Sunday, September 15, 2013

Hyperinflation Explained in Many Different Ways

Hyperinflation is part of the experimental data that any good economic theory should be able to explain.   There are many different economic schools of thought and they often have very different views of hyperinflation.  I am trying to collect as many different explanations here as I can.  I think it is fun to be able to understand this problem from many different angles.  If you know of any other explanations, then please post them in the comments.  A good explanation should fit with some common characteristics:  there are always high government debt and deficit levels, hyperinflation can start very suddenly, it often accelerates,  it can go on for years, it is very hard to stop, but sometimes it is stopped by balancing the government budget.

The biggest flaw in most people's understanding of hyperinflation is that they think if we have low inflation now we are safe for a long time.  As you read through each explanation, try to imagine how fast things could switch from low inflation to hyperinflation.

Equation of Exchange with Positive Feedback Loop

 There can be a feedback loop where the more the central bank makes money and buys bonds the less people want to hold bonds, but the less people hold bonds the more the central bank has to monetize so the government has cash to operate.  This results in a flood of new money and inflation.  The inflation causes the velocity of money to go up.  Governments almost always try to fight inflation with price controls.  The resulting shortages reduce the real GNP.   Using the equation of exchange view of hyperinflation we can see that if the money supply is going up fast, the velocity of money is going up fast, and GNP is going down that prices will go up very fast.  But nobody wants to hold bonds in a currency that is dropping fast, so this can spiral out of controlHyperinflation can be simulated using this view.

Corrected Modern Monetary Theory

A simple model makes it easy to understand hyperinflation.  In this model all government spending uses newly made money and we imagine money collected from taxes and bond sales is just destroyed.   In this model bonds are paid off with newly made money.    If much of the government debt is short term, and people stop rolling over bonds, then the government would end up paying off lots of bonds with lots of new money.   If there is a full bond panic, then this could result in hyperinflation.

Unsustainable Interest Expense

If the deficit is large then the debt and the interest on the debt can both be  growing faster than the tax base.  In this case then, at some point, the  interest on the debt adds so much to the debt that it is clear there is no hope of really paying this off.  Often about when this is becoming clear the interest rates go up and the interest expense shoots up so that it is obvious to all this can not go on.   The alternative is for the central bank to peg interest rates by buying bonds very fast.  Either way, it gets to where all the government can really do is print money to pay off the debt.   This then makes lots of new money and the value of each unit goes way down.

Inflation Tax View

Inflation is a tax on those who hold money.   The higher taxes are the more people change their behavior to avoid the taxes.  As the inflation tax gets higher and higher people change what they do so that the real value of the money they hold goes down.   This involves spending money faster and keeping lower real balances.  This can make the total real value of the currency outstanding go down even as the nominal value is shooting up. But the lower the real value of currency out there to collect an inflation tax from, the more drastic the same real value of inflation tax impacts price levels.   In other words, the more people try to avoid the inflation tax the more extreme the government has to get about printing money to get the same real amount.  But the more extreme the inflation tax the more people try to avoid it.  This can spiral out of control, often to where people avoid that currency altogether.   Search for Krugman here for more.

Backing View or Real Bills Doctrine

In the Real Bills Doctrine a bank can issue as many notes as it wants without causing inflation as long as it gets assets of real value that could be sold to withdraw the notes.   If it is getting bonds they should be for less than 60 days and come with collateral.   In hyperinflation the central bank buys government bonds.  The problem here is that the only collateral is a  real tax base.  So the more bonds they buy the less real collateral they have per bond.  Also, they typically buy long term bonds which go down in value as interest rates go up.   So the current value of the assets backing the notes per note issued goes down.  The value of notes is determined by the value of the assets per note, so the value of the notes goes down if the value of the assets goes down.   This can spiral out of control.  As the notes go down, the value of the bonds goes down, but as the value of the bonds goes down, the value of the notes goes down.  As you get hyperinflation the government gets weaker and the amount of real taxes collected goes down.  This further reduces the value of the backing/bonds at the central bank.    This feedback loop can go on and destroy the currency.

A central bank backing its currency with long term bonds is like backing the currency with the future value of the currency.   Holding a 30 year bond as backing is like backing the currency with the value of the currency 30 years from now.  There is a dangerous recursion here.   Once the future value starts going down, the backing goes down, which reduces the current value of the currency, which reduces the future value, and things spiral out of control.

Supply and Demand

If a currency is losing value fast the demand for that currency goes down.  This makes the value of the currency go down even more.   If the government needs to print money to cover a deficit of a certain real total value, to cover real expenses in the real world (employees, retired people, unemployed),  then as the value of the currency goes down it is forced to increase the supply faster and faster.   This can spiral out of control with supply going up fast while demand goes down fast and the currency gets destroyed. 

Rational Expectations

Rational expectations theory holds that economic actors look rationally into the future when trying to maximize their well-being.  History shows that when the government starts using new money to fund a big deficit that the currency will go down.  Once economic actors expect the currency to go down, they work to avoid that currency.  The faster it is going down the harder they work to avoid it.   The more people try to avoid the currency the more it goes down.  You can get  a feedback loop or panic.  Eventually everyone is out of that currency.

Half Dead Money

Good money is both a store of value and a medium of exchange.   During hyperinflation the currency is no longer a good store of value.   It can be viewed as half dead money.  Such money often keeps losing value till it eventually becomes completely dead.

Replaced as Store of Value

The higher the inflation the more the store of value function of the currency is replaced by other things.   In the past if someone did not need their money for 6 months, then the money might stand still for 6 months.   But the higher the inflation rate the less sensible it is to use the currency as a store of value.   So people who don't need their money for some time use something else as a store of value.  This might be another currency, purchasing goods in advance of when they are needed, buying gold or silver, or not selling something till they need the cash.   The less the currency is used as a store of value, the higher the velocity of money, and the higher the inflation.   But the higher the inflation, the less it is used as a store of value.   This makes a death spiral that is hard to escape from.

Loss of Confidence or Faith

For some reason the public becomes less confident in the currency.  This may be from too much new money, from central bank monetizing government debt, from war, from corrupt government, or whatever.   As the public loses confidence they don't want to hold the currency as long and the velocity of money goes up.  However, as the velocity goes up the prices go up, which makes confidence even lower.  This can spiral out of control.

"If there is a real loss of confidence in the dollar, then I think we are in trouble. That is something that has to be watched."  - Paul Volker

Inflate Away the Debt

The idea here is that those in charge have decided to inflate away the national debt by printing money and this causes hyperinflation.   If politicians have ever made such a decision I can not find them admitting it publicly.   To me hyperinflation happens when there is no good way out of a bad situation.   I doubt there was ever a "vote for hyperinflation".  Perhaps they voted to monetize the debt but did not understand it would cause hyperinflation.  I can not even find that though.

When Politicians Get Control of Printing Press

Politicians can spend unlimited amounts once they  are able to get as much money as they want from the printing presses.  Usually this is done by getting control of the central bank and making them buy as many government bonds as needed.   Once this is how things work, all restraints on the amount of money are gone.  The more they print, the higher the prices.  The higher the prices, the more they print.  They print and spend into oblivion. 

Khan Academy

The Khan Academy video explains hyperinflation as two feedback loops.  First, the more the government prints, the higher the prices go, but the higher the prices go, the more the government needs to print to pay for whatever it needs to pay for.   The other cycle is that the faster prices go up the more people hoard real goods.  But the more people hoard real goods and less cash, the bigger the impact of constant real value of new money (and so bigger nominal value).  Hoarding can be done by buying extra stuff ahead of when they normally would or waiting to sell things until prices have gone up.  They keep less cash and more real goods.   These two cycles can spiral out of control.

Addiction to Monetary Heroin 

The economy and government get addicted to cheap money.  The longer our reliance on it and the greater our dependence, the more it takes on the toxic dynamics of an addictive drug: we can only sustain a feeling of wellbeing by increasing resort to it.   If at any point the cheap money is removed the economy and government will nearly fall apart.  But over time a larger and larger dosage is needed.   Eventually the patient dies.

Taxes for Bond Holders

Bond holders that are paid with money collected from taxes can expect to get the value of their initial investment back plus interest.  However, when governments start printing money to pay bond holders the value of the money will be going down and holding bonds for years is a bad deal.  Bond holders know this and can head for the exits when governments start doing this.  The faster bond holders exit the faster the government will print.   So this can spiral out of control in a bond panic.

