs money. This is in short the Real Bills doctrine.
ReplyDeleteThe exchange of new money for something that is worth less than the new money, that would be inflationary. That's why unsustainable debts and deficits are so important. Because they force central banks to exchange money for assets above their real market value. I found this blog: jpkoning.blogspot.com/ very interesting on the subject. It would be interesting to see you comment there.
I think this is a good and interesting way to think about it. When Japan's central bank is buying 5 year bonds where it gets 0.3% interest, this is a bad investment. The time value of money, or the real inflation over the next 5 years, are such that 0.3% interest makes the bond worth less than the money they make to buy it. They are paying over the real market value, so the backing for their currency is getting weaker.
DeleteI will take a look at that blog. Thanks!
Vincent what do think of this post by David Beckworth praising Milton Friedman for his far-sighted policy prescription for Japan:
ReplyDelete"Abenomics as a Fulfillment of Milton"
http://macromarketmusings.blogspot.com/2013/07/abenomics-as-fulfillment-of-milton.html
Essentially saying, that since Japan has been in it's current predicament for SO long now (2 decades of low growth, high budget deficits, low interest rates, and low inflation/mild deflation)... that Friedman was able to see a long time ago a prescription for Japan's woes that applies TODAY (many years later).
Of course Beckworth represents a pretty typical line of thinking amongst the Market Monetarists who claim they are the true Friedmanites, carrying forward Milton's ideas (rather than the traditional monetarists who seem fixated on low inflation and inflation targeting, which the MMists would argue works fine if you're not at the ZLB). Given Friedman's quote about Japan:
"[T]he Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?” It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy." - Milton Friedman
... essentially describing QE as we know it, maybe they have a point! What do you think: Would Friedman support Abenomics. It sure sounds like he would to me!
Not all MMists are in love w/ Friedman's monetarist ideas though... Glasner has been pretty critical of him. Remember that John Harvey piece looking into the assumptions behind the M*V = P*y exchange equation? I posted that on Glasner's site to get his opinion on the two sets of assumptions (the 1st set, he claimed were consistent with Milton Friedman, and the 2nd set were more of his own). Well I got lucky in that both Glasner and another Market Monetarist (Bill Woolsey) both responded. Somewhat surprisingly, Glasner seemed to favor Harvey's assumptions! (at least that's what it sounded like, if I read him correctly). Here's their responses:
http://uneasymoney.com/2013/08/05/second-thoughts-on-friedman/#comment-21457
http://uneasymoney.com/2013/08/05/second-thoughts-on-friedman/#comment-21457
http://uneasymoney.com/2013/08/05/second-thoughts-on-friedman/#comment-21516
Glasner had three articles in a row which were not very flattering to Friedman... which caused Scott Sumner, another MMist to write two posts and one comment back in rebuttal... Scott is essentially saying "No! You take that back! Milton Friedman was NOT a Keynesian!!" hahaha... Scott's latest on this is up today.
I haven't checked out Lars Christensen yet, but he's admitted to an "irrational love" for Milty, to the point where he basically never thinks he's ever really been wrong.
BTW, if you're looking for some criticisms of your ideas, why not try the Market Monetarists? They well versed in Friedmanesque ideas, know all about the quantity theory of money and the exchange equation, and they are the ones really pushing QE and beyond! Most thought that Abenomics really wasn't going far enough. They should make a good foil. I've found that they are often responsive to questions. The one's I've communicated with are:
ReplyDeleteDavid Glasner
Scott Sumner
Nick Rowe
David Beckworth
Bill Woolsey
Marcus Nunes (AKA Jao Marcus)
I don't think I've every communicated with Lars Christensen, but I've read his site (marketmonetarist.com)
Non-market monetarists who will respond to question include:
Frances Coppola (amateur, like us I think... but a former banker)
John Cochrane
Steve Keen (Steve has a freely available simulation package called "Minsky" you might be interested in... at least I think it's free! It's based off of using differential equations harnessed to balance sheet type manipulations... like I do on my site)'
JP Koning
Steve Randy Waldman (interfluidity)
... then, of course the guys at monetaryrealism.com: beowulf, JKH, and Michael Sankowski
I found Scott Fullwiler to be very helpful, but he's not that responsive.. via email anyway. Nomi Prins is another I've communicated with via email.
This guy showed up on pragcap once asking Cullen how to get more traffic:
http://dismalecon.blogspot.ca/
He might be willing to take a look. Let's see, how about Barry Ritholtz? UnlearnedEconomics?
There's even an Austrian or two that might take the other side of the hyperinflation debate. How about Mish Shedlock or ZeroHedge (hasn't ZH dropped their hyperinflation predictions?)
DeleteHere's some info on Keen's "Minsky" ... I spent a little time reading about it's predecessor program and how it worked. I've never tried either one. If you can build your hyperinflation model using a PKEer's simulation tool, that might give it a little extra weight:
Deletehttp://www.debtdeflation.com/blogs/minsky/
... and check out Sumner on an unwind being easy. This is part 2:
Deletehttp://www.themoneyillusion.com/?p=21999
Again, this seems like a natural foil for you: he's on board w/ the exchange equation etc, but he still is for a more expansionary monetary policy and thinks an unwind will be easy.
Wow, Tom, thanks.
ReplyDeleteI think Friedman missed the fact that the Fed making new money is what caused the boom in the "roaring 20s". If they had not made the boom there would not have been the bust.
Friedman was thinking of expanding the money supply like 3% per year. Japan is expanding more than 3% per month. I suspect Friedman would not have supported this but what I think does not depend on guessing what Friedman thought. :-)
I have tried to get Cullen and Mish to look at my stuff. Mish looked at a very early version and replied a bit in email.
There is a Steve Hanke that is into hyperinflation and I have tried to get him to look at my stuff. No feedback about the FAQ yet.
Thanks for all the leads. I will see if I can get any of them to look at my stuff.
There is no such thing as debt based currency. I will explain. If I borrowed from you, and on that based my money, then that would be debt based currency. Of course, there is no real point in doing so.
ReplyDeleteInstead, what is happening is I counterfeit money, or in other words, I write checks against the balances I do not possess, and I issue money based on that, and I call this "debt based money".
While it is strangely acceptable for sovereigns to write checks against nothing, it nevertheless should not be confused with debt based money, since there is no debt at all involved here.
For the debt to exist, there must be the lending party, but it is missing here. No, you can't borrow from the future, this is for complete idiots. Try that yourself instead of working and let me know how did it go.
The people who blabber about debt based money, do not think, - they just repeat the propaganda that the FED feeds them.
So, then, what is US debt? With the exception of the debt owed to the foreigners or us non-government entities, the entire rest of "the debt", is simply a ledger of funny money printed so far. And because the system isn't stopped, then obviously, that number needs to grow. Therefore a con monetary system like US dollar, can not "pay the debt", nor can it stop the debt count from increasing. It never needs to be paid, and will never be paid, and yes, we owe it to nobody, meaning we "don't owe it to anybody".
It is simply how much the us government has stolen from the people and the foreigners without any obligation to pay back so far, in contrast to the debt to the non-government entities, in that that is a record of US obligation, i.e., what US had borrowed.
Anthropologist David Graeber has written an interesting book about the history of debt and its relationship to money. Here's an interview with him:
Deletehttp://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html
I can't do his book justice in a couple of lines, but essentially he says that historians, anthropologists and archaeologists, when they first looked into the history of money, expected to find what the "armchair" classical economists had claimed: that (commodity) money grew out of the barter system. But what they found instead was that barter was never a significant part of the history of money. The economists had done thought experiments and deduced concepts from so-called first principles w/o ever actually doing the work of going out into the field and looking at the empirical evidence: ancient texts, historical records, archaeological evidence, and the economies of modern primitive societies (e.g. Amazon rain forest, Australian aborigines, etc) the world over. In short, the economists were wrong and the rest of these disciplines have known it for over a hundred years now, and since that time they've been telling the economists... who ignore them, and instead keep putting the tired old barter myth in the econ text books.
Instead, debt and gift based systems were how economies functioned for 1000s of years before coins were even invented. "gift based" economies were/are the system used in (modern) primitive systems. These kinds of systems were supplanted by a system of recording quantified debts at temples in the earliest civilizations: Sumer, Akkadia, Babylonia, Cannan, Israel, Phoenicia, etc. These early proto-debt based systems were around at least 2500 years before the invention of coins in Greece about 600 BC. Since then "debt based" systems have gone in and out of fashion, no period lasting less than a 1000 years. This is true not just in the West but in central Asia the far East, Africa, etc.
One of the econ schools that Graeber criticizes for not doing its homework (and fieldwork!) is the Austrian school. This got the attention of Robert Murphy (Austrian) who mocked Graeber's ideas (based on interviews he'd read) w/o reading his book. Graeber wrote a series of lengthy responses in the comments to Murphy's article... which Murphy did a fair and accurate job of compiling into a single post here:
http://archive.mises.org/18301/david-graebers-response-to-my-article/
Seems like quibbling over definitions. The most common definition of "debt based money" is where a central bank loans new money into existence (maybe by buying bonds). I think it is best to stick with the most common definitions when at all possible.
DeleteWell, I think the broader point Graeber makes, is that some classical and neo-classical types incorrectly draw a straight line from barter to coins, and further claim that debt based systems are modern passing fad when in fact barter was always a minor side show at most: debt based systems came on the scene first, and have re-emerged again and again, and thus to imply that they are somehow illegitimate or transitory systems is just plain factually incorrect.
Deletepre-history to 5000 BC: gift based systems (proto-debt based: not quantified well)
5000 BC to 600 BC (300 BC amongst the Phoenicians): debt based systems (including Steve Keen style "debt jubilees")
600-300 BC to 500 AD (the age of coins)
500 AD to 1500 AD debt based systems re-emerge
1500 AD to 1900s: coins make a comeback
1971 : re-emergence of fully debt based systems, but now including central banks, etc.
A similar timeline exits for China, India, and other areas of the world.
So Tom, what is your response to the following idea. Paper money fails with an average lifetime of only about 30 years. If we assume randomness, then there is around a 3% chance of failure on any given year. To be paid 0.3% to take 5 years of risk on Japanese bonds seems foolish, even if these were just random years. But given all the groundwork Japan has put down for hyperinflation, it would seem the chance of failure is much higher than the usual 3%.
DeleteGold on the other hand has been money or highly valuable for the last 5000 years.
"Gold on the other hand has been money or highly valuable for the last 5000 years."
DeleteYou can't eat gold. Something the native Americans in CA understood very well as they looked on in dismay as the 49ers washed away whole mountain sides and polluted the streams in pursuit of the useless yellow rocks.
