Thursday, February 26, 2015

Gleeful Money Printers

Krugman has written arguments justifying the use of snark.   It seems appropriate to address some of his snark and even snark back a bit.

The longer we have gotten away with printing crazy amounts of money without inflation, the more ridiculing and gleeful the money printing enthusiasts have become.  They think that because we have gotten away with it for 6 years they have been proven right.  This is the kind of thinking that is part of any Ponzie scheme or bubble and so loud now we may be near the peak.  They also think that if inflation started the central bank could take steps to immediately stop it.

However, if it takes 6+ years of crazy money printing to start inflation, it is foolish to think the central bank could immediately stop inflation once it starts.  Clearly their control is not nearly so precise. 

In fact, run-away inflation is a problem a professional economist should know about.  High inflation is due to a set of  positive feedback loops.  For years debt, deficit, and money printing just add to the  potential for a chain reaction.  Then something triggers the chain reaction and suddenly things flip from normal to high inflation.

I can warn you now that after this happens the  money printing enthusiasts will locate the small trigger for the chain reaction and blame the whole thing on that, holding the years of deficit spending and money printing build-up blameless.  This is like putting an open bucket of gasoline next to a fire made of pine cones which is sending off sparks and then blaming the random spark for the resulting explosion (another positive feedback loop).  The real blame should go to those who setup the potential chain reaction and not the random triggering event.

When they make fun of the idea of sudden inflation by saying,  The Spontaneous Combustion Theory of Inflation, they are actually very close to the truth.   Just like a fire, hyperinflation is a positive feedback loop.  Once started it feeds on itself and gets out of control.

When they say macroeconomic quantum tunnelling or Phantom Phiscal Crisis in attempting to ridicule they are again close to the truth.  Ahead of time you don't see the crisis and then things almost jump from normal to high inflation.

They use derogatory terms like inflation cult but won't address the sound arguments for the risk of runaway inflation.

Imagine an expert says that a particular location is due for a big earthquake.  Imagine some people ridicule this person for 6 years with things like "Spontaneous Earth Rip Theory" and "Phantom Earth Movement".  Then on the 7th year there is a big earthquake.  At that point it becomes clear who is right and who is foolish.   Earthquakes are also positive feedback loops.    After the inflation positive feedback loop hits, it will then become clear who is right and who is foolish.

This past week Ukraine and Venezuela both have had huge drops in the value of their currencies.  The high inflation positive feedback loops have clearly kicked in for these countries.  Fortunes are being lost and lives are being ruined.  Because both governments spend much more than they get in taxes they are forced to keep printing huge amounts of money even as the value of their currency crashes.

Japan is spending nearly twice what they get in taxes and has huge quantities of bonds coming due.  After Japan's inflation starts they will not be able to control it there either.  When they finally realize that Japan's money printing enthusiast was wrong it will be too late.   The theory of high inflation is serious business.  It is no laughing matter.

The money printing enthusiasts go on and on about the dangers of a deflationary death spiral even though this never happens in the real world.   They see a bit less than 2% inflation and yell "deflation", which is silly.   Inflationary death spirals happen all the time with hundreds and thousands of percents but the money printing enthusiasts can't seem to comprehend these.

The money printing enthusiasts would have you just look at the "no inflation so far" result for 4 currencies (Japan, UK, USA, Eruo) for the last 6 years to "prove" their case.   They would have you ignore hundreds of years of experience from more than 100 countries.  You can look at Ukraine, Venezuela, and Argentina right now or China a thousand years ago or hundreds of other examples where lots of money printing resulted in lots of inflation.  Extrapolating from 4 cherry picked bits of data and ignoring all the rest of the data is not science, it is foolish.

Krugman keeps incorrectly saying that the fear of inflation side does not have an economic model of how debt and deficit cause things to go bad for a country that prints its own money even though for years I have pointed him to an excellent model.

The Phillips Curve theory was from data under a gold standard. If there is full employment under a gold standard then wage prices will be higher. It is a simple supply and demand observation. Taking this data and thinking that if you print more money so wages go up you will get full employment is either stupid or dishonorable.  Using data from a period with no inflation to justify inflation is wrong.  Really what is going on when they print more money, as explained on page 6 of Keynes book, is that you are tricking people into working for a lower real salary which makes it easier to get full employment.   But if you talk about it this way it does not sound like you are trying to help the common man when you advocate money printing. So the Phillips Curve makes a better sounding cover story.
A commenter on Krugman's blog said that "money printing enthusiasts" is not a fair name for Krugman's side of the debate.    Krugman makes up all kinds of unfair names for our side of the debate, so even an unfair name for him would only be fair.  :-)   However, it really is a very accurate name for his position.   Kruman posts about economics, politics, and music.   More than half of his economics posts are either ridiculing those who are worried about inflation or making a case for "stimulus" which is just code for printing money.   So his economics position mostly boils down to advocating money printing and attacking anyone worried about money printing.  He really is a "money printing enthusiast".

Here is an intellectual challenge from the "fear of inflation" side for the "money printing enthusiasts". Can you find a theoretical explanation that fits a high percentage of cases of runaway inflation (explaining why it is "out of control") which does not make Krugmans advice to Japan seem irresponsible?   If you come up with something like war, or shock to tax base, or corrupt government, that is just one of many reasons  for a government budget deficit to get out of control, note that it will not cover nearly as high a percentage of cases as if you just say "deficit out of control".

Monday, February 16, 2015

Rush out of JGBs starting?

Over the last month JGB rates and prices have been on the move:

In the last month the yield on 10 year bonds has doubled from 0.22% to 0.44%.   This means half the interest earned over the next 10 years just covers the drop in bond price over the last month.

The 5 year has gone from 0% to 0.13%.   This means that all the interest earned over the next 5 years just equals the drop in bond price over the last month.   Whatever the yield is next month for 5 years will still just equal the drop since January.   Risk reward balance is not good and does not improve even as yields go up.

The Bank of Japan is buying bonds really fast.  If the yield is going up and bond prices are going down then the selling must be even stronger.

I am expecting a panic out of JGBs and wonder if it is starting.   I am  interested to see the next 10 day report on Bank of Japan assets.  The last two 10 day periods they increased base money by 3% and 0.6%.  Those are not annual rates.  That 3% in increase in 10 days looks crazy, and it is.  Will also be interesting to keep watching the JGB yields.

With them printing so fast, who would want to hold JGBs at what are still crazy low rates?  But if everyone is getting out of JGBs, then they will have to print faster.   These two things can result in a death spiral.    Really seems like it is  not a good time to be holding either JGBs or Yen.