Market Perception

If the market thinks that the central bank is funding the government deficit with new money, then you will get hyperinflation.   There can be deficit spending, and even monetization, as long as the market thinks the deficits will be controlled eventually.  It must expect that in the future the monetization will unwind, stop, or at least slow down.   Once the market thinks the deficit will not be controlled, and the monetization will continue without bound, then hyperinflation comes.  It is like things go too far and something snaps.  Initially the market is willing to buy government bonds but after this tipping point they are not.  The central bank becomes the only bond buyer and is funding the deficit with no way to get back to the previous state.

Government with Real Foreign Obligations

If a government with a large deficit needs to pay another country some real amount (say gold bars for war reparations, oil being imported for military, government debt denominated in a foreign currency, imported food for local population), then as it attempts to do so by printing local currency, it causes inflation.   The more inflation the more it needs to print to pay the same real amount to the foreign country.   This can spiral out of control.

Bond Market Bubble

The central bank buys up more and more bonds driving the price of bonds up and interest rates down.  At some point this bubble pops.  As it pops, people stop rolling over bonds and the central bank is forced to monetize everything so the government still has cash to stay in operation.  This makes for a flood of new money and causes hyperinflation.

Wage Price Spiral

Government wages, unemployment benefits, social security benefits, medical benefits, retirement benefits, etc. are indexed to inflation.  This means that the government expenses go up right away with inflation.   As government pays out more money in wages and other things, that new money can add to the inflationary pressure, making prices go up more.  If the government is deficit spending and the central bank is monetizing debt, this can spiral out of control.

This does not work for private wages.  There is no way that private wages going up can ever spiral out of control making wheelbarrows full of money.  The spiral needs to include government to get the new money and keep going.

Diminishing Real Stock of Money

With inflation you can have a diminishing real stock of money.  It can get to where economists and business people are advising the central bank that the economy does not have enough money.   So the central bank makes more money.  After this the velocity of money goes up and inflation goes up more, making the real stock of money even lower.   This cycle repeats until the real stock of money is virtually zero, as nobody wants the money. 

State Theory of Money

In the State Theory of Money, fiat currency is a creation of the state.  The state has a monopoly on the creation of this fiat currency.  By making and spending money as well as taxing back some of this money it can regulate the quantity and the value of this money.  If for some reason the spending and creation of money get too out of balance with the  taxing, then the value can go down.  If they are way out of balance, then the value can go down fast.

The Quantity Theory of Money

The velocity of money can go from changing hands on the order of once a month to changing hands on the order of once a day.   This can account for a factor of 30 chance in price.  However, prices can go up by factors of even billions.   The vast majority of this price change is simply due to the quantity of money.    The more money you make the less it will be worth.  In hyperinflation the central bank makes lots of new money to fund the government deficit and the value goes down proporionally.

Cagan's Explanation

In Cagan's explanation of hyperinflation, the velocity of money goes up as people's expectation of inflation goes up.  Over the long term the higher the quantity of money the lower the value.   People's expectation of inflation is adjusted up if their previous expectation was exceeded.   In this model you can sometimes get control of inflation by stopping the money creation and sometimes things have passed a tipping point where even if you stop making new money the currency will keep crashing.

This model does not address why a government would not be able to stop making money but that is simple, if they are spending more than they get in taxes and nobody is buying their bonds.

Government No Longer Wins by Money Printing

For modest amounts of inflation when a government prints money (or borrows from a central bank that prints) it gets ahead.   It has the new money that was printed and downside of prices going up is shared over a wide base, not just the stuff it buys.  Often prices go up long after the new money is spent.  So initially the government is better off after the money printing.    Eventually some tipping point is passed and for each amount of money printing the prices on just the stuff government has to pay for go up more than what it got from the money printing.  So each time it prints it gets worse off and needs to print more.  However, if they are spending much more than they get in taxes and nobody is buying their bonds, they are trapped and all they can do is print (or borrow from the central bank which makes the money).   So there is a death spiral with uncontrolled money printing.

Keynesian Bubble Economics

Most government economists are Keynesians.   When a bubble pops Keynesians advocate money printing to mop up and make a new bubble.   To clean up the previous mess and make a new bubble takes more money printing than the previous bubble did.  So you get a sequence of larger and larger bubbles.  Eventually it is not possible to make a new larger bubble without making so much money that the currency collapses.

Theory of Reflexivity

Perceptions tend to create their own reality.   If people believe the money is going to become worthless, then it probably will.

Democracy Causes Hyperinflation

There have been studies that indicate democracies are more prone to hyperinflation than dictatorships.   Democracies are more prone to run large deficits because of trying to give too many things to too many different people.  Once the budget is out of control then inflation can get out of control.

Friedman said, “inflation is neither a capitalist nor a communist phenomenon.  In our modern world, inflation is a money printing phenomenon."

Lenin's View

There is no subtler, no surer way to overturn the existing basis of society to than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner, which not one man in a million is able to diagnose. -As reported by Keynes

Keynes View

Keynes wrote about hyperinflation:

"In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as "profiteers" the popular indignation against the more obvious consequences of their vicious methods. [...]

"The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent governments, unable or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance. In Russia and Austria-Hungary this process has reached a point where for the purposes of foreign trade the
currency is practically valueless. [...]

"The preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it.

When money permanently escapes central bank

The central bank is like a huge market player.  When it is buying bonds it drives up the prices and lowers the interest rates at the same time it is injecting liquidity.  If it later wants to withdraw that liquidity by selling the bonds then the prices of bonds will be lower and it will not be able to withdraw as much as it injected.  If it bought long term bonds and interest rates went up substantially, then the value of the bonds will be far less than what it paid earlier.   This means that even if it sold all the bonds it would not be possible to withdraw all the money it injected.   Note that with short term bonds it could just hold them till they were paid off and not lose money but if there is an inflation problem and it has to wait 30 years to withdraw the money then it has failed. If inflation goes up and bonds drop in value then it can't effectively fight inflation as the assets it has to withdraw cash are no longer valuable enough to do the job.   Normally a central bank should be able to withdraw all the money it has created at near the value it originally had.  However, a central bank holding lots of long term bonds where the value has crashed can no longer do this.   The money is out there but can not be withdrawn.  The central bank has lost control of it.

Flaw in "Government can't run out of money"

There are those who think a government can't run out of money because it has a printing press.     Hyperinflation exposes the error in this way of thinking.  If the government is increasing the money supply too fast, then their currency is not a good store of value and people won't want to hold it.   As people want to hold it less and less it makes it worse and worse as a store of value.  As prices go up the government needs more and more money, but since it thinks it can't run out of money it just prints more.   This can spiral out of control.   The government can print so much currency that it is no longer accepted as money.  At that point the government is out of money even though it has a printing press.

Unsustainable Currency Peg 

Sometimes a central bank is trying to both peg the local currency to a foreign currency and print money to help a government that is running a deficit.   By doing this it does not really have enough reserves to support the peg and can rapidly lose much of the reserves it does have attempting to maintain this unsustainable currency peg.   There are also times where the government just takes a central bank's reserves.   Eventually the central bank's reserves get  dangerously low and has to give up the peg.  At this point the currency can suddenly crash and they can get hyperinflation.

Hard Money View

Paper currencies all seem to fail eventually.

Like a Nuclear Reactor

The policymakers at the Fed think they are dialing a thermostat up and down, but they're actually playing with a nuclear reactor.  A runaway chain reaction can melt the whole thing down.    Paraphrase of Jim Rickards,  Currency Wars.

QE Trap / Roach Motel of Monetary Policy

Once the government/central-bank has artificially lowered interest rates to stimulate the economy, it is very hard to ever stop.   If they even hint that they might slow down a bit on the money creation then interest rates shoot up and hurt the recovery, so the central bank can not slow the money creation.   In fact, they will have to print faster to try control interest rates once they start going up.   But the more money they make the more inflationary pressure there is, which will push interest rates up.  So the central bank ends up fighting harder and harder to try to keep rates down by making money faster and faster.  This spirals out of control and you get hyperinflation.

Non-Linearity of One More Trillion

The government can keep adding trillions in debt one by one.  But at some point the market reacts very differently to one more trillion in debt than it did for all the previous times one more trillion in debt was added.   When we get this "non-linear reaction" we say the government has passed some "tipping point" and things start to "spiral out of control".   You can see this in all the previous cases of hyperinflation and yet people always seem surprised when it happens to them.   Since even people who understand the danger of hyperinflation don't know exactly when the tipping point will come, as they warn of the danger for years they will be viewed as being proven wrong for years, right up till when it hits.

