Hyperinflation is that transition period when a paper money is clearly failing as a store of value but has not yet died as a medium of exchange. This blog is to look at this and any other interesting economic issues. Vincent Cate
Vincent, I put up the bat signal, both on the Forbes site and Sumners... yes, I invoked the name of Mark A. Sadowski. He should be swooping in soon to right any injustice. :D
... which means Mark either carpet bombs Kotlikoff's article, mercilessly pummeling him until he crosses it all out and begs for forgiveness.... OR... Mark carpet bombs Sumner... OR Mark can't decide who's right and nothing much happens (rare!).
For anybody reading this that doesn't know, Prof. Scott Sumner (noted Milton Friedman fan and influential Market Monetarist blogger) thinks that the author of this Forbes article (Kotlikoff) Vincent links to has gone off the deep end. Here's Sumner's article:
Remember that Mark was not able to pummel me mercilessly and I think Kotlikoff and I are thinking the same things. So I doubt Mark will find flaw in what Kotlikoff has. I do look forward to seeing what Mark says though. I love the "put up the bat signal". :-)
Vincent, you are correct... However, Mark rarely takes the opposite side of Sumner. Plus, he may not have pummeled you mercilessly... just because he hasn't gotten around to it yet. :D
Last time I tried to stir up trouble I mentioned that I thought you'd made some relatively near term predictions (a matter of months) regarding Japan & hyperinflation-related-issues (which you did later admit to I think... though I never found any examples). If I recall Mark's response correctly it was something like "Well that's just nuts." :D
So I certainly hope Mark takes in interest in this one and has something to say, because he almost always has something interesting to say when he gets fired up. But I have seen him not get fired up... so that's certainly a possibility. That would be a sad. )c:
I'd be happy to see him get fired up regardless of who's side he takes!
I am very confident that I really understand the mechanics of hyperinflation. Any predictions I make are really just "educated guesses". These 2 things are very different.
Yes, I too hope Mark jumps in no matter who's side he takes.
Had a long back and forth with Cullen. My point was just that when he says a government with a printing press can not run out of money he is not really correct. They can print so much paper currency that nobody accepts it as money any more. Seems I just could not make him understand this point. http://pragcap.com/chart-o-the-day-u-s-government-credit-default-swaps-moving-on-up/comment-page-1#comment-156177
Cullen says "can't run out of money" a lot. I have called him on it many times over the years. It is a simple point and I am sure I am correct. However, it is like I am challenging a key article of faith in his religion. No amount of logic can shake his faith.
Vincent... some good stuff going on in this follow up post. Here's an example from Sumner:
"Rebeleconomist, I am the one using these terms in the conventional way. I doubt you could find anyone talking about how “printing” interest-bearing reserves can lead to hyperinflation, at least prior to 2008. If you can find it in the economics literature please let me know.
You probably don’t know this, but there is a long literature on the concept of printing money to monetize the debt and how that can lead to hyperinflation. In that literature 100% of the cases refer to the production of high-powered money, not interest-bearing reserves. You can call it whatever you want, but it doesn’t help Kotlikoff’s argument at all."
Vince, Mish has an article on his blog today about hyperinflation. He says: -----But with total credit market debt approaching $60 trillion, it is absurd to believe $85 billion a month in QE will cause hyperinflation. The above chart is surely a sign of inflation, but it's hardly the kind of stuff that will make the dollar become worthless. The Fed's policies are not going to cause hyperinflation. The idea is silly. Congress could cause hyperinflation (in theory). Yet, Congress is highly unlikely in practice. I will readily admit that just because something has no happened yet, does not mean it can't. But the odds are about as close to zero as you can get within a 5 year time frame (and probably decades). ----- Could you give your opinion on Mish's comments?
Imagine a guy with a small hand held flame thrower used to burn weeds off his gravel driveway. I imagine Mish saying, "there is no way that little flame thrower could burn up thousands of acres of forest". If the forest is dry enough, and has enough dry grass and dry bush, a small fire can start a big chain reaction.