I'm not in a position to challenge your figures there... better to ask Graeber... the man practically rewrote his book in Murphy's comment section!.. so you know he's responsive.
Even if I grant you that gold has been valuable accross many societies for a long time, that doesn't necessarily mean it's a good choice for money. and your use of "paper" as a comparison isn't necessarily a good one: Tally sticks date from the paleolithic to almost modern times. Are you counting paper money back to 11th century China?
I think Graeber makes a good point here:
"Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes."
For the moment, assume that my "about 30 years till average paper currency dies" is true. Do you buy the logic that then the normal risk of paper money failure is around 3% per year and do you agree that conditions in Japan are better setup for hyperinflation than average, so the odds of failure should be more than 3% per year? And if all this is true, isn't it crazy to accept only 0.3% on a 5 year Japanese bond?
DeleteAlso, with regard to your stats on paper money failing: in how many of those instances was this in a nation that had extremely large (unpayable) debts denominated in a foreign currency (fiat or otherwise)? How many cases came after some sort of major national calamity (war, civil war, revolution, coup, famine, drought), etc? Of the 200 or so countries in the world that presumably went into making your stats, how many were being rocked by the devastating after effects of colonialism? I'm talking Heart of Darkness style, King Leopold colonialism... not just North America.
DeleteI'll grant you, that in any of those circumstances I'd probably rather be paid in gold that domestic fiat... however, when things go REALLY wrong, I'd rather be paid in canned goods rather than gold.
...by the time I posted again, you got another comment off.. just so you know I'm not ignoring that comment!
DeleteI don't have a breakdown on the reasons for failure. But it also gets fuzzy. Like is Japan's Tsunami and having to shut down all the nuclear power plants count as a "major national calamity". If China and Japan each sink a few ships over those islands, will it count as a war? As countries get unsustainable debt I am told the chances of war goes up.
DeleteRe: your Japan example. Yes, if you are quantifying risks correctly, I for one wouldn't take the bet. I'm also one that doesn't necessarily buy (completely) into the efficient market's hypothesis (EMH), but those that do (like the MM Friemdanites) might say that the wisdom of the crowd (a crowd w/ skin in the game) disagrees w/ your analysis on the risks in Japan.
DeleteFrankly, I haven't really examined the Japanese case carefully enough to say one way or the other, but my gut reaction is to be skeptical of what appears to me to be the extraordinary claim, which is yours. Now you will probably argue that it's the OTHER guys making the extraordinary claim. Ha!
For me to challenge you on the particulars of Japan I'd need to bone up on the situation there. The tsunami and nuclear disaster there I don't think rises quite to the level of calamity I was talking about... but like you say, it's fuzzy. The fact that they are a 1st world industrialized peaceful democracy, engaged w/ the rest of the world, and not owing the majority of their debt in foreign currency makes me more inclined to trust the EMH here than the hyperinflation view.
Vincent, what do you think of this?:
Deletehttp://pragcap.com/the-russian-default-what-happened
... and one other thing in Japan's "plus" column: I don't have the impression that corruption is a huge problem there, like it has been in South America and Russia. I think that can be a big contributor. African countries have had terrible problems with corruption too. Zimbabwe for one, but also Mobutu's Congo ("Zaire"), and many other "Kleptocracies" there.
DeleteOne problem I have with the way Cullen looks at hyperinflation is I don't think he would ever be able to predict it ahead of time. Afterword it is easy to say there was corruption, or taxes collapsed, regime change, etc. But he would never be able to tell you ahead of time if the corruption in the USA is getting close to "hyperinflation corruption levels", or if "taxes had collapsed enough to risk hyperinflation". If it does not allow prediction, it is not really a theory.
DeleteMy theory really does make testable predictions. I can simulate my model of how it works. With more work and data I think it would be possible to put a much tighter timeline on simulations/predictions with my approach.
OK, fair enough, what evidence would constitute a falsification of your hyperinflation hypothesis? What would it take, evidence wise, for you to change your mind?
DeletePlus, don't you think Cullen is on record (as much as you are) in predicting that Japan & the US will NOT experience hyperinflation? At least in the near term (over the next five years perhaps? I don't know what he'd be prepared to commit to here).
DeleteGood question. What would falsify my theory?
Delete1) Any evidence that the equation of exchange did not always work.
2) A country with debt over 100% of GNP that was spending twice what it got in taxes getting a bond panic where the only buyer was the central bank for 6+ months without hyperinflation.
3) If interest rates kept going up and excess reserves at the Fed came out into the real economy, with the velocity of money going up (expected with higher interest rates), without substantial inflation.
Any of these would do. It would not be hard to make more such examples.
If Cullen was in or looking at Argentina or Venezuala I don't think he would have expected the over 26% inflation coming. I expected it for Argentina but was not watching Venezuala. Cullen thinks that the central bank buying government bonds with new money is not inflationary but time and time again it is (at least if the money leaves the central bank).
Delete"1) Any evidence that the equation of exchange did not always work." Well, let's take that first one. I'm NO EXPERT on the exchange equation. Looking at the wiki article:
Deletehttp://en.wikipedia.org/wiki/Equation_of_exchange
I'm especially intrigued by the version (under their "Foundation" section heading) where p and q are column vectors. Makes me think that M and V could also be broken down into column vectors (just thinking off the cuff here... I'm not sure where I'm going with this). It seems that some blocks of M might have very small Vs. Does your simulation really take into account different kinds of Ms and their associated Vs? For example, I'm on board with the MRists that inside money (bank deposits) is the true money of the private economy. I see reserves (a component of outside money) as only existing to facilitate in a rate targeting regime. Cash (the other component of outside money) is swapped for or to inside money at the discretion of the public and does not affect the public's equity position at all. The CB will provide whatever stock of cash the public decides to hold. Then you can fold in near money substitutes: short term bonds (a near bank deposit equivalent), gold, longer term bonds, etc.
But getting back to the M part of it? What are your essential complaints about John Harvey's assumptions on the four variables he gives here?:
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/4/
Cullen thinks Harvey doesn't go far enough there regarding uncertainty in what M represents:
"if you’re going to use a QTM model then you better know PRECISELY what “money” is. Unfortunately mainstream economics doesn’t entirely agree on what money is. They mainly just use M1 and M2 which are really vague definitions of money. And what happens when you do that is you have a program like QE implemented and M1 rises because of it and people start screaming about hyperinflation.
Even Harvey’s parameters aren’t specific enough in my opinion. MMTers don’t know what money is any better than most other people."
http://ask-cullen.com/mv-py/
I wonder if Cullen really meant M1 there or if MB would have been been more accurate?:
http://en.wikipedia.org/wiki/Money_supply#United_States
On a perhaps related note, Cullen introduced a "moneyness" scale a while back:
http://pragcap.com/understanding-moneyness
Bill Woolsey (MMist) has this to say about Harvey's piece:
Deletehttp://uneasymoney.com/2013/08/05/second-thoughts-on-friedman/#comment-21488
And Glasner (anti-Friedman MMist) this:
http://uneasymoney.com/2013/08/05/second-thoughts-on-friedman/#comment-21516
"I looked over the piece that you linked quickly. Allowing for the oversimplifications in the presentation for a not very sophisticated audience, I would say that his exposition seems reasonable."
So I agree that the exchange equation is an identity: true by definition. However, how do you respond to the cold water thrown here on exactly what some of the variables represent in it?
Even w/o all those complications to the equation, your feedback channel makes V rise and GDP (Y or Q) contract, right? What if the MMists are correct and GDP tends to rise instead, offsetting the rise in V and increasing tax revenues? Plus in order to put the brakes on an overheating economy why not raise taxes rather than increase rates (thus increasing, temporarily, revenue even more)? That directly sucks inside money out of the real economy and keeps gov interest payments low, especially if they stop issuing long term bonds. I don't see how you can be so certain about these feedback channels (and their polarities!).
Instead of approaching Keen/Glasner/Cullen/JKH/Coppola/Sumner/Rowe/Beckworth/Unlearnedecon/dismalecon/Ritholtz/Cochrane etc with "I'm certain hyperinflation will occur! I don't have room to explain here, check out my FAQ" why not pick out a smaller chunk, like the justification for one of your positive feedback channels and instead write "But why wouldn't THIS result in a positive feedback... blah blah blah." You might BOTH get more out of the conversation. I'll take another look, but I doubt I'm qualified to say anything insightful on it. ;)
Re: Argentina:
Delete"A ceding of monetary sovereignty is another primary culprit in hyperinflations. This is generally due to government incompetence (such as the current Euro arrangement), productive collapse or corruption. Notable cases include Argentina, Zimbabwe and the Weimar Republic. A ceding of monetary sovereignty via a pegged currency or accumulation of foreign denominated debt is a sure sign that a government is increasingly unstable and at risk of currency collapse."
http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon
Plus there's the corruption issue. I've got friends that live there and they tell me it's a big problem.
At the bottom of pragcap there's a "Search" feature. I just typed in "Argentina" to find the above. A lot of posts come up, so I don't know how far back in time they go. Might be worth taking a look if you haven't already.
I get what you're saying: perhaps he didn't call this ahead of time... this might constitute an after the fact explanation... but I don't know that's true! I haven't looked through the whole set.
Now this one:
"2) A country with debt over 100%..." ok, that's good. You say 6+ months. But what makes the CB the only buyer? You're already implying there that, say, the Fed holds an auction and it fails. I agree, that's a bad sign, but we haven't got there. I think Cullen would say that we're no where near an auction failure. So perhaps you have to back this one up a bit... what would lead to that failure?
3.) Here I disagree w/ the premise of "excess reserves coming out into the real economy" and I think you know why.
"Fed holds an auction and it fails." should read "Tsy holds an auction and it failes."
DeleteVincent Cate, what economic school are you considering yourself to be a follower of?
ReplyDeleteAustrian school.
DeleteVincent, I confess that I'm not very knowledgeable about the Austrian school, but from what little I did know initially, I had a bad impression of it. I heard that it was based on "rationalism": meaning that they came up with some "irrefutable" "self-evident" axioms regarding human behavior (by thinking about it), and then derived everything else from a kind of qualitative deductive reasoning process anchored by these "irrefutable" axioms. Conveniently, this let them off the hook in terms of making quantifiable predictions and essentially making anything they concluded "safe" from falsification by empirical evidence. A side effect of this approach was a distrust of mathematical models and empirical data.
DeleteYou don't seem to fit into that mold. For one you've built a mathematical model and accompanying computer simulation. Secondly, you've made predictions. Third, I don't get the impression that you distrust empiricism.