Borrowing To Pay Interest

After things get so bad that the government has to borrow just to make the interest payments on the debt, then things have gone too far.  To service the current debt they must go further into debt.  Bond holders can tell where this is going and flee.   The central bank becomes the only bond buyer.  The more the government borrows, the higher the interest payments, and the more they have to borrow.   But as they do this the central bank is making new money.   This can spiral out of control making hyperinflation.  

Mises/Austrian Crack-up-boom

Money is, like any other good, subject to the irrefutably law of diminishing marginal utility. It is this law, which is implied by the axiom of human action, which is at the heart of Mises's praxeology.  If the central bank is expected to increase the money supply in the future, people can be expected to rein in their money demand in the present — that is, increasingly surrendering money against vendible items.

"Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse). The mathematical economists are at a loss to comprehend the causal relation between the increase in the quantity of money and what they call "velocity of circulation."" - Mises

Ken Rogoff 

"It's pretty basic. Usually, governments desperate for money start printing currency, lots and lots of currency, and go out buying things."

Modified Dornbusch Overshoot Model

In the Dornbush Overshoot Model the exchange rate for a currency initially drops more than the eventual value in response to a one time monetary increase, so that higher local interest rates provide comparable value to investors.  Local prices are slow to adjust and exchange rates adjust much faster to changes in the money supply.   However, when the monetary injections are repeated, and not a one time thing, then you get repeated "overshoots" and the currency just keeps going down on the forex markets.  Because of the "overshoot" issue it goes down more than linearly with the monetary increase.  The higher cost of imports, and exports being bought up with cheap local currency, eventually overcome the sticky nature of local prices and make prices go up fast.

Interest Rate Below Inflation Rate

If the central bank loans out money at interest rates below the inflation rate then it makes sense for both government and banks to borrow money.  Companies can easily make money if they can borrow from banks at an interest rate lower than the rate prices are going up.  They can borrow and buy just about anything.  Often they buy inputs for their business before they are needed, which can be viewed as increased demand.   The more they borrow the more the inflation rate goes up and the better off the borrowers are.  This can spiral out of control.

Going Galt

 When a government is in trouble it often increases taxes of all kinds and tightens up on the enforcement of existing taxes. Inflation is a tax on those with money.    Government spending is an overhead that the productive parts of the economy have to support in one way or another.    At some point the burdens on an employer can be so great that he is better off to pay the cost to relocate or shut down than to continue in the current environment.   This is called Going Galt.  However, the more employers shut down the smaller the pool of productive people there is for the government  to  extract wealth from, so the higher government increases the various taxes, including inflation.   But the higher the burden on the productive parts of the economy the more business and capital flee that government.   This can spiral out of control, resulting in hyperinflation. 

Attempt to Inflate Asset Prices

     In this explanation of hyperinflation, the central bank wants to inflate asset prices (stocks,  bonds, real estate) to create a wealth effect, so they print lots of money.   However, this increases the prices of the necessities like food and energy more.  Wages do not go up as fast as food prices.   People have to sell assets to get money for necessities.   This causes asset prices to go down in real terms.  This causes the central bank to print more money.   You have a positive feedback loop that gets out of control.

Each Fiat Money is a Bubble

There is no real value to the paper in fiat money, so fiat money is just a bubble.   Hyperinflation is when the bubble pops.

Alternative Method of Defaulting

When a government that can print money has no chance of paying off the bonds it has sold with taxes it can collect, it is effectively bankrupt.   It could default on the debt or it could print money to pay off the debt.   If it prints money to pay off the debt then inflation/hyperinflation makes the value of the currency go down so much that bond holders only really get the value of pennies on the dollar, but legally they were paid off in full.    

Havenstein Moment / Kick the can down the road

Governments that spend much more than they get in taxes will eventually reach a point where the public does not want to lend the government enough money.  At this point, which can be called the Havenstein moment, the government has a choice of either cutting back spending to match the money it can get or getting the central bank to print money and "loan" it to the government.    In the short term it is easier to just print more money than to make the hard spending cuts.   This is sort of "kick the can down the road" approach.  However,  in the long term this results in much more pain.    Once a government starts down the money printing path it is very hard to ever turn back.  Sadly, politicians usually seem to focus on the short term and pick the money printing path.  This eventually leads to

Kuroda and Peter Pan

"the moment you doubt whether you can fly, you cease forever to be able to do it."

Deficits Don't Matter Until They Do

As long as people are loaning the government more and more money, then deficits don't really matter.   But when the public does not want to loan any more money and the government has to get the central bank to print money, then the deficit matters.  But by then it is too late.  Now they are printing money fast.  People are even less interested in buying government bonds.   If they raise interest rates it makes the government more clearly bankrupt, and also makes people less interested in buying bonds.   At this point there is no easy way to avoid high inflation.

Debt Bomb Exploding

When a government that prints its own money sails into the zone of insolvency you can have a debt bomb explode.   If they let interest rates go up, then the interest on the debt takes all the tax money and nobody will buy the bonds.   If they hold the interest rates down, then the yield is so low nobody buys the bonds.  Either way, the central bank ends up monetizing a huge amount of debt in a surprisingly short period.  The explosion of new money makes the money worth far less.

War of Attrition

One group does not want to cut spending and another group does not want to increase taxes.  The stand off results in money printing and inflation till one group gives in.  Thus hyperinflation can be viewed as a war of attrition.

Escape From Liquidity Trap

When a central bank makes money and buys bonds they initially force up the price of bonds and force down the interest rates.  At lower interest rates the velocity of money is lower.  So printing lots of money does not immediately result in inflation (see equation of exchange).  However, the velocity of money also depends on the inflation level.  So if the central bank tries to hold down interest rates forever it eventually results in runaway inflation.  You get to a situation where the more inflation there is, the more the velocity of money goes up, which causes more inflation, and suddenly the economy has escaped from the liquidity trap and has high inflation. 

Double Laffer Overshoot

The Laffer Curve shows how after some point higher tax rates result in lower total taxes collected.   There is also a Laffer Curve for money printing, which is really an inflation tax on those holding money.   After some rate more money printing does not result in more real wealth for the government.  World events and public confidence can shift these Laffer curves around.  Hyperinflation is when the government has overshot the optimal point on both the regular tax rate and the money printing rate.  Any further attempts to increase real revenue for the government fail and make the economy worse off.  The only real fix at that point is to cut government spending, and after all other possibilities have been exhausted, that is how hyperinflation will eventually be halted (maybe years later).

 Bond Traders vs Investors

As a central bank drives up bond prices by buying them it can make sense for a trader to hold bonds.  However, the lower the interest rate the less sense it makes for a long term investor to hold bonds.  So the longer the central bank does this the higher the percentage of bonds are held by traders and the lower percentage held by long term investors.  When bond prices stop going up and start  going down they can do so very suddenly because by that point a very high fraction are held by traders who sell very quickly when prices are dropping.  The sudden flood of sellers makes the central bank have to print money like crazy and buy bonds like crazy or the government won't be able to raise cash by selling bonds.

Central Bank Sucker Punch

For years the market lets the central bankers think they control the markets.  This tricks the central bank in to buying up lots of bonds.  Then very quickly the markets make the bonds and currency worthless.   The central bank is destroyed.

Instability of Velocity of Money

If conditions are such that the price increase from a velocity of money increase results in further velocity of money increase and further price increase then we can say that the velocity of money is unstable.  This spiral can result in hyperinflation.

Modern Monetary Theory and Monetary Realism

In these theories hyperinflation is viewed as a political issue and not a monetary issue.   They will say things like, "Contrary to popular opinion deficit spending and high government debt levels are not the actual cause of a hyperinflation".  They look for some trigger to blame the whole hyperinflation on.  This may be a supply shock, a loss of productive capacity, corrupt or unstable government, or external factors like war.   This will be some reason the government was deficit spending and has high debt levels.  While normally very into detail, even at the level of each debit and credit for monetary operations, when it comes to hyperinflation, they skip over all the detail of the mechanics of hyperinflation.

They always name the initial trigger after the hyperinflation has started and they know to go looking for one.   They do not seem to have any ability to predict hyperinflation ahead of time and never discuss the mechanics of how it works or goes on for so long.   If Japan gets hyperinflation, then they might trace things back to the tsunami and say that was the core cause; however, they could not tell you now if the tsunami will lead to hyperinflation in the future.

