Saturday, September 27, 2014

Lenin and planned hyperinflation

Gary North quotes Keynes and someone who says they got some notes from someone who interviewed Lenin.    Part of it is:

Hundreds of thousands of rouble notes are being issued daily by our treasury. This is done, not in order to fill the coffers of the State with practically worthless paper, but with the deliberate intention of destroying the value of money as a means of payment. There is no justification for the existence of money in the Bolshevik state, where the necessities of life shall be paid for by work alone.
 Assuming this quote is correct, my bet is that after the currency was "practically worthless paper" Lenin was trying to pretend that it was planned so that it looks like central planning works.   If he admitted that he did not want his money to be worthless it would seem central planning was a failure.  Lenin needed to seem in control.

In another quote Keynes says:

In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design.
The "might have done from design" seems to indicate Keynes had some skepticism about the claim that Lenin did it on purpose.

This is the only case of hyperinflation I have found where there is any claim that the hyperinflation was intentional.  I just don't buy it.  I suspect this case was just like all the others,  the market reacting after  government had too much debt and deficit and out of control money printing.

Saturday, September 13, 2014

Central Banks Jump The Shark

There was an episode of Happy Days where Fonzie jumped over a shark on water skis.  Since then the idiom Jumping the Shark has come to mean when the creators of a show have run out of good ideas.

Japan's central bank has made negative interest rates and also Europe’s central bank has made negative interest rates.   This means they have run out of good ideas.   These central banks have jumped the shark.   From here on the quality will go downhill.   It will not be fun any more.

Wednesday, September 10, 2014

Japanese Yen Heading For Hyperinflation

The Yen is down more than 4% in the last month against the dollar.

The 10 year Japanese Government Bonds (JGBs) pay 0.54%.   So losing 4% in value is about like losing 8 years worth of Interest.   If you can lose 8 years worth of reward in one month, the risk and the rewards are way out of whack.

The demand for JGBs is very low.  Many of the buyers are really just front running the central bank.   The central bank has driven some rates below zero.  Investors and traders are happy to hold bonds while interest rates are going down because the value of the bonds goes up.  With interest rates below zero, it is time to get out. 

In the Aug 31 report from the Central Bank of Japan, they had increased their balance sheet by 1.1% in the previous 10 day period.   This is printing money at hyperinflationary rates.

I think Japan is falling into the grip of the positive feedback loops of hyperinflation.  It does not make sense for investors to roll over JGBs.   As people don't roll them over, the central bank becomes more and more the only buyer.  But it is buying with newly made money which makes holding bonds an even worse investment.  The more new money, the less people will want to hold JGBs or the Yen.   But the less people hold, the more the central bank will make money to buy JGBs.   Seems like the death spiral is starting to circle for the Yen.

A big part of the last month change is really that the US dollar has gone up.  So one could argue that it is not the Yen going down but really the dollar up. 

Right now Great Britian may be losing part of their tax base to independence.  If Scotland leaves, Northern Ireland may follow.   The Euro has gone even more crazy with printing money.  So maybe it is that the Pound, Euro, and Yen are all going down and not that the dollar is really going up.

If an expert saw water coming through a gopher hole in an earth dam he could tell you for sure that the dam was going to fail very soon.  Once the positive feedback loop for dam failure starts, it is just a matter of time.  I wish I was such an expert that I could tell you for sure that the positive feedback loops for Yen hyperinflation have started, I really think so,  but I can't tell you for sure.

Full disclosure:  Author is short Yen.

Wednesday, September 3, 2014

Krugman's Missing Model

For years Krugman has been posting asking if anyone has a model of how a country that prints its own money can get into trouble from high government debt and deficit.  Here is one quote, but there are many many others:
I find it quite remarkable that nobody has managed to produce a coherent model to justify the seemingly simple story that anyone, even a country that borrows in its own currency, can suddenly turn into Greece. Again, show me the model!
I have the model he is looking for!   Of course when you print your own money the exact failure mode from too much debt and deficit is a bit different but no less dangerous or bad.

First let me quote Wikipedia about economic models, "In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques."  Also, "A model establishes an argumentative framework for applying logic and mathematics that can be independently discussed and tested and that can be applied in various instances."

In my model of hyperinflation there are positive feedback loops.   It is very similar to an avalanche, earthquake, volcano, or forest fire.  Conditions build up that make a chain reaction possible.  It is hard to predict when the chain reaction will start because some small thing triggers the chain reaction.  After starting, the chain reaction happens relatively quickly and with impressive power.   Once started, it is very hard to stop.  Eventually it burns itself out.

There are many different ways to explain the positive feedback loops in hyperinflation.   Different economic theories explain it differently.  There are many good ways to think about hyperinflation.   Here is just one sample from that link:

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 make the real GNP go down.   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.  Hyperinflation is a triple whammy of inflation.  Of course, the more inflation goes up, the more value bonds lose, so the less anyone wants to hold bonds...

I also have an online simulation showing how hyperinflation works.   It shows how hyperinflation emerges mechanically from macroeconomic processes gone wrong.  This shows 5 different feedback loops with reasonable formulas can quickly go from normal inflation to high inflation.   It uses things like "money supply", "inflation rate", "velocity of money", "interest rate", "GNP", etc.   I think my model is closer to the reality of hyperinflation than any other I have seen.  All the details of the model are well specified so that the computer can run the simulation.   Anyone can easily change the inputs or even the formulas and see how it would change the results.   They are invited to publish their version of the formulas for further argument/discussion.   It is a good model for learning and thinking about how inflation spirals out of control in a country that can print its own money.  This is the model Krugman has been searching for.

I have been unsuccessful in contacting Krugman.  If you know how to contact him, please let him know I have the model he is looking for.