Gary North quotes Keynes and someone who says they got some notes from someone who interviewed Lenin. Part of it is:
Hundreds of thousands of rouble notes are being issued daily by our treasury. This is done, not in order to fill the coffers of the State with practically worthless paper, but with the deliberate intention of destroying the value of money as a means of payment. There is no justification for the existence of money in the Bolshevik state, where the necessities of life shall be paid for by work alone.Assuming this quote is correct, my bet is that after the currency was "practically worthless paper" Lenin was trying to pretend that it was planned so that it looks like central planning works. If he admitted that he did not want his money to be worthless it would seem central planning was a failure. Lenin needed to seem in control.
In another quote Keynes says:
The "might have done from design" seems to indicate Keynes had some skepticism about the claim that Lenin did it on purpose.
In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design.
This is the only case of hyperinflation I have found where there is any claim that the hyperinflation was intentional. I just don't buy it. I suspect this case was just like all the others, the market reacting after government had too much debt and deficit and out of control money printing.
The U.S. will benefit from hyperinflation. All their debts will be paid off nominally, without the need to ship stuff to China for 15 years (ie, pay back in real terms).
ReplyDeleteOf course, the US also benefit from the status quo (getting free stuff from China), so they'll delay hyperinflation as long as they can.
Regards,
Vincent, I made the claim once (albeit with no evidence, but still I made the claim): regarding Hungary after WWII: I speculated that the commies intentionally caused the Hungarian hyperinflation.
ReplyDeleteI also speculated at the time that hyperinflations tend to be associated with left wing takeovers (e.g. Hungary, the various Bolshevik plots in Germany in the early 1920s), and that depressions tend to be associated with fascists (Hitler, Huey Long, Golden Dawn in Greece, and the neo-Fascists in Hungary right now). But of course that was all speculation.
Part of a government's power comes from the ability to print money. If a government had any smarts they would not destroy this ability. Part of why I don't believe it was ever planned to happen.
ReplyDeleteIf there were even rumors from ahead of time that Lenin was planning to destroy the money they would be more credible. But this rumor of it being planned was from after it was mostly destroyed.
Vincent, I read in some comments somewhere that all the hyperinflation you studied came from "money printing" except two that came from the CBs loosing their assets. You use QTM as an explanation for what leads to hyperinflation but wouldn't it be better to use something that can be applied to all cases? Perhaps the backing theory. I see you are using that also, but less often, but I don't think they can both be correct at the same time. Since QTM can not predict volatility, but heavily relies on it, I don't think it can be used for inflation predictions.
ReplyDeleteI would not say I use "QTM". I would say I use the equation of exchange. Yes, I really like the backing theory of central banks and money value. I discovered the equation of exchange on the page below and that was the first good theory of hyperinflation I found.
DeleteYes, if there were a disagreement in predictions between this and the backing theory, I would expect the backing theory to be right. Don't understand your comment about volatility.
http://www.sjsu.edu/faculty/watkins/infldynamic.htm
I saw your link, I think there have been earlier and later versions of both QTM and EOE making it a little confusing. I thought of them as basically the same. This is from wikipedia on EOE : "This equation is a rearrangement of the definition of velocity: V = PQ / M. As such, without the introduction of any assumptions, it is a tautology. The quantity theory of money adds assumptions about the money supply, the price level, and the effect of interest rates on velocity to create a theory about the causes of inflation and the effects of monetary policy."
ReplyDeleteIf you would side with one theory over the other if they have conflicting predictions then I would always stick to the theory you side with as the basis for analysis. It would be interesting to read more from the backing perspective. Maybe hyperinflation in Japan is still not immenent from a backing perspective for instance.
Anyway, I enjoy reading your blog.
Yes. I lost $100 once because I was only thinking in equation of exchange terms and there was a central bank that had a huge increase in their total currency but as it was backed by something that held value they did not get inflation.
DeleteBecause there are assumptions in the quantity theory, it can easily be wrong. The equation of exchange on its own is always true. It is safer to work off of that.
In Japan's case they are buying bonds years out. This is "backing the currency with the future value of the currency" which is not safe at all and not permitted under the "real bills doctrine". So Japan is not OK even under the backing theory.
Thanks!
I don't think Japan is safe either but I would like to think more about the numbers involved. Can there be a possible scenario of growth of the economy and extra income for the government that can save them. All other conceivable outcomes must be considered and discarded before I feel confident that only one thing will happen.
DeleteJapan's numbers are extreme. With interest rates near zero they are still spending 1/4th of taxes on interest on the debt. If rates go up they are clearly broke. The debt is over 240% of GNP. They are spending twice what they get in taxes. The USA and UK had numbers close to this at the end of WW2 but then cut their military. The US at least then had a budget surplus, no deficit. But in peacetime I don't think anyone has gotten these kinds of numbers and survived. There are sort of conceivable ways out, just the odds are they get hyperinflation. Really the central bank is faced with the choice of trying to keep interest rates near zero or letting them go up, either way they seem headed for hyperinflation. The idea of the government cutting their budget in half when they can borrow money for almost nothing, just does not seem realistic.
DeleteOn the other hand they have several untapped resources that could be utilized if there is some reform. Low workforce participation of women, low immigration, low taxes (compared to other developed countries). I think the BOJ are in control of interest rates. If they end up as the only owner of JGBs they would be in control of interest rates even more, but then the yen would be the only way for the market to price those bonds. So it looks like the japaneese gov only need to get the deficit under control to save the situation because they can keep the interest rates low forever.
DeleteWhen they are spending about twice taxes, that little "only need to get the deficit under control" may not be as easy as you think.
DeleteHad some discussion over on bloomberg:
ReplyDeletehttp://www.bloomberg.com/news/2014-10-02/fed-critics-say-10-letter-warning-inflation-still-right.html#disqus_thread