These two theories do not seem to help at all in warning when hyperinflation might start nor in really understanding how it works.  All the other theories  above can give you some insight to how hyperinflation happens.     These are more like, "sometimes war causes hyperinflation", without talking about how or any of the steps that go on so you might be able to predict  which wars would cause hyperinflation.    

Since these two  schools of economic thought seem unwilling to explain the mechanics of hyperinflation in their own theories, I will do it for them.   In these theories government bonds are part of the money supply.  Each time the government makes a new bond out of thin air and sells it, they add to the money supply.   In these theories, if the government budget and deficit are out of control, then the money supply is also out of  control.   Note that for this to work in practice, the central bank will have to buy the bonds as the pool of people with money who are foolish enough to buy bonds in the inflating currency soon dries up.  As prices go up the government needs to make more bonds to be able to handle the new higher prices.  However, the more bonds they make the more prices go up.  This spirals out of control, making hyperinflation.

Update:  Cullen responded to this.

Bond Currency Spiral

If the central government is spending much more than it gets in taxes, and the central bank is buying up bonds, then eventually the currency may start to lose value.   If the currency is going down people may reduce holdings in those bonds but this then forces the central bank to buy more so that the government can keep selling new bonds.  The faster the central bank prints money and buys bonds the faster the currency goes down.  The faster the currency goes down, the faster people rush to get out of bonds.   You can get a death spiral where the currency crashes.

Blind Men  Describing an Elephant

Above are more than 30 different explanations for hyperinflation, yet they are not contradictory.  They are just different ways of talking about what is going on.  There is clearly some overlap.   It reminds me of the blind men describing an elephant.  At the core of each of these explanations the central bank is funding the government's deficit spending with new money.   Many explanations have some sort of tipping point or feedback loop.  There seem to be many different adverse feedback loops that all operate during hyperinflation.    I challenge anyone to find any error in any of these explanations or any contradiction between them.  

Predicting the Timing

I think that you really can understand the mechanics of hyperinflation if you can understand all these different explanations.   You can understand which currencies have a higher risk of hyperinflation.   However, predicting when hyperinflation starts is a much harder problem.   The reason is that hyperinflation is a positive feedback loop with characteristics similar to positive feedback loops in nature.   You can tell when there is a high risk of an avalanche or volcanic eruption but not exactly when it will start.   I think polling could be used to help predict hyperinflation.  I also think that a simulation could be fitted to historical data and then used to improve prediction of hyperinflation.   

Others Views of Hyperinflation

As I think of other ways to explain hyperinflation I will add them.   If you know of any more, please comment.     I do not mean to leave any theory out.   While I have the names of many other theories (Thanks Tom!), I am finding it hard to locate explanations of hyperinflation for many of them.  If your favorite economic theory is not shown in this list, please let me know how it explains hyperinflation and I will add it.  If  I have not accurately explained hyperinflation in your economic theory, then please comment with a better version.  If your  economic theory does not have an explanation for hyperinflation, then I claim there is a big hole in your theory that someone should work on.

Rejected Explanations for Hyperinflation

Hyperinflation is a complete loss of faith in a currency.  Hyperinflation can go on for years and end in a complete loss of faith in the currency.  However, during those years of hyperinflation, before the end, there is a declining faith but not a complete loss of faith.  Hyperinflation is the process, not the end result.

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, governments usually raise taxes, 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.

Political event not a monetary phenomenon.   Yes, politics is the root cause for trouble but the way it causes trouble is by getting the government to deficit spend and get a huge debt that the central bank starts monetizing.  Central banks monetizing out of control government debt is a monetary phenomenon.  Can't we look a little closer at the mechanics of what is going on?  Can't we be a bit more scientific than just saying "hyperinflation is due to politics"?  We are talking about a feedback loop that includes money printing, higher velocity of money, and a rapid drop in the value of the monetary unit.  It is absurd to say "hyperinflation is not a monetary phenomenon".   This is not facing the facts.  It is so wrong it is painful.   Please stop this anywhere you see it.

Caused by foreign currency speculators
Some have claimed that hyperinflation is caused by currency speculators.  There are speculators betting against currencies all over the world.   If they could cause hyperinflation and win big, then all the currencies would have hyperinflation.   A successful speculator figures out that a currency is going to go down before it does and his bets against it.  This does make it happen a bit sooner.  However, speculators always cash out their positions and so undo any net influence they had on the direction the currency was being pushed.  In the long run, foreigner speculators have no ability to make a central bank add zeros to their notes or print so much money that people need wheelbarrows to carry it around.  Also, a country can get hyperinflation even when there is very little foreign currency trading going on.   When politicians and central banks cause hyperinflation they always try to direct public anger away from themselves, but this is just a diversion and not the truth.

A mad man running the central bank could make hyperinflation
A number of people have said that if a mad man was in charge of the central bank then there could be hyperinflation.  This does not help to explain any of the many historical cases of hyperinflation.  It is just someone saying they don't feel there is a risk of hyperinflation without bothering to explain any rational theory of hyperinflation.

Rejected explanations for why hyperinflation can not happen

Any explanation of why hyperinflation can not happen that contradicts the hundreds of cases of historical hyperinflation should be rejected immediately.   For example, if someone says, "the public will never stop buying government bonds", while in hundreds of cases they did stop buying government bonds, then reject immediately.   If someone says, "central bankers would never do that", while there are hundreds of counter-examples where central bankers did participate in hyperinflation, just reject immediately.

Anyone who says hyperinflation can not happen without first explaining their theory for the mechanism of hyperinflation should be asked to explain their theory for the mechanism of hyperinflation used in making their prediction.

Prize for Additional Hyperinflation Explanations

I am now offering a prize for additional hyperinflation explanations.  See details of prize here.


  1. I find it extraordinary that you dismiss the considerable evidence linking hyperinflation with catastrophic supply-side shock and, in particular, with war. This evidence has not been invented by MMT/MR: it has been produced by a number of researchers including - among others = the Cato Institute, hardly a hotbed of MMT/MR supporters. It seems to me that it is you who is picking and choosing evidence to support your case - not the MMT/MR supporters.

    The exchange equation detaches money from real economic production. It is a derivative of the quantity equation MV=PY. Crucially, it omits P. If you ignore P, then I suppose you can pretend that supply-side shock that causes P to collapse has nothing to do with hyperinflation. But you would be wrong. A collapse in P causes the tax base of the economy to collapse too. If this collapse is large enough, and government creates money to meet its obligations, hyperinflation can be the result. But it does take a pretty massive collapse of P to have that effect, and there is usually associated political chaos too. Which is why hyperinflation is frequently associated with war.

    1. I fully agree that war can lead to hyperinflation. But I think we need a better understanding so we can tell why some wars lead to hyperinflation and some do not. I am not inventing the evidence of the core issue being central bank funding of deficit spending. I find it extraordinary that MMT/MR people ignore that.

      I think you got things backwards. The quantity theory of money comes from the equation of exchange but with fixing the velocity. Then you can say that increasing the quantity of money while production is constant increases the price. I am not using the quantity theory of money in this post.

    2. Frances, I too am confused by what you mean by a collapsing P. Hyperinflation should result in a hyperinflating P. Also, I agree with Vincent that

      MV = PY

      is the exchange equation. If you assume a fixed V and Y then it becomes the quantity theory of money:

      P = k*M

      Where k = V/Y = fixed constant

      Or do you say it's just V that's assumed fixed in the QTM Vincent?

    3. The way Scott Sumner explains it, the exchange equation is a tautology: a definition for V and nothing more. Here's how he describes it: Choose an M. Scott thinks the most useful M is base money (CB deposits & vault cash held at banks). But it hardly matters: choose one, and then you can use the exchange equation to calculate V:

      V = NGDP/M

      Where NGDP = P*Y by definition.

      So for every M there's a corresponding V. For example if you chose M = M2, then you can use this to calculate V2, etc.

      Some folks are not very impressed with the exchange equation. For one the quantity of money could change over the time period for which you're trying to use it to calculate V. There are also the questions of which M to use. The Market Monetarists, for example, are far from settled on that amongst themselves. Nick Rowe and Bill Woolsey are in favor of calling the MOE money, which would include bank deposits. Scott Sumner only likes the MOA, which is the same as base money in the US. Bill Woolsey doesn't even like the exchange equation itself.

      PKEers tend not to be big fans of the exchange equation either. I got into a recent discussion trying to explain the exchange equation and the price level P to someone. I summarized my artificial example here:

      I got some feedback from Nick Edmonds, JKH, and Ramanan.