I can't say for sure if the USA is ready for the chain reaction. But I don't think Mish even gets the problem of a possible chain reaction.
Mish has said that he expects a "currency crisis" in Japan. I have asked him if he thinks prices in Japan will go up more than 26% a couple times but he has not answered. I think he may be close to me on Japan.
" But with total credit market debt approaching $60 trillion, it is absurd to believe $85 billion a month in QE will cause hyperinflation."
Imagine we watch some guy use a small hand held flame thrower to burn the weeds off his gravel driveway. We note it takes him 1 hour to clear a driveway 200 feet long and 8 feet wide. From this you might conclude that it was absurd to believe he could ever burn up a forest that was 100,000 acres. But that would be overlooking the potential of chain reaction, or feedback. If the forest is dry enough it might be that just a touch of the small flame thrower could result in the whole forest burning up. The most important thing to understand about hyperinflation is that it is a positive feedback loop.
Vincent, one of the big messages I'm hearing over and over again from the non-hyperinflationists is that the US economy is still productive, and thus perhaps a lot less like this dried out forest than you're imagining it is. Maybe you're overlooking a healthy rain this forest is getting making it far less flammable than you're thinking.
Maybe. It really looks like the issue is the central bank funding the government's deficit spending. There are plenty of hyperinflation that did not start with a loss of productive capacity, so I really don't think that is the key issue. As far as central bank funding government deficit, Japan is looking primed for a fire. The US is rather dry but not so bad.
Also note that in every case it seems the hyperinflation only ended when the central bank was no longer funding a big government deficit. It fixing that is what it takes to cure hyperinflation, it seems rather safe to conclude that is the cause.
So to my "Many Explanations for Hyperinflation" I had added a "rejected explanations section". In that I have:
Drop in productive capacity. During hyperinflation real productive capacity goes down. This is because credit is no longer available, price controls make all kinds of shortages, and it is just hard to do business in a hyperinflation environment. In most cases this loss of productive capacity is part of a feedback loop but as much an effect of hyperinflation as it is a cause. There are some hyperinflations where the government deficit can be traced back to a drop in taxes from a drop in productive capacity, but this does not work as a general explanation for hyperinflation.
... is it possible that in general, in a generally productive nation, that leaving a ZLB environment into a positive interest rate environment that productive capacity actually rises... at least at moderate levels of inflation. Thus an epsilon away from the ZLB we find ourselves in a regime of negative rather than positive feedback loops. You are assuming that we jump right to the hyperinflation where you see a positive feedback loop. Maybe your missing a "local minimum" of negative feedback that helps to stabilize the productive nation. I.e. perhaps there's a "region of convergence" of negative feedback which leads to some kind of at least quasi-stability (like an attractor does in non-linear dynamical systems) which you are overlooking by assuming we push the inflation to the point where we're outside the ROC.
Yes, most of the time the feedback loops that I am talking about are not operating. Figuring out when/why they kick in is the million dollar question. If I can figure that out then for sure I can get rich. :-)
As long as interest rates are going down then bond prices are going up and people are happy to hold bonds. This has been stable for 30 years. However, after getting to the ZLB you can not go lower and it is hard to make bondholders happy. It seems like interest rates may be going up. This is not stable. The more people that become convinced that interest rates are going up, the less will want to hold bonds. But the more that sell then the more interest rates go up, or the more money the central bank has to print.
But yes, there may be other stabilizing factors, local minimum, regions of convergence, whatever.
I am sure the feedback loops I talk about are happening in hyperinflation. After some point they do kick in. And I don't have an answer for how stable the current spot is. But I do think the ZLB is not one of the more stable spots.
Vincent, I put up the bat signal, both on the Forbes site and Sumners... yes, I invoked the name of Mark A. Sadowski. He should be swooping in soon to right any injustice. :D
ReplyDelete... which means Mark either carpet bombs Kotlikoff's article, mercilessly pummeling him until he crosses it all out and begs for forgiveness.... OR... Mark carpet bombs Sumner... OR Mark can't decide who's right and nothing much happens (rare!).