Now I'm not going to go so far as to claim that everything in economics that von Mises, Menger, and Hayek did must be wrong because of these criticisms. I'm too ignorant on the subject to make such a claim. I accept that Hayek (for example) must have had something going for him to win the Nobel prize. I accept David Glasner's assessment that Hayek really was a neo-classical in many ways. I don't feel strongly about these beliefs... I'm just accepting the opinions (as a default position) of those that ought to know better than I do.
However, though I've learned a tiny bit more about the Austrian school than when I started out (it's only been about three years now I've been interested in this stuff), I nonetheless have not moved too far from my 1st impressions.
Frankly, I'm too lazy to investigate everything in great detail. I have to pick and choose. I find a world view I mostly agree w/ and then put my initial trust in those that share it. In my case I'm pro-science, pro-scientific method, pro-inductive logic, and pro-empiricist. I'm all for deductive logic, but I think the "axioms" have to be investigated empirically.
When a hypothesis survives repeated and concerted efforts by a pool of (mostly) honest investigators highly motivated to falsify it, and practicing "full disclosure" in their efforts (i.e. peer review), then it graduates to "theory" and thus becomes "fact" until such time as new evidence arises to refute it. I look around this world, and ALL the progress in it seems to have been achieved by such a process... or at least rests on a foundation arrived at by such a process. The scientific method just plain works... better than any other way we have to separate fact from fiction. Austrian economics seems to take a different path! Do you agree or disagree (about it taking a different path, not about empiricism being the best way to go)?
For example, what's wrong with this assessment?:
Deletehttp://rationalwiki.org/wiki/Austrian_school
Rationalwiki (a wiki w/o wikipedia's politeness for those w/ my basic worldview) also has articles on a lot of the individual Austrian thinkers:
von Mises, Hayek, Menger, Rothbard, Rockwell, etc. In general they aren't terribly favorable. I think they try to be fair about their good points... if they do have some! What do you think? What are your favorite Austians? Who's worth reading?
I'm also a little familiar with David Stockman, Ron Paul, Chris Whalen, Mish Shedlock, Bob Murphy, Peter Schiff & Jim Rogers. I've actually watched a lot of interviews w/ Stockman & Whalen and I've seen their hr long lectures to Mises.org. Liberal Bill Moyers does a good long interview w/ Stockman too. Schiff I think is a charlatan. Whalen & Stockman have some interesting things to say. Whalen is particularly knowledgeable about banking. I'm not sure Rogers is an Austrian, but he sounds like it to me. Plus I'm a little familiar w/ folks like John Stossel who sounds kind of Austrian, or at least Ayn Randian or hardcore libertarian. Judge Napolitano too. Stossel, Michael Shermer, & even Penn & Teller are odd birds in my book, because I share a large chunk of their worldview, but I think they out to be a little more skeptical of the market.
What about the Austrian school attracts you?
Really I am just trying to understand what is real. The scientific method seems the best method we have. I like trying to argue things to help figure out what is real.
DeleteIt is not that I am a card carrying Austrian or something. I just think they make more sense than others. I think Keynsians, MMT, and MR all don't get hyperinflation. Seems the Market Monetarists don't either. Peter Schiff, Jim Rogers, Marc Faber, Kyle Bass, Jim Grant, these guys at least understand there is a risk to printing money. Most of these guys seem to be Austrian. Who else besides the Austrians thinks hyperinflation is part of monetary theory?
I don't think MMT and MR really look at history enough. There are so many cases that contradict their theory and yet they seem oblivious to this. Argentina has high inflation because it is monetizing government debt yet they continue to say that monetizing government debt does not matter. Hum.
DeleteKrugman at least does accept that hyperinflation is part of monetary theory. But MMT and MR seem to say that is outside a theory of money. Seems like a silly cop out.
DeleteMMT and MR people seem to agree that printing money to pay foreign debts can cause high inflation but they won't agree that printing money to pay social security, unemployment, medicare, medicade, veteran's benefits, etc can cause high inflation. How could it matter what the money is going toward? Seems very wrong.
DeleteI think we are in a time where hyperinflation will be a really important part of the real world. The economic theories that get this wrong should be tossed out. It seems like only the Austrians get it.
DeleteInteresting quote from Milton Friedman here:
Delete"I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse."
- Milton Friedman
I don't know much about the ABCT. Does that relate to hyperinflation somehow? I that a big issue over which Friedmanites and Austrians part ways?
... I found that on Krugman's, where he's been doing a series of pieces (not flattering generally) on Friedman recently:
http://krugman.blogs.nytimes.com/2013/08/12/synthesis-lost/?_r=0
"The scientific method seems the best method we have."
ReplyDeleteGood to know!
Re: Argentina: I that a case of effectively owing money in a foreign currency? That's the impression I had after reading about that Hedge fund suing them... it had something to do w/ an Argentine ship or boat that's docked in NY I think.
MMT: From what I know of MMT I don't think you have that exactly correct. It was my understanding from the start that MMT people have always acknowledged that deficit spending can cause inflation. Their solution is to deficit spend in times like now, and should inflation kick in, cut back on spending and/or raise taxes. From what I understand they think the Fed should just permanently fix the FFR to 0%, and use net government revenue (or expenditure, depending on how you want to look at it), to either reign in inflation or stimulate the economy. Warren Mosler actually attempted to run for office on a Tea Party banner by saying he wanted to cut taxes to the bone (i.e. create fiscal stimulus).
I'm pretty sure Cullen thinks the MMT outlook is way oversimplified and I'm sure he doesn't agree about setting the FFR to 0%. Also Cullen has said that MMT talks a good game, but they really want to keep gov deficit spending going indefinitely. So there's some definite daylight there... but I think if you asked Cullen straight out: "Can gov deficit spending cause inflation?" He'd say "Yes" but he'd be a bit cagey about it thinking you might be an MMTer trying to catch him in a "gotcha!"
I've found that Cullen, JKH, Michael Sankowski, and beowulf are more than happy to explain MR ... if you come at it from the standpoint of asking questions, rather than trying to prove your point to them. It might help to clear up a few misconceptions... I'm pretty sure that nobody in MR would claim that unlimited gov deficit spending won't cause inflation.
That's kind of my take too to some extent. Did you take a look at this simple example:
http://brown-blog-5.blogspot.com/2013/05/banking-example-8-treasury-deficit.html
The deficit spending there is linear... i.e. it can be boiled down to a linear growth in Tsy negative equity over time vs a linear growth in pvt sector equity over time. It's as if the gov is just pumping NFA's into the private economy to "enrich" it. At some point that's going to cause inflation! Add QE on top of it and it doesn't make a lot of difference: bank deposits are slightly more liquid that Tsy debt. Cullen presents this as a moneyness scale, and Tsy debt doesn't rank as high as Fed deposits which in turn is slightly less than bank deposits.
I think where Schiff gets it way wrong is that he seems to think that reserves are like some vast pool of money (in addition to the linear growth in NFAs I alraedy mentioned) just waiting for the damn to burst and come flooding out into the real economy. I don't see it that way. I think they are just an accident of the fact that normal joe's don't have Fed deposits... they don't represent any addtional equity added to the real economy because they are offset dollar for dollar by bank deposit liabilities on the banks' balance sheets.
Yes, MMT agrees that making money can cause inflation. But they think hyperinflation is caused by external events and not just deficits or printing money. Same as MR. Cullen wrote for both and has not changed on this point.
DeleteI think Schiff is right on this point. The reserves are a vast pool of money just waiting to flood out into the real economy.
"I think Schiff is right on this point. The reserves are a vast pool of money just waiting to flood out into the real economy."
DeleteI think he's wrong. Work it out for yourself. Let's assume there are four entities in a simplified economy:
1. Tsy
2. Fed
3. Banks
4. Private non-banks (public)
Start everyone off with a clear balance sheet (BS). Assume that if either the public or the banks own Tsy debt that the Fed will purchase them. The Fed just doesn't purchase directly from Tsy. Also assume that Tsy spends every dollar it raises the debt auctions.
OK, given that set up, work it out for yourself in any order: If Tsy auctions bonds that will build equity in the public: dollar for dollar: Tsy builds a $ of neg equity, and the public builds a $ of positive equity in for form of bank deposits. It doesn't matter whether or not the public exchanges their bank deposits for cash, it changes nothing: The only two players with non-zero equity are the Tsy and the public, and the levels don't change. These two non-zero equity pools are ONLY a function of the bonds that Tsy decides to auction and nothing else.
It's a one to one relationship having nothing to do with how many reserves are held by the banks. The banks can hold infinite reserves: if Tsy doesn't decide to auction another $ of bonds or the public doesn't decide to exchange another dollar of bank deposits for cash, those reserves aren't going anywhere.
I'll draw all this out for you on balance sheets if you don't believe me.
The thing I think that Schiff forgets is the other side of the balance sheet. Or maybe he's stuck thinking in the old gold-standard days back before the Fed hand infinite reserves at it's finger tips instantaneously. Fractional Reserve Lending (FRL) and the money multiplier died the day that became available. I think Mish gets confused about this too. Schiff perhaps thinks in the old money multiplier paradigm where reserves get multiplied up into loans by 1/(reserve requirement ratio). That's no longer how it works: Now the banks and the public lead, and the Fed follows, providing whatever reserves are necessary. The reserve requirement ratio hardly matters anymore with unlimited reserves. The Fed influences the banks/public by setting the FFR, but that's it. To defend the FFR they must provide whatever reserves are necessary. Mish too doesn't get it: We no longer have FRL in the gold standard days sense. The reserve ratio hardly matters: The Fed could raise the requirements to 100% of deposits, and it would hardly make a bit of difference in this process. So what if it's 100%? The Fed is obliged to provide that if it's going to maintain it's control of the FFR! So if Mish thinks that a 100% RR is going to stop the "legalized counterfeiting" he's completely wrong! In fact, with a Fed dedicated to maintaining the FFR and ensuring the smooth operation of the payment clearing system (which it is), then we could raise the RR above 100% and it still would have very little affect on lending.
I do a thought experiment about raising the reserve requirement (RR) to 100% at the end of this example:
Deletehttp://brown-blog-5.blogspot.com/2013/02/banking-example-2.html
As long as the Fed ensures reserves are available to clear payments and deposit transfers and to hit it's FFR target, and they ensure cash is available on demand (this is called being in an interest rate targeting regime, and we've been in one for a long time) then this will work.
It's not like it won't have ANY effect. I discuss the effects it will have at the bottom of that example. Bottom line: as long as the banks can make a spread on their balance sheets, it works: It might mean convincing people to move their money to savings deposits or to get them to remove it as cash or charging them a small rate for the convenience of holding a bank deposit, or just making up for a slightly smaller margin by bumping up the interest rate on loans slightly... whatever, the banks just need that spread, and if they can get it, it all hangs together, 100% RR or not.