    4. JP Koning and Cullen Roche like to speak about a scale of "Moneyness" instead of money. JP Koning referenced a recent speech (or paper) by David Laidler in which he presented a concept of "Moneyishness" which JP described as similar. Nick Rowe is not in favor of such a concept. Here's where the three of us discuss that a little:

      Start here:

      Mike Sproul gets in on the act too (and BTW, Nick's article is very good!)

    5. I think Wells Fargo could give us a good idea of the velocity of money this year compared to last. So I think it would be possible to measure the velocity of money, just that it is not easy for you or me.

      Second, even if we can not measure the velocity of money, we know from Hussman that if interest rates change the velocity of money changes. This lets me do a simulation of hyperinflation using the equation of exchange. In the simulation, the velocity depends on the interest rate. Then I can use the equation of exchange with the money supply, the real GNP, and the velocity of money to calculate a price level. So I can simulate hyperinflation!

      The equation of exchange works for any definition of money supply as long as you use the same definition all the way through that problem. So, for example, if you use an MMT definition including all Treasury bonds, then with the same GNP you have a much lower velocity than if I use M1. Things work out either way.

    6. As soon as I wrote that I do see a problem you may have been getting at. :-) So if we use base money and all Treasuries as our money supply, say $20 trillion then $1 trillion more from the Fed would be only 5% price change. But if we use just base money of $3 trillion, then $1 trillion more is 33% price change. That is a good question Tom. Hum. I may have to sleep on that.

    7. I probably should sleep on it and answer in the morning but...

      In the base money and treasuries we have 33% more base money, which moves around faster. So now with $4 trillion in base money and $17 trillion in bonds the average velocity will be higher. It should in fact be higher by the right amount so that you still get 33% price increase. Hum.

    8. So M0 = Mbase0 (Mb0) + Mtreas0 (Mt0) = 3 + 17 = 20
      and P0 = M0*V0/Y0 = (Mb0*Vb0 + Mt0*Vt0)/Y0

      Now M1 = Mb1 + Mt1 = 4 + 17 = 21
      and P1 = (Mb1*Vb1 + Mt1*Vt1)/Y1

      If Y0 = Y1 = Y, then P1/P0 = (4*Vb1+17*Vt1)/(3*Vb0+17*Vt0) = 4/3

      Say Vt0 = Vt1 = Vt

      12*Vb1 + 51*Vt = 12*Vb0 + 68*Vt
      12*Vb1 = 12*Vb0 17*Vt
      Vb1 = Vb0 + (17/12)*Vt

      So that's the relation that has to hold between Vb1 and Vb0 assuming Y and Vt do not change from t0 to t1 if the price level increases by 33%

      But that doesn't make any sense does it? Unless Vt = 0.

      Now instead of Treasuries, Mt could instead be the rest of the MOE (i.e. bank deposits, as Nick Rowe and Bill Woolsey would count it). It's very doubtful in that case that Vt = 0. (of course the formula would be different).

      It seems to me to properly fold in "moneyness" to the exchange equation, you'd need something like this:

      M*V = (M4-M3)*V4 + (M3-M2)*V3 + (M2-M1)*V2 + (M1-M0)*V1

      since M(n+1) is a super set of M(n)

      Although that doesn't quite work for M0 I think, or MB, or MZM or L (well I guess L is like M5)

      You can probably back each Vn out of the FRED data... as it stands I think it'll calculate the wrong V... a cumulative V based on the raw Mn you choose. So to just get the V for the (M(n+1)-M(n)) you'd need to back it out.

      Or you could just go with Scott Sumner and say that only MB is important (in the long run). But even Scott knows that the QTM doesn't hold in the short term. Scott's a long term QTM believer. But even there he claims the answer could be off by a factor of 3. It just gives you a very very rough guess (see the part about 15 to 50 times below):

    9. Of course to increase Vb by $1T via QE, then Vt goes down by $1T. Unless there's another $1T of deficit spending in addition to the $1T of QE.

  2. I think MR is pretty clear: deficit spending is inflationary. Full stop.

    How come you didn't cover the MM view? Why do you suppose the Friedmanites/Market-Monetarists don't agree with your hyperinflation theory?

    Also MR agrees with Krugman there (in your FAQ): when govs lose the ability to tax it is a big factor in causing hyperinflation. No disputes there. Did you read Cullen's write up on hyperinflation? That's one of the main contributing factors he discusses.

    As far as Krugman supporting your particular hyperinflation predictions (or any new Keynesian for that matter), I thinks it's inaccurate to suggest that they do.

    So I's day that NKers, MMists, traditional Monetarists, (Friedmanites in general) and PKEers of all stripes all reject your particular hyperinflation theories/predictions for the most part, as do a number of Austrians.

    1. This post was explaining hyperinflation in different ways. It does not have any predictions.

      What makes you say I suggest that Krugman supports my predictions? Where is that coming from?

      Hyperinflation is "out of control inflation", not regular inflation. MMT and MR think inflation can't get out of control. To think this they have to ignore a lot of history.

      Do you have a URL for a MM explanation of hyperinflation? I don't know if they agree with me or not.

    2. What I mean is they think just funding deficit spending with new money does not get inflation out of control. They think it is external factors.

      So really their explanation of hyperinflation is external to their theory of money. No debits and credits. You could use their explanation with any other theory of money too.

    3. "What I mean is they think just funding deficit spending with new money does not get inflation out of control."

      Sure it could. Nowhere have I seen that the gov couldn't do that. The government could do lots of stuff. They could tear up all the highways and turns the drones on the civilian population. Not good policy for economic health, but they could do it.

    4. Re: MMists... well you've go a little feedback, but not enough: Mark Sadowski expressed his opinion... so did Marcus Nunes.. but neither elaborated.

      Here's an indication of what Sumner thinks:

      Just use his search box to find all articles related to hyperinflation. You can do the same at Nick Rowe's site, or Glasner's or Nunes' or Christensen's or Woolsey's or Beckworth's. Here's Glasner's articles:

    5. "Sure it could. [...] Not good policy for economic health, but they could do it."

      That is sort of the MMT view. If there was some idiot running things it might be possible to make hyperinflation on purpose. But the reality is that even with smart people running the government and central bank they can back themselves into a corner and get hyperinflation even when they don't want it. This is what MMT/MR does not get.

    6. I can find MM opinions that they are not worried about hyperinflation. I have yet to find where they give an explanation of the mechanics of hyperinflation, comparable to the many different ones in this post.

    7. You should hit Marcus Nunes up for his opinion again. He claimed he's the "anti-hyperinflationist" ... so I say make him prove it!

    8. BTW, how do you explain Marcus' example of Brazil putting hyperinflation to bed with that trick?

    9. He think that they just tricked people but I promise you that really the government got the deficit spending under much better control. If they did not it would contradict my understanding, so if you want to check... :-)

    10. Can you think of any other schools of economic thought I should try to represent in my collection of hyperinflation explanations?

    11. I will list for you all the schools I'm aware of (this will be quick):

      1. Classical (Adam Smith, Ricardo, John Stewart Mill)
      2. Marxist (outgrowth of classical, oddly enough)
      3. Austrian
      4. neo-Classical
      4.A. - old Keynesian (John Hick's "synthesis")
      4.B. - neo-Keynesian
      4.C. - new-Keynesian (yup, there's a difference!)
      4.D. - traditional monetarist (e.g. John Cochrane)
      4.E. - market monetarist (claim they're "heterodox")
      5. post-Keynesian
      5.A MMT
      5.B MR
      5.C "monetary circuit theorists" (not sure about this)
      5.D Steve Keen
      5.E "Chartalists" (opposite end of spectrum from MCT)
      6. Real Bills (Mike Sproul, maybe Antal Fekete too?)
      7. Free Banking (George Selgin)
      8. RBC (real business cycle)

      Now it could be that 6 & 7 are related. And that 6, 7 & 8 are sub-categories of 3 or related to 3 or 3 and other stuff. I don't really know!

      Regarding "endogenous" schools, Mark Sadowski identified three (these would also be organized under PKE I think):

      1. Accomodative
      2. Structural
      3. Liquidity Preference (which he says is uncontroversial in MM circles... since MMists themselves are not in any kind of "exogenous" camp, and have made statements supporting endogenous money themselves).

      But I don't know how those overlap w/ the other PKE categories I already identified.

    12. Shoot, you know I think there's a whole bunch under the general category "heterodox" that I forgot like:

      9. Behavioral
      10. Marxian (not Marxist!)

      Here's a link:

      This is a BROAD category ranging from Austrian to MMists to PKEers.