DeleteFor anybody reading this that doesn't know, Prof. Scott Sumner (noted Milton Friedman fan and influential Market Monetarist blogger) thinks that the author of this Forbes article (Kotlikoff) Vincent links to has gone off the deep end. Here's Sumner's article:
Delete"Kotlikoff goes off the deep end"
http://www.themoneyillusion.com/?p=23933
Enjoy!
Remember that Mark was not able to pummel me mercilessly and I think Kotlikoff and I are thinking the same things. So I doubt Mark will find flaw in what Kotlikoff has. I do look forward to seeing what Mark says though. I love the "put up the bat signal". :-)
DeleteVincent, you are correct... However, Mark rarely takes the opposite side of Sumner. Plus, he may not have pummeled you mercilessly... just because he hasn't gotten around to it yet. :D
DeleteLast time I tried to stir up trouble I mentioned that I thought you'd made some relatively near term predictions (a matter of months) regarding Japan & hyperinflation-related-issues (which you did later admit to I think... though I never found any examples). If I recall Mark's response correctly it was something like "Well that's just nuts." :D
So I certainly hope Mark takes in interest in this one and has something to say, because he almost always has something interesting to say when he gets fired up. But I have seen him not get fired up... so that's certainly a possibility. That would be a sad. )c:
I'd be happy to see him get fired up regardless of who's side he takes!
Here are some examples where I come close to making predictions on Japan:
Deletehttp://howfiatdies.blogspot.com/2013/09/zooming-past-inflation-target.html
http://howfiatdies.blogspot.com/2013/05/bank-of-japan-printing-at.html
I am very confident that I really understand the mechanics of hyperinflation. Any predictions I make are really just "educated guesses". These 2 things are very different.
Yes, I too hope Mark jumps in no matter who's side he takes.
Oh, and Mark was just looking at my Hyperinflation FAQ that does not make any predictions.
DeleteHad a long back and forth with Cullen. My point was just that when he says a government with a printing press can not run out of money he is not really correct. They can print so much paper currency that nobody accepts it as money any more. Seems I just could not make him understand this point.
ReplyDeletehttp://pragcap.com/chart-o-the-day-u-s-government-credit-default-swaps-moving-on-up/comment-page-1#comment-156177
Ya, I saw that.
DeleteCullen says "can't run out of money" a lot. I have called him on it many times over the years. It is a simple point and I am sure I am correct. However, it is like I am challenging a key article of faith in his religion. No amount of logic can shake his faith.
DeleteVincent, you got some responses.
ReplyDeleteVincent a follow up post from Sumner:
ReplyDeletehttp://www.themoneyillusion.com/?p=23967
Vincent... some good stuff going on in this follow up post. Here's an example from Sumner:
Delete"Rebeleconomist, I am the one using these terms in the conventional way. I doubt you could find anyone talking about how “printing” interest-bearing reserves can lead to hyperinflation, at least prior to 2008. If you can find it in the economics literature please let me know.
You probably don’t know this, but there is a long literature on the concept of printing money to monetize the debt and how that can lead to hyperinflation. In that literature 100% of the cases refer to the production of high-powered money, not interest-bearing reserves. You can call it whatever you want, but it doesn’t help Kotlikoff’s argument at all."
Vince,
ReplyDeleteMish has an article on his blog today about hyperinflation. He says:
-----But with total credit market debt approaching $60 trillion, it is absurd to believe $85 billion a month in QE will cause hyperinflation.
The above chart is surely a sign of inflation, but it's hardly the kind of stuff that will make the dollar become worthless.
The Fed's policies are not going to cause hyperinflation. The idea is silly. Congress could cause hyperinflation (in theory). Yet, Congress is highly unlikely in practice.
I will readily admit that just because something has no happened yet, does not mean it can't. But the odds are about as close to zero as you can get within a 5 year time frame (and probably decades).
-----
Could you give your opinion on Mish's comments?