"The banks can hold infinite reserves:"
DeleteWhat I didn't state here, was given my assumptions: start off w/ clear BSs for everyone, the Fed buys every $ of Tsy debt from the banks/public available, and the Tsy spends every dollar it raises by auctioning debt, then it will always be the case that every $ of reserves will be offset by a $ of liabilities on the bank BS. So I'm definitely NOT saying:
"The banks can hold infinite equity:"
Those are two very different statements... and I really should have said "arbitrary" rather than "infinite," etc. Just work out the BSs yourself, and you'll see what I mean.
OK, given my assumptions above, say that Tsy sold $T in debt and the public decided to hold $C in cash and that T > 0, 0 < C < T:
DeleteTsy:
asset: $0
liability: $T (T-debt)
negative equity: $T
Fed:
asset: $T (T-debt)
liability: $C (cash in circulation)
liability: $(T-C) reserves
total liabilities: $T
equity: $0
Banks:
asset: $(T-C) reserves
liability: $(T-C) bank deposits
equity: $0
Public:
asset: $(T-C) bank deposits
asset: $C cash
total assets: $T
liabilities: $0
equity: $T
If Tsy doesn't auction another $, then equity in the private sector stops growing... regardless of how much cash the public decides to hold and regardless the $(T-C) reserves held at the banks.
Cullen has a related post up today (or last night) having to do w/ sectoral balances, which shows that the above equity way of looking at things doesn't get the picture quite right... that it even has LESS to do with government than I imply here.
Tom, if the banks lend money to the public then the public will get money and their excess reserves will go down (since each loan increases their reserve requirements it reduces their excess reserves). Do you agree that if the banks started loaning out money the public/companies would have more money and the excess reserves would go down?
DeleteIf the reserve requirement ratio (RRR) > 0, yes absolutely. But that does not put any equity into the hands of the private sector, and it doesn't affect overall reserve levels which will not be changed. Above I'm assuming RRR = 0. It's easy to add RRR > 0 to the above: it changes almost nothing. Now if we add private lending, that's completely uncoupled from any of the above. That happens regardless. Yes it's affect reserve levels, but the Fed would provide that regardless of the public's desire to hold cash or the Tsy debt sold.
DeleteAlso the presence of the excess reserves (ER) has no bearing on lending. The Fed will provide the required reserves (RR) AFTER the fact anyway.
(cont.)
ReplyDeleteBTW, if you look that Example #8 I gave you... probably in the comments you'll see "phil" ... and MMTer that Cullen has a HUGE disagreement with... to the point were they get a bit nasty w/ each other. I've actually learned quite a bit from phil, but he does not like that Example #8 (though most of his comments are probably on other posts), and he and Cullen really get into it. It's the only time Cullen has come over to my site to leave comments... in doing battle w/ phil. Personally, I just don't see the big difference. I completely get what Cullen is saying... and I can see it from phil's POV too, ... but I don't get why the acrimony. Oh well. (I do think Cullen's take is better overall, BTW).
Actually, if you can lure "phil" over to take the other side of your hyperinflation FAQ, he'd be excellent! You think I'm persistent and long winded... once phil get's going he just WILL NOT let it go. :D
Actually, if you look at Cullen's recent post here:
Deletehttp://pragcap.com/yes-government-deficits-equal-private-surpluses
It ties into what I'm saying here. Also, I think you can get a hint of why Cullen and phil (MMTer) clash. Personally, I'm still not comfortable with that S = I + (S-I) equation, in that I prefer the longer form. In the short form MR guys like, it does nothing for me: it's an informationless tautology. But I guess the MR guys like it as a kind of convenient shorthand. I get what he's saying and I think his post here is good. But this flies in the face of MMT a bit because it puts the emphasis on the private sector, whereas MMT people sometimes skew things (more like my balance sheets here! .. with $T etc.) such that it appears that we are all "just sitting around sucking our thumbs waiting for the government to spend money and issue bonds" ... Ha... I think that's what drives Cullen crazy about phil. Not that phil ever says that explicitly, but by looking at it from his point of view that can be seen as the implication.
All I've shown here is a subset of financial assets, and as you point out I've skipped net outstanding bank loans (I've implied them, but they are shown as paid off), corporate bonds and stocks and real assets (real estate, etc.). I've also skipped foreign trade.
Also, I have another post that might be interesting to you where I look at what happens if the gov deficit spends, Tsy buys the bonds, and lets them mature and the gov sells more bonds to pay the principal. It's pretty simple stuff and it's not one of my best posts (kind of long for what you get), but for some reason it's one of the most popular on my site.
ReplyDeletehttp://brown-blog-5.blogspot.com/2013/03/banking-example-6-cb-holds-gov-debt-to.html
So... take it w/ all the qualifications I present at the end... not too realistic overall. But it's much the same as Example #8 when you boil it down: linear growth in equity in the private sector vs linear growth in negative equity for Tsy.
BTW, when I say "linear" I don't literally mean linear... I just mean there's not some compounding effect due to QE going on. It's more or less a gradual thing, and there's no giant pool of EQUITY building up behind the scenes waiting to burst.
But it is the feedback loops making hyperinflation non-linear that makes it so interesting and different from normal inflation. In normal inflation the velocity of money and GNP are basically constant. Not so with hyperinflation. Hyperinflation is the interesting case. As in may you live in interesting times. :-)
DeleteVincent, you should be eating this up: the Friedmanites are talking Japan. This one folds in Beckworth, Bill Woolsey, Krugman, and Glasner:
ReplyDeletehttp://www.themoneyillusion.com/?p=22948
so the Friedmanites (my new name for the MMists) would disagree w/ my assertion here that ER > 0 means little: they claim that has a big effect through the "expectations channel."
I don't agree. I think that just having the CB guarantee to provide the reserves as needed should be all the expectations required. They shouldn't have to pre-provide them. Jared/I seemed on the cusp of getting David Beckworth to agree to this... at least in a qualified way... when he ditched the thread :(
I do think though that there's a little bit of a portfolio rebalancing effect that can occur, which perhaps does raise NGDP or expectations of NGDP, but I think that's a second order effect. Of course it depends on how aggressive QE is and what kind of assets they can buy. If the Fed buys bags of dirt, there's no question inflation will ensue.
http://macromarketmusings.blogspot.com/2013/08/a-permanent-expansion-of-monetary-base.html?showComment=1376089065005#c8429590144400010281
Jared has an alternative idea:
http://brown-blog-5.blogspot.com/2013/08/market-monetarists-please-explain.html?showComment=1376083799512#c9050066793138926420
I guess we'll see what happens in Japan:
MRists: Skeptical of Abenomics: think that eventually the crowd will notice the emperor has no clothes.... and perhaps a slip back into recession, low growth, ZLB and deflation? (not sure about this conclusion, ... again, I personally haven't looked into the Japan situation too much)
MMists: Depends on the day. When things are going well: "Abenomics is raising NGDP just like we said it would! We're geniuses!" ... on a day when bad news comes out (like inflation is still under 2%) "They're not doing it right! Why won't they listen to us?"
Hyperinflationists: They're doomed. :) (ha! ... I know your position is a little more complex than that, but you do think all this Abenomics crap will lead to hyperinflation)
"Jared/I seemed on the cusp of getting David Beckworth to agree to this" ... it seems that Sumner here has acknowledged a shift in his own views which now more or less line up with where Jared/I had Beckworth at:
Delete"PS. I can see how someone might have assumed I relied on the Pigou effect in the past, as I’ve argued that QE probably has a small effect above and beyond the expectations channel. Cash and bonds are not perfect substitutes, even at zero rates. But I’ve never emphasized this channel, and in any case it’s based on a (very weak) hot potato effect, not the Pigou effect."
... at least that's how I read it: I translate "I can see how someone might have assumed" into "I used to argue" ;^)
More from Sumner on Japan:
Deletehttp://www.themoneyillusion.com/?p=22961
"They got off to a good start, but need to do more. I suggest another round of yen depreciation combined with more QE. What they did helped a little – - – so do more!"
This comment has been removed by the author.
DeleteMore from Cullen here on the exchange equation (he gives a brief example):
ReplyDeletehttp://ask-cullen.com/is-peters-money-an-endless-loop-where-velocity-matters-more-than-amount/
Tom, if you assume velocity and GNP are constant then the equation of exchange simplifies to say that the more money the higher the prices. But in hyperinflation velocity and GNP are not constant.
DeleteIt turns out that in general velocity is not constant if interest rates are changing. If interest rates are moving lower, then velocity moves lower, and if they are moving higher, then velocity moves higher.
This comment has been removed by the author.
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DeleteThis comment has been removed by the author.
DeleteSorry, about the deleted comments... they could have been based on a misunderstanding, so let's settle that first: in the above, do you mean "...that in general (during hyperinflations)...?" or do you mean "in general any old time, hyperinflation or not...?"
DeleteWhat I mean to say is that the velocity of money depends on the interest rate and the inflation rate. If these are not changing then I expect the velocity of money is not changing, if these are changing, then the velocity of money should be changing. Higher interest rates and higher inflation rates result in higher velocities. Lower interest rates and lower inflation rates result in lower velocities.
DeleteThe above paragraph holds for any old time, hyperinflation or not.
How fiat dies, you say? Here's one spectacular example:
ReplyDeletehttp://www.instablogsimages.com/images/2010/07/24/women-driver-parked-her-fiat-panda-in-the-bathroom_Gofyd_3868.jpg
Another convert to right minded thinking!:
ReplyDeletehttp://pragcap.com/sp-says-repeat-after-me-banks-cannot-and-do-not-lend-out-reserves/comment-page-1#comment-151401
;^)
Hey, Vincent, re: velocity of money, check these charts out:
ReplyDeletehttp://research.stlouisfed.org/fredgraph.png?g=lwt
and compare it with this:
http://research.stlouisfed.org/fredgraph.png?g=lwp
Especially take note of the velocity curves for M1 and M2 and how it is very different in the latter period (1st chart).
Hi Vince,
ReplyDeleteI read the F&A, great points. I see no flaws in them, since you described "only" all mechanisms that (might) apply, IMHO very correctly.
On the other hand you have been carefully enough to avoid a statement that it is inevitable and will happen in a time span of XY.
IMO a HI is only armed and ready to roll, when the liquidity gap is closed and people start to realize that they have a dimishing utility of money. Or in Martin Armstrong words: "when there is no functioning debt market". As long as you have credible debtors to work their bud off, no HI is about to happen.
Greets, AD
The big debtor is the government and they don't really work their but off to pay down the debt, the just borrow more. I am not sure this qualifies as a functioning debt market.
