We who are advocates of sound, free-market money need to get our story straight. Are we predicting hyperinflation or massive deflation? Personally, I am much more worried about the former problem. FULL ARTICLE
Source link: http://archive.mises.org/10266/mish-should-ditch-his-deflation-fears/
Mish Should Ditch His Deflation Fears
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ABOM,
Thank you for the insight — I didn’t think about the possibility of inflation exportation. But if all these new dollars do get exported, they’ll need to be converted and the dollar will suffer.
This is a very confusing topic for me. It seems that a number of concepts are being mixed together: What will the Fed do? What is money? What is deflating/inflating? Geography? Mood? What happened in other countries? World reserve currency? Short-term vs Long-term? Why do prices fall in one sector but rise in another? What is vs. what ought to be?
I haven’t read anything that has helped me to draw a final conclusion. I feel like I’m discovering an animal in a dark room, but the animal keeps shap-shifting. What is clear to me is that alot of people think they are talking about the same animal, but they are NOT!
I would like to see more articles that simply define the problem.
hazlitt debunks “velocity” (dr murphy’s italics hint that he is of the same mind):
http://mises.org/daily/2916
mises on “velocity”:
“In analyzing the equation of exchange one assumes that one of its elements–total supply of money, volume of trade, velocity of circulation–changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely `economy'] as such, but in the individual actors’ conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals’ demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics.” (Human Action, p. 399)
“Loan losses are, in effect, investment losses, and investment losses are not deflationary per se” (Saville).
The articles that Newson posted are essential for understanding this topic. Mish has argued that debt destruction has dwarfed the money supply increase, so we can expect deflation. This view is flawed: Loan losses decrease the shareholder equity account on the balance sheet. This means there is no direct decrease in the amount of money in circulation because of the loan loss.
http://safehaven.com/showarticle.cfm?id=10804
Newson, thanks for that link! I missed that point completely.
re: emil suric
I think the point is that the purchasing power of money depends not only on the supply of money, but both on the supply *and* demand. (as Jon pointed out previously)
i.m.o. we could see surges of inflation, but hyperinflation is almost impossible for the short-medium term outlook. The USD as the world’s reserve currency has tremendously aided America in that regard.
re: alan
I agree, supply of money along with the combination of demand (Global Demand) will drive prices higher. As creditor nations eventually call our debt, as I mentioned in my previous post, you will see money supply grow as well as their increased demand, as they will too become wealthier and more productive nations.
Instead of lending the U.S. money so we can consume their products, wait until they start realizing they’re better off keeping their own money &consuming their own goods. That will, as you said, drive demand up, and all that money that is being printed now will come home to roost.
Now, as for Hyperinflation? If the United States / FED stays stubborn with their belief that they must continue to print money to either maintain this unsustainable standard of living and/or they wish to unhonorably pay back their debt to their lenders. Facts are this. Hyperinflation will occur if those in power fail to believe, realize, or be the culprits who will have to tell this Nation, “I’m sorry but, No. We can’t give you any more”
Any Politician worth his salt could tell their American Public that, but my money is on Politicians, the majority anyway, continuing this welfare state and then blame previous administrations when the dollar finally collapses.
NO ONE – wants to be the one who’s hand is forced to turn the faucet off. They’d rather the pipes burst before they do that.
Alan,
Yeah, but I was taught that the demand for money is represented by k, or 1/v. I always had a hard time understanding that, and confused T for V. My professors told me that instead of T, I should just use Q; It never really cleared up the confusion.
Well, PPI was up 1.8% last month – .5% core rate. So, even at the core rate we are looking at 6%+ if it keeps up.
High marks to Newsom for recognizing that the demand for cash holdings is now in the drivers seat.
I think the question here, which has not been answered, is “is credit money?” Or, more accurately, “is credit acting as money under our current monetary system?”
If you believe that credit is acting as money in our current, you would have to be on the side of the deflationists. If you don’t believe credit is acting as money, then you would be in the inflation camp.
Personally, I believe that credit is acting as money — credit is serving as a dollar-denominated medium of exchange. As a result, the total number of dollars available for economic transactions is affected.
regarding Zimbabwe… usually in the FRB induced credit cycle the bust phase is deflationary… but this stage is brief… and, if reflationary policies are followed with the virulence that US authorities have done, followed soon by renewed inflation.
But hyperinflation?
Well look at US mortgage rates since the 1980s… every boom-bust cycle they’ve ended up lower and lower… and there is a real possibility that we a re close to a vanishing point, the final stages, the crack-up boom in which fiat currencies die.