Thanks
Imagine a guy with a small hand held flame thrower used to burn weeds off his gravel driveway. I imagine Mish saying, "there is no way that little flame thrower could burn up thousands of acres of forest". If the forest is dry enough, and has enough dry grass and dry bush, a small fire can start a big chain reaction.
DeleteI can't say for sure if the USA is ready for the chain reaction. But I don't think Mish even gets the problem of a possible chain reaction.
Mish has said that he expects a "currency crisis" in Japan. I have asked him if he thinks prices in Japan will go up more than 26% a couple times but he has not answered. I think he may be close to me on Japan.
I wrote the following comment on Mish's blog:
Delete" But with total credit market debt approaching $60 trillion, it is absurd to believe $85 billion a month in QE will cause hyperinflation."
Imagine we watch some guy use a small hand held flame thrower to burn the weeds off his gravel driveway. We note it takes him 1 hour to clear a driveway 200 feet long and 8 feet wide. From this you might conclude that it was absurd to believe he could ever burn up a forest that was 100,000 acres. But that would be overlooking the potential of chain reaction, or feedback. If the forest is dry enough it might be that just a touch of the small flame thrower could result in the whole forest burning up. The most important thing to understand about hyperinflation is that it is a positive feedback loop.
http://globaleconomicanalysis.blogspot.com/2013/10/ron-paul-ruins-great-rant-seriously.html
Vincent, one of the big messages I'm hearing over and over again from the non-hyperinflationists is that the US economy is still productive, and thus perhaps a lot less like this dried out forest than you're imagining it is. Maybe you're overlooking a healthy rain this forest is getting making it far less flammable than you're thinking.
DeleteMaybe. It really looks like the issue is the central bank funding the government's deficit spending. There are plenty of hyperinflation that did not start with a loss of productive capacity, so I really don't think that is the key issue. As far as central bank funding government deficit, Japan is looking primed for a fire. The US is rather dry but not so bad.
DeleteAlso note that in every case it seems the hyperinflation only ended when the central bank was no longer funding a big government deficit. It fixing that is what it takes to cure hyperinflation, it seems rather safe to conclude that is the cause.
DeleteSo to my "Many Explanations for Hyperinflation" I had added a "rejected explanations section". In that I have:
DeleteDrop in productive capacity. During hyperinflation real productive capacity goes down. This is because credit is no longer available, price controls make all kinds of shortages, and it is just hard to do business in a hyperinflation environment. In most cases this loss of productive capacity is part of a feedback loop but as much an effect of hyperinflation as it is a cause. There are some hyperinflations where the government deficit can be traced back to a drop in taxes from a drop in productive capacity, but this does not work as a general explanation for hyperinflation.
... is it possible that in general, in a generally productive nation, that leaving a ZLB environment into a positive interest rate environment that productive capacity actually rises... at least at moderate levels of inflation. Thus an epsilon away from the ZLB we find ourselves in a regime of negative rather than positive feedback loops. You are assuming that we jump right to the hyperinflation where you see a positive feedback loop. Maybe your missing a "local minimum" of negative feedback that helps to stabilize the productive nation. I.e. perhaps there's a "region of convergence" of negative feedback which leads to some kind of at least quasi-stability (like an attractor does in non-linear dynamical systems) which you are overlooking by assuming we push the inflation to the point where we're outside the ROC.
DeleteYes, most of the time the feedback loops that I am talking about are not operating. Figuring out when/why they kick in is the million dollar question. If I can figure that out then for sure I can get rich. :-)
DeleteAs long as interest rates are going down then bond prices are going up and people are happy to hold bonds. This has been stable for 30 years. However, after getting to the ZLB you can not go lower and it is hard to make bondholders happy. It seems like interest rates may be going up. This is not stable. The more people that become convinced that interest rates are going up, the less will want to hold bonds. But the more that sell then the more interest rates go up, or the more money the central bank has to print.
But yes, there may be other stabilizing factors, local minimum, regions of convergence, whatever.
I am sure the feedback loops I talk about are happening in hyperinflation. After some point they do kick in. And I don't have an answer for how stable the current spot is. But I do think the ZLB is not one of the more stable spots.