DeleteDon't you think the private sector is a much bigger debtor than the Federal government? Check out figure 1 here:
Deletehttp://keenomics.s3.amazonaws.com/debtdeflation_media/2012/01/TheDebtwatchManifesto.pdf
Vince,
Deleteyes, that's exactly the point I meant. As long as the net producers (=real workers in the real physical plane) are in debt and it is being made sure they stay in debt, the physical market place will still be filled with goods and services, just like the day before.
Go check and ask yourself why do people do sweat jobs in todays times from which we all benefit? Is it, because they just love it and believe in it? Or might it be that they just do it to get along and pay of their obligations?
Now imagine that those real contributers to the physical plane are not in debt any longer, dont you think that it is only human for them to say "hey I paid off my home, my car, my TV, now with the money that is coming in, I will go to the market place myself to get my more stuff, or maybe I will just chill and take a vacation" (=turning from being a remaining net producer in real terms into a consumer as well)?
Earlier you could determine by "moneyness" who is a net producer and who is a net consumer, but since we all probably agree that the money system is completely screwed up, this kind of differenciation is hard to tell. So I always try to look at the physical plane exclusively, because that's the one with its wealth that only matters.
So that's the point of maintaining a "functioning debt market", to have net producers in debt, sounds sick and probably is ;(
The FG narrative is that the value of fiat IMF money is determined by its ability to buy gold. I am not sure of that altough it might not be wrong, I say, you give money value by stealing it from the physical net productive, as soon as this is not the case (liquidity trap filled) BOOM. So that's why I am much more in the Martin Armstrong camp.
Greets, AD
P.S.
DeleteAs soon as the debt is only concentrated by a not producing entity (government, central bank, bad bank) this BOOM effect will be develop. And if you check the HI history. Especially in Weimar you could see this effect about the distribution of debit and credit, due to the war reparation payments.
P.P.S.
DeleteAgain, this is just my opinion and feeling. And I am not saying that this is some conspiracy of whomever to enslave the world to some whatever NWO. Maybe it is maybe not and it is just organic to the system, but that does not really matter.
I try to look at it without any kind of judgement wether that's the way it should be or not, but looking at the world and history to me that narrative would fit pretty good.
So you might just file it into another narrative and see how which fits best for the overall picture.
P.P.P.S. (sorry me again, if you dont mind ;)
Deleteand if this narrative is correct, things that go on today will avoid HI dramatically:
- student loans
- cypress savers
- bail out the parasides
- bail in the savers
- jacking up taxes
- jacking up fees & property taxes
- jacking up capital gain taxes
- putting up CO2 taxes
- tobin tax
(...you name it, everything that can be sold to the public)
how far can you push it and how long? I dont know, as long the parasite has not killed its victim endlessly and I have the impression most people will never move to Galt's Gulch and desprately attempt to overcome their burdens while still believing in the "greater good" and "social justice" and all that other crap.
So the core problem is out of control debt and deficit. So jacking up taxes of any kind might theoretically help but in practice taxes are often so high already that it chases away business and hurts GNP, which makes the risk of hyperinflation higher.
DeleteIf you look at Japan, they are spending twice what they get in taxes. It is really hard to close a gap that large.
sure, but I didnt mean that this is intended to fill the gap, that can not be repaid in full at all anyway and was never intended in no western country, I agree that this is not possible. Increased income tax is just to give the impression and feeling that the money the producers receives for their surplus net after tax is more worth.
Deletee.g. You are a worker and receive $5000. You have to pay off $2000 mortage besides that, otherwise your homeless. If there wouldnt be an income tax, you will have $3000 as spending money. At an income tax of 50%, you would just make it to pay the mortage. But with $500 you barely make it over the month. Now with 60% your dead. Guess what, you as the worker that wants to keep his regular life, will probably get a second part time job. And that is the very essential only point I wanted to make.
Now that was "just" the fiscal monetary approach, it is not about printing up of IOUs or steal them from whomever. No, not at all. My point is, that regardless of all those monetary smoke and mirrors it is important that the worker will continue to work, hopefully even get an additional job.
Let's face it: If only <1/4 of the population works and >3/4 of the population consumes, there cannot be any monetary system that give the producer the impression to be paid in full. But if you jack up the tax to 75% people will probably just quit or enter the black market.
Again: The trick is how to I keep the people producing and push them to produce more than they consume for the growing herd of none producers.
Greets, AD
Yes. If the fraction of the economy that is living off the government gets too large then the productive part can not support it. It can not support it with inflation or with taxes. So the gap can not be closed. So things must fail. It will not be fun.
DeleteI found your HyperInflation FAQ quite informative.
ReplyDeleteThere are just two things that I don't agree with you on.
The first one is Euro HyperInflation.
You yourself say that for a currency to hyperinflate the central bank must be willing to print currency indiscriminately. In the Euro's case ECB is not controlled by any of the govt in the EuroZone. Currently if Greece had its own currency it would have hyperinflated. But at present Germany and others are loaning it money. And Greece is forced into austerity. Similarly Cyprus has had its bank's deposit money liquidated instead of pumping money into the bank to save it. Again because ECB will not print indiscriminately.
Why do you think that a Gold standard is hyperinflation proof, when you already have several examples of politicians abandoning gold standard so that they can print indiscriminately. It was even done by Romans. Why do you think getting back to a Gold Standard would be better than the current situation.
Why not get into something like what Europe is doing. A currency that is not dictated by any nation state. I wouldn't still want it to be the sole currency of the world, but still its better than national currencies. I would prefer several such blocks, each having their own currencies.
Euro is actually harder than any Gold Standard ever could be. It is not in the control of the politicians.
I like to correct here quite some misunderstandings about the Euro:
Delete"In the Euro's case ECB is not controlled by any of the govt in the EuroZone."
The ECB is just as dependent on the governments as the FED. Not more, not less. In the beginning of the ECB, the Maastricht treaty would outlaw bond buying for deficit spending and bail outs by other countries. That line has been crossed and it is openly admitted "We dont care about any rules, if we consider to break them and we will continue to do so".
"But at present Germany and others are loaning it money."
yes, through the ESM. Which is a joke. How can the german government loan money that it does not have by themself, while still running a deficit? Yep, borrowing it by themself. And those bonds are a Tier1 asset by themself for the ECB. How much more MMT nonesense can it get?
"Similarly Cyprus has had its bank's deposit money liquidated instead of pumping money into the bank to save it."
which is also only half of the truth. The ECB/ESM/EU/IMF bailout was much bigger than the bail in. So in the end the same Lehman-QE as usual. And take a special look at the ESM: They can just infinitely monetize on the account of any country at free will. Please tell my why this is any different from the FED<->Treasury.
"A currency that is not dictated by any nation state."
Okay okay. So take a look at the facts? Who "officially" controls the actions of the ECB? The board of members. And how are the actions decided? By the simple majority. Cypress vote at the same weight as Germany. Now just count: PIIGFS..., versus whom?
It is not that a gold standard is safe, it is that gold is safe. Yes, new coins can be devalued but the gold you have can not be. Clearly a paper currency that is backed by gold could stop being backed by gold.
DeleteThe Euro is not a normal currency and so may not follow the normal hyperinflation path. But the central bank has already broken rules, so it is wrong to think that rules will prevent hyperinflation. Normally the central bank rules are broken. Japan had a "note rule" that limited the amount of money the central bank could make and they are just ignoring that now. The Euro could get hyperinflation if Germany left it. It is a funny case and even harder to predict than normal.
"Euro is actually harder than any Gold Standard ever could be. It is not in the control of the politicians."
DeleteGiven the choice of having $100,000 worth of gold or $100,000 worth of Euros put in a vault for the next 50 years, would you really rather have the Euros?
being german/european I like to change this one into: Let's give the only choice of having €100.000 or $133.000 into a vault for the next 50yrs.
DeleteI would take the dollars, altough I know I loose most of it, I wouldnt loose that much as with euros. Because I know my government is very flexible to have monetary reforms while screwing the productive. So although the euro might not hyperinflate, there will be a monetary reform before and as a citizen I loose anyway.
Greets, AD
"Given the choice of having $100,000 worth of gold or $100,000 worth of Euros put in a vault for the next 50 years, would you really rather have the Euros?"
DeleteNeither. I would only keep physical Gold.
I just compared Euro and Gold Standard. Not Euro and Physical Gold.
Actually in the present times of Plastic money, Gold Standard is not usable. There would be too little actual physical gold currency. With Gold being so expensive even the coins will not be in Gold. So there is no difference between a gold backed currency and fiat currency. The Central bank can and will fake data, as long as it's survival depends on it.
About ECB breaking rules. What rules are you talking about? Are you talking about the posturing that they have been making? Or are you talking about any real rule changes.
Greece is a very simple example. Why was Germany forced to help out Greece? ECB would not print, true Germany doesn't want ECB to print. Many of the Sovereign bonds were bought by German Banks using money by German Depositors. If Greece goes down, that money will be defaulted. So they tried to give some money to Greece, to hopefully prevent that loss. But it is futile Greece Sovereign bonds are a bad debt. It was also to buy time.
The 59% haircut resulted in the crisis in Cyprus. Yes Germany and other nations gave 10BEuro, but the rest was taken out from the depositors account itself.
This was possible because ECB is not in govts control. Also this has not caused the ECB to lose control.
Compare this to the Great Depression. US gave up on Gold standard (as far as it concerned the citizens). It lost total control, because the FED wasn't in control, the Govt was.
It is very convenient to blame the banks. When they operate in the legal framework that the govt provides. They are corporates and will make a profit where it can be made. The root of all evil in a democracy is the party system. Democracy can work best only when there is a hierarchy of communities, with representation by individuals for communities, with proper decentralization of power. The founders of the USA had very good ideas, unfortunately the Civil War happened and Abraham Lincoln damaged that vision forever.
I missed the actual answer. IMO a realistic option will not include Gold Standard, as I don't think its a realistic option in the present age.
DeleteSo given a realistic option and an unrealistic option, I am left with the only valid option of Euro. Its actually not a very good option though, if physical gold is an option.
Hi anand,
DeleteWhen you say "Germany" you porbably mean the german state? Guess what, the german state has no money left over to "give", so they "print up" that stuff as well, through the market, up to the ECB. So please tell me where is the difference?
And about the "banks" and insurance companies such as Pimco aka Allianz, they dont have money by themself either, they can only get the money either by savers (aka german workers forced in "pension fonds") and/or by collaterizing at the ECB. So tell me where is the difference?
And when you want to know what rules have been broken:
1.) Violation of the Maastricht trety: max. 3% deficit, max. 60% debt to GDP.
2.) Read the lisbon treaty §125 and compare that with the rules of the newly installed ESM.
3.) Read the conditions of ELA... oh wait a minute you wouldnt find any definition under which conditions those are applicable, those dudes just pull them out of their as...