How high a probability? could we have another.. or even two more mini-cycles before the collapse? Maybe. But for the first time in a generation we have to take the possibility of US hyperinflation seriously.
Bear in mind things move very fast in todays world.
Remember… once a currency collapse starts, credit destruction is not deflationary, it just adds to the panic…
Bob, agreed credit is not money but it acts as money. Remove credit and effect on prices is comparable to removing money. Put it this way, many Austrians spent years banging on about increase in credit and related effect on various asset prices. These price rises were the Austrian evidence of inflationary policy missed whilst central bankers obsessed over narrow range of prices in CPI. Now if this credit disappears and is paid off (ironically this is a bid for the dollar which most Austrians including Schiff woefully missed) we see a consequential collapse in asset prices. This is exactly what has happened yet still we have to quibble about the technicalities of how money is different than credit. The point is surely that credit plus money effect prices. Whether you pay for a house with cash or credit affects not the vendor but surely affects the price.
Regarding the question of whether credit is money, I think a useful way to conceptualize this is by considering credit as an increase in “velocity” of the current stock of money. If I want to hold $100 as savings over a month, I can either put $100 cash under my mattress, lend out $100 for that period of time (either directly or indirectly through a bank deposit), or some combination of the two. In the first scenario, each dollar that I have gets spent zero times in that month. In the second, each dollar gets spent one or more times before it is “returned” to me by the end of the month. In this example, the money stock has not changed at all, but in the second scenario it is possible for my $100 to increase “demand” for goods by putting it into the hands of someone who wants to spend it during that time instead of me. I cannot spend the same $100 during that month (which is fine by me, or else I wouldn’t have lent it in the first place). If my borrower defaults, I have lost my $100 but it still exists in someone else’s pocket.
“Velocity” is of course a faulty term that nevertheless is based on a legitimate concept. I think there is a more Austrian way to describe the frequency with which each dollar is spent and its implications. At any given time, each dollar in circulation could be said to have a “time preference” proportional to the length of time between the last time it was spent and the next time it will be spent. The time preference actually exists in the mind of the owner of each dollar, but you get the point. This is all purely conceptual and could not be measured in any meaningful way.
The time preference of all of the dollars could be averaged. During periods of time when many people want to save money and few people want to spend money, the average time preference of money will be low. Each dollar will be exchanged less frequently. When more people want to spend money, the average time preference of money will be higher. Each dollar will be exchanged more frequently. Assuming a fixed supply of goods during such a period of time, prices will likely be higher during periods of high time preference.
Credit markets tend to increase the average time preference of money by moving dollars from people with low time preference (savers) to people with high time preference (spenders) for a period of time. Savers are willing to pull their cash out from under their mattress and lend it because they believe there is a high probability of being repaid by the time they will want to spend it, usually with a profit (interest). This can increase demand for goods, and thus prices, during that period of time beyond what it would have been if the loaned cash had stayed under mattresses. However, it does not increase the supply of money. If all of the loans default, the original savers will have lost their expected “future” money, but the same original amount of money remains in the economy in someone else’s hands.
Note that I have not addressed the fractional reserve banking system here, which complicates but does not invalidate this concept.
Tim,
I have credit cards and it doesn’t make me buy things any faster than with cash, or check. I still buy the same number of peas, carrots, corn and potatoes at the store even though I use a credit card. I do so at the same rate. I’m certainly not eating any more. My decision to consume is indepent of a credit card.
What might matter to my speed of consumption is if I rack up a higher and higher balance on my card. But I could accomplish the same via a loan, and besides someone else has to reduce consumption in order to lend me the money. So it’s a wash.
People who focus solely on CPI figures are missing the boat. Look all around you. Housing cost (normally the biggest expense) is still plumeting, people are losing their jobs, people are saving more and spending less – hardly inflationary signs. And lastly, look at treasury rates, probably the best barometer of inflation. Short term rates are barely above zero percent. I doubt that the folks who invest trillions in those instruments will accept those low rates if they feared inflation.
I agree with Jon Robinson. The problem with many Austrians is that they don’t often take human psychology into account. There is just too much x + y = z type of analysis. Behavioral finance has been gaining acceptance for a good reason. Prechter (who has posted articles on this site) is a staunch deflationist and gives good arguments supporting it in his book “Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression “. One of his arguments for deflation is the switch from people’s desire to consume to their desire to conserve. No matter what government policies are instituted, they can’t force people to spend.
