Wednesday, August 27, 2014

Regression toward the mean / Pendulum swings back

Hussman has a very interesting graph.

We are currently at extremes never reached before.   We should expect regression toward the mean or for the pendulum to swing back past the mean.   We should not expect to stay at the current extreme levels for low interest rates or for high monetary base to NGDP ratio for a long time.

So how do we return to normal levels?   With  US deficit spending levels, and Yellen as Fed Chair, I don't think there is any real chance of reducing the monetary base.   Over a long enough time, the real GNP might grow by a factor of 2 and bring us back to normal levels of monetary base to NGDP, but I don't think we have that much time before something happens.  So what will happen?   The easy way is for prices to go up so that NGDP goes up.   That is what I expect.   Prices going up.

Prices going up by a factor of 2 or 3 gets us near the mean for the above data.  However, after such extremes, I think we should expect a pendulum swinging to extremes at the other end of the graph.   So prices should go up well over a factor of 3 and we should have high interest rates.

Monday, August 25, 2014

Kuroda Warns JGBs will drop in value this fiscal year

In Jackson Hole, Kuroda said:
Mr. Kuroda vowed to maintain Japan’s aggressive monetary-policy easing until the country reaches its 2% inflation target, which he said could happen as early as this fiscal year.
Mr. Kuroda said that once inflation starts moving higher, 10-year government bond rates around 0.5% will not be sustainable.
If interest rates are going up then bond prices are going down.

I think Japan is primed for hyperinflation and just needs some kind of spark to light the positive feedback loop.  Bonds dropping could be the thing to get the ball rolling.  People don''t like to hold bonds that are dropping in value.  The more people who sell the more they will drop in value.  So we could set off the feedback loop.  In fact, just the central bank chief saying bonds will be dropping might even be enough of a trigger.

Saturday, August 16, 2014

Positive Feedback Theory of Hyperinflation

I contend that Hyperinflation is a set of Positive Feedback loops.   There are many different ways to describe these loops.  One is that after a government has a large debt and a large deficit that it can get into a loop where the more people stop rolling over their bonds the more the central bank has to make new money and buy bonds, so the government has cash to operate.  But the more new money it makes the more inflation there is and the less anyone wants to hold bonds.    So the phenomenon can feed on itself and grow.  There are more loops, but this gives you one way of explaining one part of hyperinflation.

In comments on the previous post Tom said this was circular reasoning.  A good example of circular reasoning is:

       "The Bible is the Word of God because God tells us it is... in the Bible."

In the above the reasoning is circular.  If the Bible is the word of God, then in the Bible God tells you so.   But if it was not the word of God, then God did not say it was.  It is not a good logical argument.

In a positive feedback phenomenon there is a feedback loop made up of real things.   It is not just circular reasoning.   You can watch and measure what is going on in the real world.  You can see how one part pushes another, and that pushes so that it comes back around magnifying the phenomenon.

I think it will help readers to understand my examples of positive feedback loops below, and their common characteristics, before looking at hyperinflation:


A bunch of snow can be sitting on a steep mountain so that it is almost ready to slide.  If something, say a little rabbit, then causes some of it to move, then that can cause more, which causes more, etc.  A small trigger can set off a chain reaction that causes a huge amount of snow to slide down the mountain.

Forest Fire

If there is a high enough density of burnable material in the forest, then a single ignition can set off a chain reaction where a whole forest burns down.


There are two plates of earth touching each other.  But they are slowly pushing past each other.  For many years the ground just slightly flexes under the strain.  However, at some point part of the ground rips.  After the first part rips the strain is too much for the next part and it also rips. This chain reaction continues down the fault line often for miles.


Water is mixed in the lava but under such pressure that it does not turn into steam even though it is very hot.  However, if some of the lava on top breaks through the earth dam around the lava and spills out then there is less pressure on the lava below.   If there is enough less pressure that the water turns to steam it can throw off the top of the lava.  This then reduces the pressure on the lava further below which then also releases steam.  This chain reaction can continue till huge quantities of lava are thrown into the air as volcanic ash. From space you can see the ash and water vapor after an eruption.


If the ocean is over 82 degrees F and the ocean is hotter than the air then it can warm up the air as wind blows over he ocean.  The hotter air rises and makes more wind.  The faster the wind goes the more heat is transferred from the ocean to the air. 
The more heat there is in the air, the faster the wind blows.  So you get a positive feedback loop leading to really strong winds.