    13. you forgot 'Keynesian', i.e. the theories of Keynes as described in the General Theory, etc, which are not necessarily the same as Hicks'.

      Chartalists and Circuitists are not necessarily at opposite ends of the spectrum; there's a lot of overlap. "Neo-chartalists" like MMT combine the two. Steve Keen is a current advocate of Circuitism who agrees with MMT on most points. Monetary Reformists like the American Monetary Institute have a different take on Chartalism from that put forward by MMT. Although the Monetary Reformists don't explicitly refer to themselves as Chartalists as far as I'm aware, their work is closely tied to Knapp's. They advocate full-reserve banking. Prominent authors are Stephen Zarlenga and Michael Kumhof.

      'Monetary Realism' isn't a 'school', it's a series of blog posts. At present 'MR' seems to amount to: "we disagree with parts of MMT".

    14. "'Monetary Realism' isn't a 'school', it's a series of blog posts."

      Ha!... fair enough. Cullen doesn't claim it's a school either. He states that today actually. I don't know about JKH, Michael Sankowski, beowulf or Brett.

      But regarding defining it (whatever "it" is) I don't think they do so in relation to MMT. MMT is rarely mentioned. And they're hardly the only ones to claim they disagree with (parts of) MMT. Just a couple of friendly critiques here for example:

    15. Also, I think I forget another, but I don't know what to call them:

      pre-Keynesian neo-classical.

      I'm pretty sure there were neo-classicals prior to Keynes and Friedman!

      Like Irving Fisher perhaps? Hawtrey? (David Glasner is a fan of Hawtrey -- that's his background image). How about Wicksell?

    16. Glasner claims that Hayek was a neo-classical. Most consider him "Austrian" I think. But if Glanser's right, then there's an anti-Keynesian neo-classical!

    17. Then there's this guy:

      Founder of "Sraffian Economics" ... you'll still find some of his fans out there!

    18. yes the 'classical economics' Keynes refers to was actually the neo-classical marginalist economics developed by Jevons, Menger, Walras and Marshall. The Classical economists were people like Adam Smith, David Ricardo, and latterly Karl Marx.

    19. "But regarding defining it (whatever "it" is) I don't think they do so in relation to MMT. MMT is rarely mentioned."

      The way 'MR' developed (I saw it in real time, I'm guessing you didn't) was entirely in reaction to MMT.

      Michael Sankowski:

      "Cullen Roche has a post up over at Pragmatic Capitalism about a new project we're working on together. The recent back and forth about the Job Guarantee brought a bit of clarity to my thinking, and I think to many others too. I don't fully support the Job Guarantee, and it's clear the founders of MMT believe the JG is essential to MMT.

      We're starting an "offshoot" of MMT which we're calling Monetary Realism. We're massively indebted to the work of Mosler, Fullwiler, Kelton and the rest. We're standing on the shoulders of giants.

      But we're not fully "in paradigm" (as they say), and we don't want people to be confused that we are a source for pure MMT. We are not pure MMT. We do not want to undermine the work of the developers of MMT.

      And, I want to be 100% clear - we are not against the mainstream MMT movement.

      We just want to focus more on the insights of Warren Mosler, and what it means for the economy. We want to use these insights to make millions of lives better. Focusing on the operational realities will bring even greater recognition of those ideas, which should pave the way for a better functioning economy.

      We have several other differences in focus as Cullen writes:

      1. We side with Godley on the current account issue.
      2. We view the state theory and the "taxes drive money" idea as incomplete.
      3. We will focus more on productivity as a compliment to consumption as opposed to mainly looking at ways to increase aggregate demand.
      4. We reject the JG as a central component of understanding the modern monetary system.

      Still, we share a ton of common ground with MMT purists. Let's not forget we grew up reading Mosler's comments section.

      The blog itself isn't up yet, but it will be soon. We'll let you know when it is up.

      Here's one final note: We're going to take the operational realities of modern money and put it everywhere. Everywhere".

      (January 25, 2012)

      Cullen Roche:

      "I’m a little confused why we would be accused of stealing MMT ideas when we refer to ourselves as “Mosler Monetary Theorists” in our about us page: ”Because of this MMRists often refer to themselves as “Mosler Monetary Theorists” due to the enormously positive influence of Warren Mosler and many other MMT economists. We are extremely grateful for this influence and hope that the disagreement, while material, does not distract the reader from the many similarities between the two schools of thought.”

      "They should be flattered by the fact that people are taking 90% of their work and trying to expand on it. After all, it's not like I've said all of MMT is bunk. Not even close... And in the end, I'll always credit Scott and Warren for much of what I've learned because they taught me...It's not like I'm not grateful. We just disagree on a few things".

    20. ... and apparently if you want to get the opinion of one of the top dogs in macro (who happens to be an NKer), you have to email him:

    21. Hahaha!... Philippe is right, I wasn't around for the start of all that. OK, then, lets say MMT is hardly mentioned *any more* (although he does mention it today!... in the same post he says MR is not a "school").

      In case this is all very confusing Vincent, watch this:

    22. BTW Vincent... if you can find Woodford's email... you SHOULD email him! That would be hilarious!... who knows you might get another convert! (read one of his papers first, so you can lead by talking about that... :)

    23. ... why stop with Woodford? Maybe go for a homerun: email the whole gang!:


      That would be a hoot! ... I can see you now responding to Sadowski .... "That's not what Paul Volcker wrote in our email correspondence!"

    24. Note that the post Mike Sankowski links to ("Cullen Roche has a post up over at Pragmatic Capitalism about a new project we're working on together") has since been deleted by Cullen and replaced with something else. Cullen likes to delete things from the past which no longer fit with what he is saying today.

    25. "Cullen likes to delete things from the past which no longer fit with what he is saying today."

      I have exactly the same policy! :D

    26. Vincent, as a complement to the list of schools above, you might want to check this out (think of it as the list of reform schools):

      I actually think I know who that last one is!

      (BTW, it's too bad he didn't include a category for the friendly hyperinflationists)

    27. Talking about Cullen deleting things. I posted a question on asking if there was anything incorrect about MR in this post here, and linking to it. My question went away. :-)

      I am taking that to mean he does not like this post but there are no factual errors here in what I say about MR. :-)

    28. Not exactly that I forgot Keynesian, just I am not sure if Krugman view is good for all of them or if there is some other view of hyperinflation. If you know of any different Keynesian view on hyperinflation let me know.

    29. Tom, are you surprised that Krugman thinks hyperinflation is something that an economic theory can explain? That it is a real thing? Your comment on Krugman still puzzles me a bit.

    30. I have changed it from "Krugman's View" to "Inflation Tax View" just so nobody thinks Krugman is too close to me. :-)

    31. Vincent, don't let my off hand comment change your post.. unless you prefer the new way. It wasn't a well thought out criticism on my part. I'd be shocked if Krugman supports your particular predictions (e.g. re: Japan), but he may well bless your general theory for how hyperinflation happens.

    32. I prefer the new way. He has his explanation for hyperinflation. I have no reason to think he would bless my theory of hyperinflation. But I see his theory as fitting fine with my theory.

  3. Not bad Vincent: a comment from the 112th most influential econ blogger!

    Of course I've had comments from both the 21st and 53rd... but who's counting? :D

    1. Wow. Cool!

      Who is counting? I guess we both are now. :-)

  4. "I think MR is pretty clear: deficit spending is inflationary. Full stop."

    Who says that? Cullen, JKH, Sankowski?

    1. If you define the money supply to include bonds, then when the government is deficit spending and printing up bonds out of thin air they are adding to the money supply.

      But many of the people that count bonds as part of the money supply seem to think that monetization is "just an asset swap" and of no importance. If monetization does not matter, they can not explain hyperinflation using their theory. Fail.

    2. Philippe, I don't know... but I most likely either saw that at pragcap or monetaryrealism since I don't read a lot of articles at NEP. It makes intuitive sense since (neglecting foreign flows) the Tsy debt is the public's financial equity (assuming a zero TGA balance). Well yeah, of course, it's the usual three sector thing. That's common to both MMT and MR. Frances Coppola did something on this not long ago as well.... which I know you're aware of since I saw you commenting there... helping her to straighten out some equations if I recall correctly.

      Vincent, I think the "asset swap" business is just said to emphasize that QE on its own does not alter the public's equity position. QE hs nothing to do with the gov "printing up bonds out of thin air." (you make that sound so dirty!)

