Monday, November 25, 2013

Armstrong and Hanke out of touch with real world definitions

If the US had 100% inflation in 3 years just about everyone except Armstrong and Hanke would say, "the US has hyperinflation".  Here is a good post on this idea, Prof. Steve Hanke, Your definition of hyperinflation is just nonsense.

Wednesday, November 20, 2013

Armstrong gets hyperinflation wrong

In Armstrong's latest post he says:

Hyperinflation - All Just Hype
Hyperinflation is a good sales pitch but it PRESUMES government will honor all its promises. There is no indication in history that any established government has EVER done such a thing. They will confiscate everything they can, raise taxes that kill the economy, and the less revenue they generate the higher interest rates will rise forcing further defaults on debts.

Hyperinflation PRESUMES they will honor their debt. If they do not, it just vaporizes and that is DEFLATIONARY.
If we use 26% inflation per year as the cutoff for hyperinflation, then hyperinflation has happened many many times.  In the US alone there are several in the colonial period, the revolutionary war, and the civil war.  Armstrong makes it sound like hyperinflation is something that can only happen in a bad theory with false assumptions.  Really it is something with many historical examples.  Plenty of real world experimental evidence.

Really, there is no history of a government ever defaulting on debt in their own currency.  They just print to pay off the bonds.   If you look at Japan now the interest is only 0.19% on 5 year bonds, not rising higher.  This is because the central bank of Japan is making money like crazy to buy up bonds.  This is the normal sort of thing leading up to hyperinflation.  In the end the value of the paper they are using to pay off debts is a small fraction of the original value, so this is not particularly honorable, but they do not default.  

Armstrong has hyperinflation all wrong.

Hyperinflation is a market revolt not a political choice

Again and again I see people saying that hyperinflation is a "political event" or a "political choice".    There are political events and bad choices leading up to hyperinflation but really hyperinflation is a market revolt against government debt and and deficit spending.   Hyperinflation is a market response to bad politics, not the bad politics themselves.   Never do politicians explicitly choose hyperinflation, they just keep trying to kick the can down the road further with deficit spending and then the market revolts.

How could they not expect inflation?

Some day in the future people will look back on our time and graphs like this and wonder in amazement, "How could they not expect inflation?".

Saturday, November 16, 2013

Real life success in hyperinflation detection?

I am wondering if any readers have lived through hyperinflation and what was their first clue that hyperinflation was coming?    Or if people have read any real life examples someplace on the net if they can say how people first became aware hyperinflation was coming (links if you have them).    Like did foreign exchange rates change first?   Did food go up first?  

One place I read that stock markets in Germany, Zimbabwe, and Venezuala went up early on.   I note that Japan's stock market is well up.   It seems that when people get worried about money one of the first things they do is buy stocks.  So this seems a good clue.

Another early way is when the government robs the central bank of its foreign reserves.   Using the "backing view" in my many explanations of hyperinflation we can tell this will cause hyperinflation.

People rushing to get out of bonds while the central bank is buying also seems a good warning.

It would be nice if there were people who had already had success in detecting hyperinflation ahead of time and we could find how they did it.   I don't mean predicting that sometime there will be hyperinflation but I mean in telling when something has already started but before the prices are going up fast.

Thanks for any help anyone can provide.

Saturday, November 9, 2013

Food Prices as Early Warning for Hyperinflaton

It seems that in previous hyperinflations food and energy prices went up first.

Food and energy cross boarders and so foreign exchange rates impact them quickly.   It seems that a currency heading for hyperinflation does poorly in foreign exchange markets.

When times get tough there are people selling off optional things but everyone keeps buying food.  Even land and houses become optional as people can move in with parents or rent.   So prices of some things can go down while food is going up, making it look like the overall price change is not too much.   But as a leading indicator for hyperinflation, I think we should only look at food and energy.

Every household buys food most every week.   So they see the prices going up on food.   It does not matter so much what government says the CPI is to people who notice that a grocery cart full of food costs more than it used to.  Their personal perception of the rate of inflation is shaped by what they see in food prices.

We are currently seeing food inflation in India and in Japan.

The world food price index is one way of looking at how the US dollar is doing.

If your bank account pays 1% and the price of a can of tuna is going up at 10% then you are better off investing in canned tuna than putting your money in the bank.  It would be very rational to take any extra money at the end of the month and buy canned food.   After enough time that most people understand what is going on, I think we will eventually see rational behavior.

If food is going to be up over 30% in 3 years it is just not reasonable to invest in government bonds paying 0.19% per year for 5 years, or less than 1% total after 5 years.   Better to buy canned food.

As more and more people get out of bonds and buy real things, the central bank will make more and more new money to buy up the bonds that nobody else wants.  If nobody at all were buying bonds, the government could not deficit spend, which at this point is not optional.  So the central bank must buy bonds.  The price of food will go up even faster, and it will make even less sense to hold government bonds. 

I think we should keep an eye on food prices in any country at risk for hyperinflation.

Tuesday, November 5, 2013

BOJ only buyer of JGBs

The Bank of Japan is now the only buyer of Japanese Government Bonds.   This is what happens in the early stages of hyperinflation.   Next I would expect JGB selling to go faster and faster.  The death spiral could start anytime now.

Monday, November 4, 2013

Hunt Brothers vs. Japan

In the 1970s the Hunt Brothers were able to drive the price of silver up to about $50/oz.  With around $1 billion they controlled over half the world's silver.   There is many times the amount of money in circulation today as back then.   The stockpile of above ground silver is smaller than back then.   Imagine if Japan gets hyperinflation, so the Yen is not a good store of value, and many people in Japan start buying silver as a store of value.   The price of  silver could go way up.