Domino Avalanche

Set up dominoes so that the first one will knock over 2 others, and each of those will knock over 2 more, etc.   So with each time increment there will be twice as many dominoes falling.   One little push can then cause many dominoes to fall over.


This is much like an avalanche but earth instead of snow.   There is a bunch of earth on a slope and once some of it starts to break more and more follows till there is lots of earth sliding down.

Earth Dam Failure

If a little bit of water goes over or through an earth dam it can erode a bit of the dam.  This makes for a bigger path for water and so water flows faster.  This then removes earth faster and so water flows faster and faster.   With this positive feedback loop, an earth dam can be quickly destroyed.  


With the right hill and snow you can start a small snowball rolling down the hill and it will grow and grow and grow till it gets to the bottom of the hill.

Ping Pong Balls and Mousetraps

If you put a bunch of ping pong balls on set mousetraps and trigger one, you can get a chain reaction.   It only takes a small amount of energy to trigger a mousetrap and then the ball flies off with lots of energy to bounce around and hit others.   This is not part of nature, but the video is fun and does illustrate the idea of a chain reaction.

Common Characteristics for these and Hyperinflation

In each case there is some set up condition.  Something that has to be in place for a growing chain reaction to be possible.   Under the right conditions, a small thing can set off a large chain reaction.  Once the chain reaction starts it is very hard to stop it.  Eventually it will burn itself out and stop on its own.   Under the "proper conditions", we say there is a risk of this chain reaction.  Even if the reaction has not yet happened, an expert can still see that there is a risk of it happening.

Because a small input can move things to another state, the initial state can be viewed as unstable.   We also tend to see positive feedback loops as causing destruction.

The positive feedback loops above have some form of stored energy which is used up in powering the chain reaction.  The stored energies above are gravitational potential energy, chemical energy,  heat energy, or elastic potential energy.  I think the equivalent in hyperinflation is the total value of all the currency and bonds in that currency being used up.

The best prediction you can give for most of these is "a high risk" and not an exact date.   Earthquakes, volcanoes, forest fires, avalanches, etc. are things where an expert can tell when there is a danger, but still not be able to say  exactly when the trigger will be.    I think it is the same with hyperinflation.

It would make as much sense to accuse each of these real world phenomenon of circular reasoning as it does to claim this of my explanation of hyperinflation.

Now on to Hyperinflation

Once you understand the above examples of positive feedback loops you should then read the different ways of explaining the positive feedback loops in hyperinflation

Tuesday, August 12, 2014

Lack of avalanche does not prove lack of risk of avalanche

Hyperinflation is like an avalanche, forest fire,  earthquake, or volcano eruption. Conditions for a chain reaction build up and then things happen fast. But the build up time can be very long. It is not really possible to predict exactly when the chain reaction will start. The best you can do is say that conditions for the chain reaction are such that there is a high risk. Certain types of things can transition from stable to destruction very quickly with very little provocation.

If conditions are right, a small rabbit jumping across the snow could set off a  huge avalanche.   Conditions in Japan are such that some small event could trigger hyperinflation at any time.   Maybe China sinking a Japanese boat or a pension fund getting out of JGBs.  We don't know what the equivalent of the rabbit will be for Japanese hyperinflation, but we can tell Japan has the setup for this type of chain reaction.  

Again and again there are blog posts where people say the fact that Japan or the USA has not had hyperinflation so far proves that the theories saying there is a risk of hyperinflation are wrong.   This is just not true.  That an  avalanche has not happened yet is in no way proof that there is no risk of avalanche.  Such logic is flawed.   It ignores the fast moving chain reaction that is fundamental to the nature of the problem.   The same is true for hyperinflation.  That it has not happened yet does not in any way prove that there is not a high risk of hyperinflation.  Many countries went from normal inflation to hyperinflation rather quickly.

I have yet to have any really strong logical attack on my hyperinflation explained or hyperinflation faq posts.   More than 100 times I have tried to engage other bloggers posting about hyperinflation.

The lack of any serious intellectual challenge to my "positive feedback theory of hyperinflation" is more of a confirmation of my theory than the lack of hyperinflation in Japan or the USA is any sort of refutation.  

Cnningham's Law says, "the best way to get the right answer on the Internet is not to ask a question, it's to post the wrong answer.".     If I was wrong, I really think someone would have been able to point this out by now.

The xkcd Duty Calls sort of sums this up:

I think it is safe to say there is nothing obviously wrong with my theory of hyperinflation. 

Dear reader, if you think there is anyone that could refute my theory of hyperinflation please send them a link to this post.