Rothbards book “The Mystery of Banking”, while a good read, missed the boat on deflation because it failed to take mass psychology into account. He, like many folks, assumes continuous inflation because of their belief that the fed can simply expand credit forever when in fact it cannot. There is a tipping point where people are over saturated with debt.
and again US CPI beats estimates… +0.7% MoM vs. 0.6% exp.
expect inflation to stabilize over summer, jump in Q4.
There’s a Tsunami coming.
Paul
“No matter what government policies are instituted, they can’t force people to spend” is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend….. instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it “missed the boat on deflation” isn’t valid.
The Fed *can* expand the *money supply* without limit regardless of “mass psychology” or the “tipping point where people are over saturated with debt”. Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn’t seem to be such a “tipping point” with regard to “saturation with debt” with the US Government – ie. they desire inflation and I agree with Robert Murphy that in the end they’ll get it.
Sorry Paul but your statement “no matter what government policies are instituted, they can’t force people to spend” is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend….. instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it “missed the boat on deflation” isn’t valid.
The Fed *can* expand the *money supply* without limit regardless of “mass psychology” or the “tipping point where people are over saturated with debt”. Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn’t seem to be such a “tipping point” with regard to “saturation with debt” with the US Government – ie. they desire inflation and I agree with Robert Murphy that in the end they’ll get it.
Sorry Paul but your statement “no matter what government policies are instituted, they can’t force people to spend” is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend….. instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it “missed the boat on deflation” isn’t valid.
The Fed *can* expand the *money supply* without limit regardless of “mass psychology” or the “tipping point where people are over saturated with debt”. Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn’t seem to be such a “tipping point” with regard to “saturation with debt” with the US Government – ie. they desire inflation and I agree with Robert Murphy that in the end they’ll get it.
Sorry Paul but your statement “no matter what government policies are instituted, they can’t force people to spend” is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend….. instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it “missed the boat on deflation” isn’t valid.
The Fed *can* expand the *money supply* without limit regardless of “mass psychology” or the “tipping point where people are over saturated with debt”. Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn’t seem to be such a “tipping point” with regard to “saturation with debt” with the US Government – ie. they desire inflation and I agree with Robert Murphy that in the end they’ll get it.
Sorry Paul but your statement “no matter what government policies are instituted, they can’t force people to spend” is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend….. instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it “missed the boat on deflation” isn’t valid.
The Fed *can* expand the *money supply* without limit regardless of “mass psychology” or the “tipping point where people are over saturated with debt”. Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn’t seem to be such a “tipping point” with regard to “saturation with debt” with the US Government – ie. they desire inflation and I agree with Robert Murphy that in the end they’ll get it.
Brian,
By using your credit card rather than paying in cash, your cash savings have not been reduced during that period of time. If you wanted to keep $100 under your mattress as cash savings during that time period, your credit card allows you to do so by allocating someone else’s (the credit card company’s) savings to you during that time for the purpose of spending. If the credit card company decided to keep their cash savings in their vault during that period of time rather than lend it to you, you would have had to choose whether to refrain from your purchases in order to maintain your $100 savings, or to reduce your own savings during that period of time in order to make the purchases. In other words, your access to credit allows you to increase your time preference. This does affect your decision of what to consume and when to consume it.
Note that there is not much difference to the saver (credit card company) if they lend to you or not during the period of time. Whether the cash stays in their vault or they lend it to you, they expect to have the same amount of money at the end of the loan period (plus profit & interest balanced against risk of default). Their time preference is the same in either scenario, while your time preference increases if they lend to you. So a well functioning credit market tends to increase time preference throughout the economy, as compared to an economy in which everyone keeps their cash savings under their mattresses. As time preference increases, prices of scarce goods and services tend to get bid up more quickly, as people willing to spend are given additional dollars that would have otherwise been under mattresses.
A clearer example is a home loan. If a saver wanted to keep $300,000 under his mattress for 30 years rather than loan it to you, you would have to save up your own money for years rather than purchasing the home now with cash borrowed from him. His loan allows you to increase your time preference for purchasing a home. This increases the demand for housing in the present time.
Brian,
By using your credit card rather than paying in cash, your cash savings have not been reduced during that period of time. If you wanted to keep $100 under your mattress as cash savings during that time period, your credit card allows you to do so by allocating someone else’s (the credit card company’s) savings to you during that time for the purpose of spending. If the credit card company decided to keep their cash savings in their vault during that period of time rather than lend it to you, you would have had to choose whether to refrain from your purchases in order to maintain your $100 savings, or to reduce your own savings during that period of time in order to make the purchases. In other words, your access to credit allows you to increase your time preference. This does affect your decision of what to consume and when to consume it.
