Interesting recent interview with Greenspan. Some parts:
But the fact the fiat currency expansion got very tarnished with -- you know, in 1775, we printed a whole bushel full of continentals. And one of the fascinating things about that period is the fact, for the first year or two, there was very little evidence that that had any effect on prices, meaning that that paper currency circulated with the same value as specie.
And there is an extraordinary -- there's an extraordinary lag which exists between actions of that type and consequences. Now, eventually the continental was not worth a continental. But it took a long while. And I think that we're looking at very similar things now. This, again, is a human propensity.
The Continental currency had hyperinflation. It is interesting that Greenspan says, "I think that we're looking at very similar things now". He is directly talking about the long delay between printing money and high inflation, but it sure seems like he is hinting at high inflation this time too.
Greenspan also thinks gold is a good investment:
Tett: Do you think that gold is currently a good investment?
Greenspan: Yes... Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.
Beginning in May, 1775, the Congress of the newly unified former colonies began the issue of Continental Currency to finance its fight for freedom.
ReplyDeleteThe Continental Currency was plagued, though, by increasing public distrust. The Continental paper dollar was able to hold its value at par with a specie dollar only until October, 1777, by which time widespread counterfeiting by British, Tories, and opportunists conspired with the natural inflation of a printing press economy and increasing uncertainty as to the outcome of the war to push the exchange ratio of the Continental Currency to $11 in paper for $10 in specie.
After that point, the devaluation accelerated. By the next year, October, 1778, the ratio was 4.66 to 1.
The low point was reached in April, 1780, when a dollar in silver or gold was worth $40 Continental. And these were the official exchange ratios...
-- from the Introduction to Standard Catalog of United States Paper Money, ninth edition. Krause Publications, Iola, WI. 1990.
Hey, I did a comparison of Depression-era base money growth and inflation in several posts recently. A seven year lag is not out of the question! See
The Ridges on the Rocks
for several comparisons of the two data series, and the follow-up
A Look at a Lag
I don't agree with Greenspan. I don't think there is a long delay between printing money and inflation. The market captures changes in the fundamentals for a currency pretty fast. By "printing money" we usually mean an expansion of the central bank balance sheet. That is not in itself inflationary, it's all about how that expansion is backed. If there first is an expansion of the balance sheet and later a deterioration of backing then it will look like a lag between printing and inflation but the actual cause was a change in backing which can happen with or without expansion of the balance sheet.
ReplyDeleteI mostly agree with you. However, most of the time the way the central bank expands its balance sheet is by buying government debt. Governments almost always monotonically increase their total debt till there is some sort of collapse (default, hyperinflation, war, breakup, etc). As they sell more and more bonds there is really a deterioration in the quality of the bonds (assuming quantity is going up faster than taxes or growth). So making new money and buying government bonds eventually adds to the inflation, but with a delay. But I agree that you better understand what is going on if you look at it as the deterioration of the backing. When interest rates and inflation go up, the real value of the bonds will go down, so the value of the backing will go down, so the currency will go down. If we see interest or inflation pick up, the gig is up.
DeleteAgreed, it's very hard to understand why the BOJ actually wants 2% inflation since their bond holdings would fall in market value. I guess they hope for some miracle with a coordinated move by the government to balance the budget at the same time to counteract. Even if they don't think in terms of backing, they can clearly see what is going to happen to the governments interest cost when inflation and interest rise. It's very hard to believe they are going to get the deficit under control in the face of rising interest costs but this must be the miracle they're hoping for.
DeleteIf you believe that T-bonds are money, the same as deposits are money and cash is money, then it would seem there has indeed been an extraordinary lag between money printing and inflation, assuming the inflation does come.
ReplyDelete....
I don't believe that interest rates on T-bonds will ever go up. I think T-bonds will essentially become 0 pct bearing coupons now that the central bank is on the path to owning all of them.