4.) Talking about pulling something out of ones rear, continue reading about the installation of OMT.
5.) Because lots of PIIGS banks are completely under water they just changed/broken the rules of a minimum reserve from 2% to 1%.
Now tell me, still can or just simply dont want to see how rules are continuesly being broken?
Greets, AD
To answer AD:
DeleteYes German banks are in deep debt. Any deposits in them above the guaranteed amount is suspect. The backbone rule is maintaining inflation rate of 2%. That has not been broken. To preserve that, other rules can be broken.
Yes in extremis, some rules need to be broken. Important is to consider which rules were broken and which were not.
And today we are in Extremis. USD is about to hyperinflate. Maybe one year, 2 years tops.
They are about to increase the 85B$ QE. There is too little liquidity in the markets. When will we get into the same situation, I would think half the time, depending on the amount. So last one took about 8 months, since Jan. This one will barely cross the year. What would happen next. Once inflation makes Bonds worthless, we are into HI, as Vincent has very well provided info.
I know AD, you are more emotional than practical. Your answer to Vincent's question shows that very well. I wish you were practical.
AD:
DeleteHow do German States print up the money?
They take a loan which the market is foolish enough to give it to them.
When you talk about the rules. Do you think these rules are broken by the ECB or EU?
Yeah the EU can break rules, it is governed by the Politicians. ECB is also governed by the Politicians, but not directly. To change ECB, all politicians must get together and tell ECB to do certain things. While to enforce those rules all the Politicians had to get together and tell the defaulting states to not default.
You see the difference?
For ECB to change the politicians must get together. But for breaking rules they don't have to get together. They must get together to prevent breaking of those rules. Its always very difficult to get any group of people to get together and do something. Unless ofcourse they have same incentives. Which in the ECB case they don't.
You talk about a lot of PIIGS banks being underwater, why not look at the German banks, most are also underwater. Actually every large bank in the world is underwater.
Okay, got your point, let's check who broke which rules on my list:
Delete1.) politicians (tolerated by ECB)
2.) politicians (tolerated by ECB)
3.) ECB
4.) ECB
5.) ECB
now what? What's the difference at the end? Again, I agree the Euro will probably not hyperinflate. Why? Because it will end with totalitarian capital controls, fraud & theft at random. And this is something that makes me so emotional. I'd rather have an honest HI than enternal totalitarism. But I have not lost all faith, I am looking forward to see burning streets and regional warlords in the streets of the PIIGS, right now with 65% and rising youth unemployment it's getting prepared.
Let's look at your "main ECB rule": The backbone rule is maintaining inflation rate of 2%. That has not been broken.
And this is simply not true and I wonder how you can say something like that, not living here, without any access to durable numbers. I run a company, so I see lots of prices, especially in the end of the year I get these nice letter saying "sorry, but due to .... we have to raise 3-5%...". Okay that's industry, for the regular person the state tells the people, "we dont give you the raw numbers, who needs those anyway, but look, now you have cheap chinese&korean electronic toys much cheaper, who needs food, energy and housing anyway, therefore the inflation rate is *DRUMROLLS* exactly 2%, just what our price state department predicted & worked on, arent we great?"
I highly recommed Vince document: http://pair.offshore.ai/38yearcycle/
with which I 100% agree. Especially I enjoyed the part how MMTs think they can control inflation: muddling numbers in some computer, price controls and stealing through tax. Yep, that's exactly the desperate attemp we are experiencing right now here in Europe. And IMHO due to the absolute power of the socialist politicians today, they get away with it.
Greets, AD
and to add about your assumtion, that (german) government bonds are not inflationary, since they "just loan" from the market place/savers is also not necessary true, since, depending on the arbitrary credit rating, these IOUs are accounted to Tier1 capital, and when being collaterized through a bank at the CB, you get straight new freshly printed cash, without touching the free market place at all. And the scam gets even bigger: AFAIK spanish banks borrow from german retirement fonds AAA rated bonds, to collaterize at the ECB....
DeleteOn the other hand I like your comment: "They take a loan which the market is foolish enough to give it to them.". You need to know the laws in germany. The for workers in some cases obligatory private retirement fonds are obliged to buy government bonds!!! Or if you want to buy a home, most people are obliged to take out a capital life insurance (which is obliged to buy ...guess what).
So how much more ponzi can it get than living in Europe.
But since 2006 we have a special law to back stop this Ponzi in case it is falling, VAG§89. Which basically says, if the retirement fund is bankrupt, that this is not a bankruptcy by definition and does not free clients, but rather obligies them to continue paying into the failed fund.
http://www.versicherungsgesetze.de/versicherungsaufsichtsgesetz/0089.htm
Again, I am just amazed that the Eurofanboyz just always pray to such scam and call that a stable currency system, how much more MMT can it get?
I probably, know your answer: "but look that has nothing to do with the euro....it is somebody else fault not the euro". Now tell me, when this defaults (I personally really dont care who to blaim in that case in particular), so you seriously think that the nations and economies continue with the euro?
Greets, AD
Vincent
Delete"Yes, new coins can be devalued but the gold you have can not be."
Sure it can. What prevents 1 unit of gold from buying a year's worth of provisions one year and a week's worth the next?
What's to prevent us from finding a huge pile of gold somewhere? An asteroid perhaps?
How do you know fashion won't change and gold will be shunned?
As you probably know, it's possible to manufacture gold in tiny quantities... (VERY inefficiently... with atom smashers). Perhaps a super cheap energy source (fusion?) will enable the mass production of it economically.
Perhaps gold will be found to cause a health issue, and people will want to get rid of it.
If you are in Japan it is trivial for the government to make more Yen and so eventually reduce the value of the Yen you have in your pocket.
DeleteYes, gold can go up and down in value, but it is not trivial for a government, say Japan's government, to devalue gold like it is for them to devalue the Yen. It takes something on the order of Japan's government finding an asteroid, mining it, and bringing the gold back to Earth, all for less per ounce than gold sells for now. This is non-trivial. Comparing this to printing more yen is like comparing a amazing advance in technology to running a photocopier.
In reality it would take decades to bring back significant quantities of gold and the price would change gradually. Japan could get hyperinflation where prices change by a factor of a million. Just not that similar really.
But we've seen wild fluctuations in gold over the past few decades in comparison to the CPI basket of goods.
DeleteFor 2000 years 1 oz of gold has been about enough to get a nice suit, belt, and shoes. Even back in Roman times.
DeleteIn 1963 when I was born a dime could get you a gallon of gas and today 1/10th of an ounce of silver can still get you a gallon of gas.
This is amazing stability for gold and silver prices over very long times.
If I am right and we see factors of 1 million change in the Yen in the next few years you will see the difference between paper money stability and gold and silver stability.
According to David Graeber, gold (and coins) didn't actually play much of a role in most transactions from about 500 AD to 1500 AD. Tally sticks did, but not coins. Nor did it at anytime prior to about 600 BCE.
DeletePlus there's this:
http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png
Is that the kind of roller coaster we want to get on?
Plus I like this from Scott Sumner:
"In 1930 the workers of the major industrial countries were paid in gold. Not gold itself, rather their wages were denominated in terms of so much gold per hour, paid in some other medium. Then in 1930 global gold hoarding caused the value of gold to soar. The price of the commodities that workers buy fell in terms of gold. You might think workers would say to their boss; “We understand that gold has become more valuable, and thus we don’t need as much to buy our usual purchases, so you can pay us an amount of MOE that buys less gold, as long as we can buy our usual goods.” But the workers did not say that. Why not? What’s the title of this blog? They said “We insist on being paid in gold, even though there isn’t enough gold in the world for full employment. We don’t care that our gold wages will now buy more goods and services, we demand payment in gold.” And keep in mind that many workers never owned a gold coin in their life. They were poor. Yet it remained a token with mystical powers to the workers, a sort of barbarous relic."
http://www.themoneyillusion.com/?p=23269
"Is that the kind of roller coaster we want to get on?"
DeleteNo. And if we were not using dollars you would not see that kind of swing. Both around 1980 and now there is serious concern about the future value of the dollar. When gold and silver were money prices could be nearly the same 100 years later.
Hmmm, I'm not sure... Friedman, Schwartz, Sumner, Christensen too (I think)... all concluded the Great Depression had a lot to do with tight money policy, with the gold standard and gold volatility playing a role:
DeleteActually Bernanke was also a scholar of the Great Depression in the Friedman/Schwartz tradition. This is an interesting read from him (describing how gold and the gold standard fit into what happened):
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
If you really want to get to know your opponents views on this (and I know you do!), here's some more:
http://uneasymoney.com/2012/01/08/just-how-scary-is-the-gold-standard/
http://macromarketmusings.blogspot.com/2012/01/hey-newt-we-need-sound-money-not-hard.html
http://uneasymoney.com/2012/02/12/am-i-being-unfair-to-the-gold-standard/
Lots of links in there to Lars and Tyler Cowen, etc. All good stuff!
When I think "gold standard" I think of this kind of deadly volatility and rigid responses to it by the CB leading to depressions.
The Fed had 2.5 paper dollars for every 1 dollar in gold. As people took there gold out it made for a tight money policy.
DeleteIn 1873, 1893 and 1907 there was widespread suspension of convertibility into gold in the banking system during panics. This was not allowed during the bank panics from 1929 to 1933, which resulted in disaster. Friedman & Schwartz lay the blame on the Fed for not suspending convertibility during this period. They pretty much lay the blame on the Fed in general for deflationary policies.
DeleteI lay the blame at the Fed's Ponzi Gold Standard and Fractional Reserve Banking in general.
Deleteand to add:
ReplyDeletejust look at the balance sheet expansion of the ECB. You want to tell me that this expansion is due to natural growth? IMHO when I put the graph of the FED over the ECB I dont really can see your claim, that the ECB is different from the FED in terms of reacting due to government request.
Greets, AD
Vincent,
ReplyDeleteSome ideas here I wanted to point out. I've been looking into the differences between the concepts of unit of account (UOA), medium of account (MOA), and medium of exchange (MOE) recently. I think I tend to agree with JP Koning and Bill Woolsey on this. For example if we were on the gold standard, and a dollar was pegged to 1/35 oz of gold, we'd have
UOA = "dollar" (I put it in quotes, because it's literally the word "dollar")
MOA = gold
MOE = bank deposits, paper reserve notes, coins, Fed deposits
Now the dollar peg could be changed to 1/25 oz and none of this would change, so there's obviously something missing here, and Bill calls that the "definition" relating the UOA to the MOA. So it's the definition that changed.