Note that there is not much difference to the saver (credit card company) if they lend to you or not during the period of time. Whether the cash stays in their vault or they lend it to you, they expect to have the same amount of money at the end of the loan period (plus profit & interest balanced against risk of default). Their time preference is the same in either scenario, while your time preference increases if they lend to you. So a well functioning credit market tends to increase time preference throughout the economy, as compared to an economy in which everyone keeps their cash savings under their mattresses. As time preference increases, prices of scarce goods and services tend to get bid up more quickly, as people willing to spend are given additional dollars that would have otherwise been under mattresses.
A clearer example is a home loan. If a saver wanted to keep $300,000 under his mattress for 30 years rather than loan it to you, you would have to save up your own money for years rather than purchasing the home now with cash borrowed from him. His loan allows you to increase your time preference for purchasing a home. This increases the demand for housing in the present time.
Robert P. Murphy wrote:
It could be possible if in practice the sum total of the credit lines that the credit cards companies give to their customers, is bigger than the sum total of the cash they hold as reserve, more or less like the goldsmiths are said to have done in the past with their own gold.
If it is so, then we should call it ‘fractional reserve lending’, to distinguish it from the fractional reserve system of the commercial banks.
If the Fed was implementing a policy of +10% inflation through the expansion of the money supply, what about the US bond market? The long end of the bond market whose prices are not determined solely by the Fed would see rates sky rocket. Weimer Germany and the emerging markets who printed money without restraint never had the largest most liquid bond market in the world to contend with. I can’t see how the Fed can do a run around of this. Perhaps some of the more knowledgeable hyper- inflationist proponents can enlighten me on how money could be debased at such a rapid rate while interest rates skyrocket and the value of government debt made worthless?
Lets say the Fed, prints money and starts buying bonds every day to prevent rates rising. First, they have tried this in 09 and as soon as they stopped, long rates rose.
So lets say they continued to print money and buy long term bonds every day and every minute, other people and institutions could just keep selling, even sell short. At that point, the only buyer left would be the Fed. How is that for a whopper, bond market short sellers would have a license to print money!
If the US government bond markets goes the way of all flesh, what would all these blood sucking politicians and government employees do? Get real jobs? I doubt it.
Also, the Wall Street/ Pentagon connection would be devastated. They would have to look for real work too. I think there will be moderate inflation (which is too much imho) over future years as there has always been, but the US Empire cannot afford a bond market collapse under any circumstance.
Non-credit money is the only real money. Non-credit money is the necessary additional quantity of money in circulation (dM) as percentage (k) of existing quantity of money in circulation (M). dM = kM ;
k = (supply – demand)/demand ; If non-credit money is emitted according to the cited formula, inflation cannot exist. Also, taxes are annulled for the amount of non-credit money. The consumers pay less and producers get more than today, in the order of credit money. All get! Non-credit money is the way for solving both national and world economic crisis. We must create both national and world order of non-credit money.
Robert Murphy is almost there. He left out the crucial piece that leads to outright deflation in his example: It is the fact that Rothbard may treat the claims to future money as if they were money, and spend all the rest of his money accordingly. Let’s say the person he loaned the money to does the same thing and again loans it out to someone else. Let’s say the final recipient in this chain defaults and everyone else in the chain follows. Each of the people involved will suddenly realize that their claims to future money were actually never as good as actual money in their pocket. They will start appreciating true cash again. All the necessary results of deflation will ensue.
I explained it in full detail here: http://www.economicsjunkie.com/inflation-deflation-revisited/
Non-credit money is not debt than gift. No inflation, no deflation, no economic crisis. If there is non-credit money. We must create non-credit money.
Stojan,
Any non-fiat currency such as a commodity based currency (like gold) will perform it’s role in an economy suitably well. There is no need for a “necessary additional quantity of money” and/or emitting “non-credit money” according to a formula. The concept of managing money’s purchasing power or trying to achieve price stability is futile and in fact counter-productive.
Any suggestion of “a national and world order” is also a really bad one in my opinion!
Matt,
Formula is better than gold. Non-credit money must be both national and world money. Without inflation, without deflation, without debt, wthout economic crisis, without gold and without Federal Reserve.
you are all dumb.
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