      Even Sumner says short term bonds and deposits are near perfect substitutes at the ZLB.

      BTW, Vincent, let me ask you this: if I write out an IOU for 3 eggs to trade to my neighbor for a cup of sugar (because at the moment I have neither, but I need the sugar now) does that sound dirty to you? Even if I have a good egg laying chicken ... but just no eggs right this minute? :D ... and I've always honored all my egg IOUs in the past... because my chicken always comes through for me in the end? Does it sound like I'm flirting with some dark forces that I'd be better off steering clear of ... and I should really just wait until I have the actual eggs to trade with sometime in the future?

    3. Philippe, I should qualify and say that it doesn't HAVE to be inflationary. But it's always identified as a potential cause of inflation.

    4. Money creation is not inherently evil. It is this out of control money creation that is bad.

  5. One of my favorite blogs is "Moneyness" by JP Koning. I just typed "hyperinflation" in his search box and ended up with some intriguing titles:

    Try the search yourself and see what comes up.

    1. In the first paper notice that the government stopped borrowing money from the central bank. That is always the real key to ending hyperinflation. If they do that hyperinflation ends, no matter what else they do. If they don't do that hyperinflation does not end, no matter what else they do.

    2. Oh, so an easy solution then! :D

    3. Right. If Japan's government would just cut their budget in half and stop borrowing money there would be no risk of hyperinflation. So easy in theory, so hard for politicians who use government spending to buy votes.

  6. Vincent, I think I posted this before, but I don't recall if you make any comment on it. Did you have a chance to read?

    1. Seems to fit exactly with what I say, right? Out of control deficit spending causes out of control money creation. When the deficit is fixed the hyperinflation ends.

  7. Here's Lars Christensen's (MMist) articles on hyperinflation:

    You can also search Bill Woolsey's (at the bottom):

    Dave Beckworth:

    You can try David Glasner too. Well there's this one:

    You're probably aware of most of that stuff... probably doesn't tell you much about the unique MMist position unfortunately. But you can always ask! I've asked O/T questions of Glasner on his "about" page, for example.

    1. Thanks. None of these seem to have what I am looking for.

      I posted a question which is awaiting moderation:

  8. Vincent, I put a plug in for you here:

    You're welcome. :D

    Also, I can't find the quote, but I'm pretty sure I saw where Nick Rowe (#21 on the list) referred to Mark A. Sadowski as "the world's greatest econ blog commentator." I know that Nunes & Sumner hold him in high regard, and so too does Steve Waldman probably (despite the take down he experienced). Even people that don't agree with Mark often (like Mike Sax) hold him in high regard in general I think. So doubly well done there as well!

    1. Yes, I hold Mark in high regard too. Like I said, if I can survive Mark, I can take Warren. :-)

  9. OK Vincent, you'll be glad to see Mark's response I think!... and now I'm telling terrible lies about you making predictions about Japan... so you'd better get over there to publicly denounce my libel!

    1. Wow, "Vincent’s hypothesis seems well grounded theoretically but...". Yes, I am glad to see Mark say that! Coming from a guy very skilled at exposing flaws in economics blog posts that is really something. Even though there is a "but". :-)

    2. ... but then there was also this:

      "Well, frankly, that’s just nuts."

      Is that what you call a technical analysis? Ha! Sorry if I misrepresented you there Vincent, but I thought for sure you'd said something about events in Japan over the next few months... so I left it there (qualified of course)... but when I went looking I didn't find an example of your statement (that I thought I remembered). Am I totally out to lunch there? Did you say something about Japan in the next few months? (not that it would definitely be in hyperinflation... I don't recall that... but I thought you made some kind of prediction)? Perhaps regarding interest rates?

    3. Yes, I have said things. :-) I think like 6 months ago I said I thought the Yen would be heading down significantly by January. Now that it has not been going down the last 5 months I am not so sure. :-)

    4. If we say that understanding well enough to predict when hyperinflation starts counts as a 10 then just understanding the feedback loops may only be a 1 or a 2. It is far harder to get the timing than to understand what is going on once it is going.

  10. Tom, can you think of any MMT or MR people who might want to argue about what I say? I think it is right but also think they might not agree. :-)

  11. Sure a lot... why don't you just cut and paste that bit, and then gussy it up a bit, into a post sometime. I'd chop out all the MMT bits, because all that's going to get you is "I don't know: why don't you ask an MMTer." Then change the words slightly to fit into the topic you think it fits it. Provide a link as well for more info. You'll probably get folks like ... well... shoot, I shouldn't really guess. I don't know who might take you up on it, but probably somebody would. And it may not even be a true MRist.

    Or try over at That site attracts a different crowd in general. Ramanan, Nick Edwards, JKH, Michael Sandowski, beowulf, etc. You might get some pushback there. Nick and Ramanan have their own blogs, so you could try there directly too.

    Or try it at NEP... only chop out the MR bits and leave in the MMT bits. Ha!

  12. ... on the MMT side there's MikeNormanEconomics too... and BillyBlog.

    Other PKE general sites might include CreditWritedowns... or UnlearnedEconomics

    (I'm not terribly familiar with either... I might not even be characterizing them correctly)

    Steve Roth and AngryBear is another idea... or Steve Waldman.

    Or Steve Keen!

    Why not go down that list of the most influential blogs and post it to every one of them. Ha! ... all 200. That ought to get you black-listed for sure!

    1. Steve Keen says he is really busy for the next 2 months.

    2. I actually did email Woodford. But don't worry!!... No corpses or necklace of skulls!! Lol... just a slight blood spatter on the face. ... and upper torso... and limbs... and machete blade.

      No! I'm joking... I emailed him with a very short courteous note (modeled on JP's) alerting him to the fact that Nick Rowe has been trashing NK models. Nothing to do with you!! ... other than the picture... with the machete... and the splatter... and the email I used:

    3. " in summary, thanks again Professor Woodford.

      Your's truly,

      Vincent "Machete Man" Cate

      (See enclosed.)"

    4. So I am up to 21 different ways to explain hyperinflation. Taking longer to find a new one each time.

      Fun part is they still all don't conflict.

    5. ... you should email Woodford... before he changes his email address :D

    6. ... Krugman too:

      " wouldn't it be easier on everyone if you just took a few brief moments to reply? Why would you want to have to keep looking over your shoulder for the rest of your life? ... and so in summary, thanks again for your time Professor Krugman.

      Kind Regards,

      V. Cate (the "V" is for "Vengeance!" :)


      (see attached)"

      OK, I'll stop now. Shoot, that was fun though... :D

    7. ... actually that's probably tame compared to what Krugman usually finds in his in-box.

  13. Creating money for nothing, lending it to first kings then nation states, plus interest & the institution of taxation to pay the interest, is why the American constitution specifies Silver as legal money and has never been amended otherwise.

    Add in the special monopoly privilege excluding all other competing monies, and you get the TYRANNY rampant we have today.

    "Only Gold is money, everything else is credit" JP Morgan

    ...and subject to the counterparty risk inherent in money substitutes.

    Market commodity money, supplied on market demand for America's first 125+ years, ['cept the paper central bank's & greenback abject failures periods] netted about 8% inflation TOTAL.

    Say bye bye to shy-shy and hello to market money no one has to coerce one to use while it robs you while sleeping in lost value and debt & interest.

    What has been the opportunity cost to American intergenerational wealth accumulation of this 100 years of constant thievery, and the opportune finance of one atrocity after another, such that a 1913 "dollar" equal 2-3 Cents today?

    Who stole my 98 cents and slaps a six figure IOU in my and my grandchildren's laps?

    I think we need get our stolen gold and money back.

    BTW, DON'T MISS the Larry Summers "End Game" memo freshly exposed at

    What a necrotic pushole this string of bankster run govt comic puppets in my 60 years has been.

    Only JFK dared to go against his cabinetful of power's preselected handlers. Same general special interests admin after admin, scum all have been. is also rec'd, great connections made of power to policy historically illustrated.

    Monetary expansion = inflation, how it manifests itself, and in which sectors, with higher prices varies always.

  14. The key to stability avoiding hyperinflation,
    is to avoid "instablity".

    Monetary excess (distortions) create instability.

    Avoid booms (and hyperinflation) ... that will help
    in solving busts with its recession & instability.

    Or more simply booms cause busts, and the money creation
    excess-swings )in creation, value & flow become unstable.