Now all that's different today is the definition and the MOA. Instead of gold, the MOA is the basket of goods in the CPI. The definition is how big of a slice of that basket of goods one "dollar" buys you... combined with a promise from the Fed to shrink that slice at about 2% a year or so (the inflation rate). Interestingly enough, I think JP partially credits Nick Rowe w/ those concepts, even though Rowe was more ambivalent about it later:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/04/from-gold-standard-to-cpi-standard.html
What do you think about Rowe's argument there? JP extends it here:
http://jpkoning.blogspot.ca/2012/11/discussions-of-medium-of-account-could.html
Bill Woolsey's definitions here:
http://www.themoneyillusion.com/?p=17412#comment-201444
The nice thing about using gold is that it is really hard for anyone or any government to have a big impact on the quantity of gold. A government that really has gold backing their currency can always defend the value, just like a currency board can. All the mining in the world only changes the amount of gold by 1 or 2% per year. Perhaps someday when they are mining asteroids there will be more than a 2% change some year but even then the markets will see it coming and not be a sudden surprise.
DeleteSaying that the value of the dollar is what the CPI says it is does not in any way anchor the dollar. I expect Japan's CPI to shoot up in the next year. What good would it do to say "the value of the Yen is what the Japanese CPI says it is"? The Yen might be worth 1/1000th as much 2 years from now. It is not like a currency board or gold backed money where they really have a pile of assets to support the currency.
"Saying that the value of the dollar is what the CPI says it is does not in any way anchor the dollar."
DeleteSure it does! If your basket of goods is all the stuff your average human needs for life: bread, eggs, shelter, water, electricity, weighted appropriately etc. And you define your UOA as a small piece of this basket. Read Nick's article! He walks you through it. That means you can be assured that your $ still buys you pretty much the same sized slice as you had the year before. Let's do it for laughs. Say the CPI was 12 loaves of bread, 1 stick of butter, 1 gallon of milk. Now if the $ is defined as 1/30 of that. Why isn't that an anchor? You could throw gold and or silver or any other commodity in the basket (in the appropriate quantity) if you wanted as well. That's exactly how Nick walks through the problem actually (except in the other direction).
The bad thing about gold is that it's value in relation to the basket of goods humans need to live can wander all over the place!
DeleteIf you are pegged to gold and have all the gold then you can really keep the peg.
DeleteAs soon as you start doing anything else, even buying bonds, you may not be able to keep the peg. This is really what happened to the Fed in the early 1930s.
http://howfiatdies.blogspot.com/2010/11/feds-ponzi-gold-standard.html
So even trying to peg the CPI at 2%, like Japan is, they can fail and get 1000%.
The big difference between the 1930s and the 1890s, from what I understand is that previously the banks would refuse to convert, thus saving the banks, but later laws were passed for force convertibility.
Delete"If you are pegged to gold and have all the gold then you can really keep the peg.
DeleteAs soon as you start doing anything else, even buying bonds, you may not be able to keep the peg. This is really what happened to the Fed in the early 1930s."
This is the whole problem with Gold Standard. It relies on the honesty of the Political class :-).
Actually there is nothing that you can leave up to the political class. Its better to keep your excess production in gold, and don't care what the currency is.
This is only possible though when the gold is not pegged to currency. The govt may resort to Confiscation when it is running out of gold. This is what happened in the Great Depression.
Fiat is better, we are free to buy gold, and the political class is free to waste the currency. They are not forced to confiscate our gold. Only money from those that are foolish to keep in banks or in currency lose out. But the foolish and their money is easily parted.
Here's who you should be arguing with:
ReplyDeletehttp://www.themoneyillusion.com/?p=23406
http://www.themoneyillusion.com/?p=23345
http://www.themoneyillusion.com/?p=23337
The Milton Friedman fans! (step on the gas, Japan's doing better, etc, etc, etc) Lol
Here's another on Japan to add to the list:
ReplyDeletehttp://marketmonetarist.com/2013/09/05/there-is-no-fiscal-cliff-in-japan-a-simple-as-ad-analysis/
Thanks!
DeleteHaving trouble posting there too. Nothing shows up then I try again and it says detected duplicate posting. Very strange.
Going to be something like Firefox on Ubuntu having trouble with wordpress comments.
The weird thing today on Marcus' site was I tried posting 1st w/ your name, your website, and an email address I have (that I know is good), but which I never actually use. It didn't work. so then I removed the link to your FAQ from the body of the email (and maybe from the header too... I can't recall) and it STILL wouldn't let me. Then my test message went through w/ my usual info in the header.
DeleteOK, you want another one? This isn't about hyper-inflation, but fiat money. One of Sumner/Rowe/Koning's commentators (DOB) had some interesting things to say. He's not a PKEer (doesn't think banks are important) but also not a MMist (doesn't think the stock of money is important, base or otherwise). He's (actually I don't know if it's "he" or "she") pretty insightful. Perhap's he's most akin to a new Keynesian type like Michael Woodford (is Michael an NKer?). I think DOB says he really doesn't have a school though in his blog description. Anyway, he proposes something here I thought you might be interested in:
http://catalystofgrowth.com/theory/fiat-currency-construction/
phil's over there making comments on it.
"body of the email" ... should be "body of the post"
DeleteBTW, did you and Marcus every engage in a thread? I'd be interested to see that.
DeleteVincent, I thought you'd like (hate!) this from DOB:
Delete"If tomorrow, IOR was lowered back to -50bps and the Fed repoed out its inventory to support the Treasury GC repo rate at its current level (and Fedfunds by extension), it’s likely the monetary base would drop back from $3trn to $1trn or so in a matter of days. Economic impact of such an action? Absolutely nothing: quantity doesn’t matter! It would just be nice from a housekeeping standpoint."
http://catalystofgrowth.com/2013/07/12/quantity-doesnt-matter-part-2/comment-page-1/#comment-259
I can not post on catalystofgrowth either. I tried 2 browsers, firefox and lynx (text only browser). I rebooted the computer. Still can not post.
DeleteIt seems I have trouble with wordpress sites.
So I thought maybe if I made a wordpress account things would work better. I did and it now says, "sorry this comment could not be posted".
DeleteSo clearing cookies and using "Vinny C" as a name and not linking to howfiatdies I was able to post to where it says "comment awaits moderation" on catalystforgrowth.
DeleteWith your tests in my name and this test, it is very clear wordpress has it out for Vince Cate and howfiatdies.
Check it out Vincent, an MMist that doesn't have much use for the equation of exchange! Now that's a bit of a rarity I think! (I could be wrong!)
ReplyDeletehttp://monetaryfreedom-billwoolsey.blogspot.ca/2012/10/money-and-medium-of-account.html
Thanks. I can post to blogspot type blogs, and posted there.
DeleteSeems wordpress has decided I am a robot spammer.
Milton Friedman gives some advice for Japan in 1998 (short):
ReplyDeletehttp://www.hoover.org/publications/hoover-digest/article/6549
He talks about excellent monetary policy when Japan decreased the rate of growth in the money supply from 25% to 10% and then 3% per year. If he were alive and saw that Japan increased their money supply by 3.4% in the last 10 days I think he would be ringing the alarm bells.
DeleteThought you'd like this:
ReplyDeletehttp://en.wikipedia.org/wiki/Mart%C3%ADn_Redrado#Removal_and_controversy
Vincent, do you have a problem with NGDPLT? Say at 5% a year?
ReplyDeleteBecause Vincent, if you DO have a problem with it... this is the place to elaborate on it. Nick's looking for examples:
Deletehttp://worthwhile.typepad.com/worthwhile_canadian_initi/2013/09/is-ngdplt-a-perfect-guard-dog-a-challenge.html
It's "typepad" ... perhaps you can post there.
Thanks. I was able to post. Any rule limiting the central bank gets tossed out or ignored when it is time for the central bank to really fund government deficit spending and get hyperinflation.
DeleteVincent, here's some intellectual jousting for you: more from Nick Rowe on what makes a bank a central bank: asymmetric irredeemability: and why a central bank with a redeemable gold standard is not really a central bank: but the gold miners COULD be, if they wanted to: even though they might have to fight it out for dominance.
ReplyDeletehttp://worthwhile.typepad.com/worthwhile_canadian_initi/2009/10/what-makes-a-bank-a-central-bank.html
Friedman interview: discusses Austrian Business Cycle Theory (ABCT) and Hayek near the bottom:
ReplyDeletehttp://www.hoover.org/publications/hoover-digest/article/6459
Yes, I have seen that. I think Friedman was right about capitalism in general but wrong about government made money and the problem of central planning the money supply and interest rates. A real capitalist does not like central planning of any type.
DeleteOuch! Are you saying Milty wasn't a "real capitalist?" I think he'd be hurt! But perhaps he's a "practical capitalist" ...taking what works over ideological purity. You suppose that might be justifiable? It is for me... but then I'm not tying myself down as a "capitalist" necessarily... I'm willing to listen to ANYONE's ideas. ;)
Delete(To me, purity is always the enemy: I'm a purist about that!) :D
And here you go... an opportunity to jump in the fight on the MMists side for once! (against the PKEers):
ReplyDeletehttp://www.interfluidity.com/v2/4583.html
Waldman/Roth(comments) (PKEers?) are arguing demographics caused the Great Inflation (1970s) more than it being a "monetary phenomena" (as Milton Friedman always claimed). Their opponents? The MMists (of course: always coming to Milty's defense!): in this case Sumner/Sadowski(BIG detailed comments in posts)/Nunes(Nunes on his own blog).
Vincent, I know I've posted a lot of links for you over the past few days, but this is really a great opportunity... one of Sumner's commentators (Mark A. Sadowski) is really really good at digging up ALL kinds of data very quickly. I don't know if he's an MMist... but he certainly does support NGDPLT and he's at a minimum very sympathetic to the MM views. He's a favorite of Sumner and Nunes (they keep encouraging him to start his own blog). I tried to suck him into taking the anti-NGDPLT view by pointing him to that challenge that Nick Rowe put up, but he was "insufficiently motivated" to do so... he didn't want to go on a "snipe hunt" cause he's not a "chump." Anyway, he started touching on hyperinflation today in the Confederacy, complaining about the typical PKE/MMT view of it. He also briefly mentions that "at least" the Austrians don't go there, even if they are overly worried about hyperinflation. Well here's what he said in a post today:
ReplyDelete"In the econoblogosphere you constantly hear from Post Keynesians and MMTers that just about everything causes inflation except money. The usual explanations are demographics, commodity prices and war. (Thank God this is something the Austrians have right, even if they do think hyperinflation is lurking under every bed and around every corner.)"
http://www.themoneyillusion.com/?p=23432#comment-273870
So I would suggest to you that if you really want to have your views challenged, then you need to get Mark to be "sufficiently motivated" to take you on... or even Marcus Nunes. Either will unleash a fire hose of data on you (just look at what Mark does in the above post... in several different comments there). It'll be like a dream come true for you! ;^)
My friend Mike Sax sure got an earful... but he was glad of it... and thanked Mark for the info.
Thanks!
DeleteMy comment there is now awaiting moderation. I posted on Marcus blog but he has not responded yet.
Vincent, Scott Sumner has his own FAQ page you might like (hate):
ReplyDeletehttp://www.themoneyillusion.com/?page_id=3447
Because when they start buying bonds with new money it pushes the interest rate down and lower interest rates lower the velocity of money there is a lag between when money is created and when prices go up. I am sure he is wrong on #13. And because of this there is a risk of overshoot. And by overshoot, I do include hyperinflation.
DeleteHere's Scott on "long and variable lags" and "overshoot":
Deletehttp://www.themoneyillusion.com/?p=10952
http://www.themoneyillusion.com/?p=940
Scott has to use Italy as an example of a country not resorting to inflation to get rid of its debt. But Italy is on the Euro and can not resort to inflation. Japan is the only real counterexample and if I am right people soon will not want to hold it up as an example. Be interesting to see the next BOJ report tonight at 9 PM.
DeleteIf Italy tried to return to the Lira before fixing their deficit they would get hyperinflation right away.
The Fed may suffer some capital losses. He thinks if the market is efficient they won't? Can you follow any logic there? Central banks can artificially depress the price on long term bonds by being huge buyers and then have losses when they later try to sell them. He thinks that a gigantic government distortion of the market can't happen by efficient market theory? He is wrong.
When an economist says that if things don’t work out the way he predicts it could only be because people at the central bank or government are grossly negligent, he has left himself a copout. This economist will throw out all experimental results that contradict his theory by saying, “well in that case those humans were bad”. It is not real science.
DeleteVincent, you have to admit Scott's Q&A #20 was funny though:
Delete"20. Aren’t you just a monetary crank trying to solve all the world’s problems by printing money?
Yes, but like a broken clock the monetary cranks are right twice a century; 1933, and today. The other 98 years I am a Chicago-trained, libertarian, inflation-hawk. Twice a century I put on my Irving Fisher super-hero suit, and emerge from my deep underground bunker."
Maybe you should insert a little humor in your FAQ... in your case I'd lead off with it... maybe that'll get more people to pay attention. The self-deprecating kind is especially effective here I think. :D
Let me try to help you out here:
DeleteQ: Aren't you just an overwrought father of four living on a tiny tropical island, entertaining yourself with visions of financial haywire in the world's major economies?
A: Yes, absolutely. How else am I supposed to keep my sanity?
...something like that! I'm sure you'll figure it out. :D
I liked this too:
ReplyDeletehttp://www.economist.com/blogs/freeexchange/2013/08/economic-history
I find Frances' post here to be related loosely:
Deletehttp://coppolacomment.blogspot.com/2013/09/savings-investments-and-dose-of-realism.html
Vincent, another interesting thing here. Have you heard of Mike Sproul? I don't know his work very well, but I've been engaged with him in a thread recently. Sumner, Rowe, and Glasner all refer to him with some deference and have linked to his work, but he's a bit out of the main stream. He's a "real bills" proponent (I think) but I'm sure he's a "backing theory" proponent, which means that fiat money is an illusion: claims there is no such thing:
ReplyDeletehttp://www.csun.edu/~hceco008/realbills.htm
... also the "backing theory" replaces the QTM.
DeleteI think there are many reasonable ways to view things and it is good to be able to understand different ones. When central banks fiat money goes bad they have always violated the real bills rules. If the Fed limited itself to 60 day bonds and never bought 30 year bonds it could not get the kind of losses it has over the last 4 months, which as they continue will really make it so that it can not unwind all the stimulus they have done. This is a very legitimate way to look at things. The Fed will be in huge trouble because they violated the Real Bills guidelines. I have not heard of Mike Sproul but looking at his stuff agree with him so far.
DeleteI made a post on Real Bills and his work.
DeleteVincent... you should check out the bang up job that Mark A. Sadowski did in utterly dismantling Steve Waldman's recent posts over at interfluidity (Steve's #26 on the list of most influential econ blogs... Cullen's at #53):
ReplyDeletehttp://www.interfluidity.com/v2/4706.html
Check out those links! Especially to the article that Steve completely crossed out, charts and all, and then called "essentially bullshit" ... Ha! ... and then thanked Mark for the feedback. Steve is a humble guy... make more so by Sadowski's cutting criticism! Here's the crossed out article:
http://www.interfluidity.com/v2/4624.html
(BTW, I informed my inter-net friend Mike Sax that he got a plug from Steve on that 1st link above! He didn't know)
I guess I'd be flattered if Sadowski cared enough about my posts to force me to cross them all out! Ha! :D (but I did get a plug myself today from Cullen... Mr. #53! Ha!)
Which brings me to my next point: a way you can get Sadowski to come over here and force you to cross out all your posts!... let him know you're a fan of RBC (Real Business Cycle) theory, and especially of Kydland and Prescott. Here's Mark on the subject:
"I've wagered my whole economic life on the defeat of RBC."
"Kydland and Prescott's [RBCers] work is a tough sell to me. You don't seem to get it. As far as I'm concerned they are the dark side. I'll combat with every ounce of energy I have into the darkest corners of hell."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/04/monetary-policy-is-just-one-damn-interest-rate-after-another.html
Ha!...
To make it plausible, just go back through and riddle your posts with references to RBC, and Kydland & Prescott. The more motivated Mark is, the harder he goes at something!
DeleteI would love to get Mark A. Sadowski to critic my work on hyperinflation but don't really have any interest in arguing RBC with him. I am not sure your plan would really get what I am looking for. :-)
Delete... well, yeah, your right... I was just being silly. But if you could get him similarly fired up... once he's motivated he can really change things (including people's minds, as you can see). Note that I don't actually agree with him on everything though... I do respect his knowledge, familiarity with the data, and analysis skills... since I have precious few of any of those, especially the latter two (at least in the world of Econ... I don't even know how to make a FRED chart... that's on my list of things to learn!).
Delete... ok, I'll offer you a piece of advice (take it for what's it worth!) as to how to get more feedback of the valuable kind. You can have a 1000 yahoo's like me commenting here, arguing for or against what your saying and it won't amount to a much. But if you're truly interested in seeing why or why not your hypotheses might be correct from somebody like Mark I would de-emphasize the "hyperinflation" angle. I for one am attracted to the PKE/MR view of things (as you know) but I have an open mind about it. That's why I like reading about the MMists and the NKers (mostly the former). I've learned not to underestimate them. After reading a few PKE ideas ("loans create deposits," etc) I was way over-confident. It took me a while to learn that Sumner et al are not morons... they are well aware of those concepts (just go back through Sumner's OLD posts.... especially in his threads w/ JKH to see what I'm talking about).
DeleteHe's knows the argument, he's considered it, and he still thinks that banks don't matter. I see so many people make the mistake of underestimating him on his level of understanding which naturally just pisses him off and makes him unwilling to engage with you. If I went over there posting links to my "Why banks matter FAQ" he'd ignore them. Better to find where his views *might* conflict with my beliefs and argue things in his terms. I find I get a much more positive reaction from that.... and much more useful feedback.
It is easy to make Fred graphs. Just go to:
Deletehttps://research.stlouisfed.org/fred2/graph/
Under Add Data Series you can browse different data to add. If you add more than one data series to the same line you can make a function using both. You can also just have several different lines. It is easy and very good to know.
Hyperinflation is the thing I am most interested in. I am afraid that your recommendation to de-emphasize the "hyperinflation" is just not going to work for me. :-(
Banks may be interesting for some things, but only monetization by the central bank seems to matter for hyperinflation. The "bank made money" is just not important, once things are moving.
I understand Vincent... perhaps that's too much to ask. Hyperinflation is your thing. But this is what I have in mind... or example, with Sumner. Say he'd written #13 of his FAQ in the body of a post... you pop in with the following:
Delete"Scott, because when they start buying bonds with new money it pushes the interest rate down and lower interest rates lower the velocity of money there is a lag between when money is created and when prices go up. I am sure you are wrong on #13. And because of this there is a risk of overshoot."
See... almost the same as what you wrote here.., I just left off the "hyperinflation" bit... Now Scott gets back to you and tells you why you're wrong instead of ignoring you completely. Now you respond... and perhaps one or both of you learn something. In my case it's ALMOST always me that learns something (I'm pretty sure).
... or let me put it this way. Say you know for certain that the best way to appease the gods is throwing maidens down volcanoes. But the poor misguided people in the next village over don't understand this and furthermore don't take kindly to that view, and think that the only REAL way to appease the gods is to cut their enemies hears out while they're still alive.
DeleteNow say you were concerned about the well being of ALL villagers on the Island (being the magnanimous guy that you are), so you're eager to share the good word about maiden tossing, volcanoes, etc. Understandable Vincent, but it might be advisable to cool your jets ... just a little! Say you're invited over the neighbor village's shin-dig... I wouldn't bring up the maiden-tossing thing ... at least not right away! ... especially if the shin-dig involves some heart cutting... you might want to be a bit more circumspect... causally mention... "So, did you guys run out of hearts to cut out last week? No?... You had plenty to cut out you say... Hmmmm.. Oh, well I was only asking because you had that big fire and all, which burned up all your huts.... I figured it was because you guys ran out of hearts. No... No we didn't have a fire actually, funny you should ask..."
You bring it on gradually, because the poor deluded heart cutters have to brought around to see the light gradually. You see?
:D
Sometimes all you have to do is ask. :-) Mark has been looking at my hyperinflation stuff:
Deletehttp://www.interfluidity.com/v2/4706.html
Vincent! Great!... I'm glad you were able to get Mark's attention on this. I read you entire exchange on interfluidity and I re-read the parts of your FAQ he was reviewing that you re-wrote. Fantastic!
DeleteI did not have the impression however that he reviewed the entirety of your FAQ, did you?
I have to say, I'm actually surprised that he spent as much time on it as he did! Just curious, after finding him receptive to looking at your FAQ, why didn't you ask him directly if he believed there was a serious risk of hyperinflation in the developed countries or not, and if so why or why not? That would have been a good question don't you think?
DeleteI thought it was clear enough what he thought of the risk of hyperinflation from his comment, "But it quickly veers into an over the top hyperinflation fearfest that I simply do not subscribe to.".
DeleteI am not sure he really read and thought about the whole thing but he clearly helped me get off to a better start. The core definition is really key get as right as possible.
With at least 4 current cases of hyperinflation, using my 26% cutoff, I find it sort of strange when people dismiss hyperinflation as something that never happens. This seems to be a case of people using a 50% per month definition. So it is good to attack this issue head on.