  15. Vincent, you and traditional monetarist John Cochrane might have some overlap:

  16. Vincent, you might enjoy this blog:

    I would perhaps describe Nick Edmonds as a PKEer, but I'm not sure. If you dig into some of his posts you'll find that he favors making mathematical models. Here's an example:

    Also you might like this one by Ramanan:

    And a discussion here between Michael Sankowski, JKH, Nick Edmonds, and Ramanan touching on the usefulness / validity of the QTM and exchange equation:


    1. Cool, thanks again! I posted at:

    2. You're welcome Vincent. I'm always happy to introduce you to new victims. :D

    3. I'm a hyperinflationist enabler!

    4. Here's a tip: the PKE guys LOVE this book by Godley & Lavoie:

      I searched for "hyperinflation" but came up with zip. "Inflation" however has quite a few entries. Unfortunately none of the ones you can see for free looked all that interesting. I bet if you can work Godley & Lavoie into the convo somehow, you'll get a lot of attention! :D ... maybe it's worth a trip (electronically?) to the Aguilla public library? Lol

      (I'm going to go out on a limb and say that the probability of finding that book at the Anguilla public library, electronic version or otherwise... is somewhere around 0.000001%)

  17. Vincent, conditions at pragcap reached full threat level Sadowski today! ... here's an excerpt:

    I thought that was interesting because I had no idea that total private level assets amounted to $203.1 trillion! Did you? That kind of puts a $17T government debt into perspective, doesn't it?

    1. Well, perhaps that $203.1T is off a bit... it's a battle of the stats now. It's all above my head, so I'm just going to get the popcorn on and sit back and watch:

    2. Cullen is not as nice in that debate. I think Mark is more accurate.

    3. Oh, a nice think about FRED is when I see graphs like what Mark linked to I can save them to my collection of FRED graphs. In the future I could modify them or look at them with the latest data.

    4. VC,

      I wasn't very nice to Mark. I should have been nicer. But he has a very unfriendly tone to his comments and tries to barrel through people. It reminds me of Peter Schiff or something.

      The bottom line is, he has his facts wrong. In his "analysis" he failed to include about $50 trillion in financial business liabilities. In other words, his data was totally wrong. He wasn't reading the flow of funds report correctly.

      Anyhow, I was hoping I could find some common ground with him, but he's pretty steadfast in his belief that fiscal policy has zero positive impact during the recovery. I just don't think that's accurate and I found it rather disconcerting that he was misreading accounting tables so incorrectly.

      Still, that's no reason to be mean and I regret my tone with him....

  18. Vincent!... Who's always looking out for you? Eh?... taking the opportunity when presented to get you a drop or two more feedback? I am, that's who!

    OK, so I had a brief email exchange w/ Ramanan, and I put in a good word for you... asking if Godley & Lavoie ever looked into hyperinflation. They hadn't. But Ramanan had a couple words of advice he authorized me to pass on:

    "Plus most who do it [analyze hyperinflation] miss out wages in the analysis. So watch out for that!"

    I asked for clarification:

    "Oh what I meant is if someone presents a model or an article on hyperinflation, check if it has some discussion on wage dynamics. If the article doesn't, it is missing a very important thing."

    You're welcome.

    (BTW, does your model include wage dynamics? I don't even know!)

    1. I made another explanation with heading "Wage Price Spiral".

      Thanks again!

  19. Shoot Vincent!... just on a lark I Googled "Michael Woodford"... 1st hit had his homepage WITH his email! Why not give it a go? I don't think there's any one in macro held in higher regard:

    It can't hurt to ask, right? (You saw how Sumner put him just two steps below top dog: that would be "the Market" ... only "God" came in between!)

    1. Now for Alan Greenspan:
      He is the president of Greenspan Associates LLC, 1133 Connecticut Ave, NW, Washington, DC 20036-4305

      You can try this one for Paul Volcker (but I doubt it'll work):

      Janet Yellen & Ben Bernanke (I doubt this will get you anywhere):

    2. As big a nuisance as I'm being to you right now... just think how you could amplify that a 1000 fold... here's another one:

      (That's the guy that co-wrote the PKE bible... Godley died in 2010)

      ... and of course this madness wouldn't be complete w/o this one:

      Good luck!

    3. Vincent... you'll be glad to know I took the liberty of trying to contact all those nice folks on your behalf from my new hotmail account:

      I made you sound ...uh... passionate! ... sure... some might say deranged, but I don't think so. I presented your views in a clear logical manner... and I kept it short and sweet! Yes... yes, I did threaten some of them with bodily harm if they didn't answer me... er, I mean you. (I bet Krugman won't be standing next to any windows with the blinds open anytime soon! Hahahahah!)

      You're welcome. Let me know if I can be of further assistance in the future! ;^)

    4. PS: I included a pic I found of you on the beach!... wielding a machete... I Photoshopped in a necklace made from human skulls.

    5. ... and some blood splatter and a pile of corpses in the background. Did I mention the corpses?

  20. Oh Phil. Yes, MR is not a "school". We're not building a cult. In fact, I rather like that it's not a bunch of economists because the more I study economics the more I find that economists don't really understand much about the financial world. So no, it's not a "school of economics" at all. More like a set of understandings developed by real market practitioners.

    Some of MR's ideas developed out of the brief period where we were "MMTers", but the ideas that MR is based on have developed substantially since then. Maybe you haven't been paying attention too closely. And many of those ideas were developed by JKH who never associated himself with MMT in any way. In fact, JKH and I are the primary contributors of unique ideas to what is MR and I'd say we've deviated pretty far from the Mosler influenced days. So you can grab little snippets and quotes and misrepresent how they would be applied to the present, but don't be surprised when someone corrects you and says "so what if they said that 2 years ago"....When the facts change, I change my mind and the facts have changed quite a bit since then.

    You might call this evolution a bad thing. I call it progress.

    PS - Vincent, I didn't delete anything from you. And yes, I delete some of Phil's comments on my site because he's a nuisance.

    1. A comment from the guy who does the 55th most popular economics blog! Wow!

      I seem to have a hard time with The question was just just can you comment on my stuff about MR in this post.

      Also, have you seen any other explanations of hyperinflation that I don't already have in my list?


    2. Ha. I am a nobody. Phil will remind you of that in case you ever get confused. :-)

      Steve Hanke had a good paper on this.

      Not sure if you've seen it. Other than that, I can't think of too many off the top of my head. Hope you find that one helpful!

    3. Yes, I saw that paper. It just reports the inflation rates. To me the interesting part is what caused the hyperinflation, not what the precise inflation rate was.

      Also, I think he is just wrong to think that 40% per month inflation is not true hyperinflation. Millions of people will be calling it hyperinflation and he thinks he gets to define it as not hyperinflation. Hum.

    4. Oh, and it was 53rd. You have far too much influence to be a nobody any more. :-)

  21. Vincent, Nick Edmonds and another guy got back to you.

    1. Cool. Thanks. I replied to them:

    2. Vincent, I do think that your model would benefit from a writeup similar to what Nick does here:

      With a complete list of variables and formulas.

    3. If anyone just clicks "clone insight" they can then see and even edit all the formulas.

      With the GUI letting you see how it all connects together it seems easier to understand the way it is. Hum.

  22. I sent emails to both Woodford and Krugman. Be fun if either replied.

  23. I'm new to the site and it's counter comments so this may already have been addressed, but I wonder if the views of Ellen Brown in THE WEB OF DEBT have been looked at for a totally different idea of inflation,misconceptions about it, and how it can be avoided. Also Stephen Zarlenga in THE LOST SCIENCE OF MONEY. Michael Wade

    1. I talk some about "debt money" in my Hyperinflation FAQ:

      I have not read Zarlenga but have now put that on my reading list. To me it seems that the USA is collecting an inflation tax from the whole world and spending the money inside the USA. So while American's are also paying part of the inflation tax they get the whole benefit. So I think I look at it a bit different than these 2 authors.

  24. So Cullen has blacklisted me! He has forbidden me to post comments on his site linking to my site. He moderates all my comments. This means it can take many hours (or to the next day) for my comments to show up, so it is not practical to participate in the fast discussions on his site. Oh well.

  25. If there are other economic theories with different explanations for hyperinflation I would really like to add them to my collection. I have decided I will pay $30 by paypal or BitCoin to someone who comments here with a new explanation that in my judgement is different from any in the existing collection but of as good or better than the average explanation so far. This offer starts today, Dec 20, 2014.

    1. I made a post on this offer and submissions should be made as comments to that post.


Looking for polite debate on ideas. Never attack a person. Be nice.