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Source link: http://archive.mises.org/9725/there-will-be-hyperinflation/

There Will Be (Hyper)Inflation

April 2, 2009 by

The German hyperinflation was the result of a policy that considered the financing of government debt by an accelerating increase in the money stock as the politically least unfavorable method. It seems that the state of opinion hasn’t actually changed much. Today, there is great public support when it comes to expanding the base-money stock for financing ailing banks, insurance companies and, most important, rising government debt. FULL ARTICLE

{ 53 comments }

John April 2, 2009 at 8:58 am

Great article. I don’t understand that gold price chart though, I don’t see any other gold price history data showing gold over $2000/oz in the past decade!

Also, the Mises quotes seem to indicate our situation will lead to either bankrupcies and deflation, or hyperinflation. But how to tell which (at this moment what does an individual do to protect himself?).

Thanks,
John

scott April 2, 2009 at 9:23 am

Buy TIPs. even if we don’t get “hyper” inflation– you have to think a reflation is certainly coming.

That’s just my personal opinion–you have to judge for yourself.

redshirt April 2, 2009 at 9:41 am

TIPS are based on gov CPI aren’t they? We know gov CPI is manipulated. As such, TIPS shouldn’t reflect the real level of inflation and certainly CPI could undergo future changes to benefit the gov whenever it chooses.

Anonymous April 2, 2009 at 9:52 am

I really enjoyed this article. Please consider a new economic model called xonomics. See it at
http://www.invisiblepatriot.blogspot.com. It may not only check big buisness but big government.

Matt April 2, 2009 at 9:55 am

Ausgezeichnet!

Brodie April 2, 2009 at 10:00 am

Hyper inflation is bad, but that is not the real culprit. The reason being, is that if wages do not lag too far behind inflation, then everything balances out. The problem is government waste. Because the government is wasting so much wealth, wages will stay stagnant, while prices sky-rocket. This is when hyper-inflation is really awful. And this is what is going to happen.

fundamentalist April 2, 2009 at 10:18 am

Excellent article! Thanks! What does it mean for the investor? Kyosagi in his “Rich Dad Poor Dad” series wrote that the really wealthy follow the long term economic cycles so that they buy at the bottom and sell at the top. For example, when the stock market peaked in 2000, the very wealthy had already exited and invested in real estate long before its boom. Regardless of what economics teaches, the wealthiest apply the basics of Austrian economics to their investing. They buy low and sell high, which means they buy during depressions and sell during booms. The average investor does just the opposite.

Austrians can console ourselves with the knowledge that we are right while the world burns, but we can also find some consolation in getting rich from the errors of mainstream econ and state policy. Inflation will eventually cause interest rates to rise, so borrow all you can now and invest in assets that benefit from price inflation such as commodities and land. Stocks that will benefit when the economy turns around will be those in commodities and capital goods. As a result, we can benefit twice from the resulting inflation, once from the devaluing of the dollar which will reduce the real principle of the loan, and again from the increase in price of assets.

Hyperinflation hurts only those who are not prepared. A lot of people became wealthy as a result of the hyperinflation in Germany because they understood how inflation works.

George April 2, 2009 at 10:20 am

Buy TIPs. even if we don’t get “hyper” inflation– you have to think a reflation is certainly coming.

Inflation is here, but TIPs?

TIPs get taxed on the “inflation gain” each year. This can require an external source of funds to cover the taxes if it exceeds the interest
payments.

This problem is in addition to using the phony CPI inflation measure.

And also ignores that the US will not be in any position to pay off the TIPs in anything worth anything if there is a serious problem with the dollar.
~

Rob April 2, 2009 at 10:23 am

I enjoyed this post very much, though I’m not sure that we will actually hit hyperinflation. The market still works and this is causing people to save money which keeps the money velocity down. This should prevent hyperinflation at least for the time being.

Something that I find interesting when reading the comments on articles like this is that everyone talks about the problems and worst case scenarios while almost no one offers a way to protect yourself or your family.

My suggestion? Invest wisely in items of real value and in companies that earn profits in currencies that belong to countries that have surpluses. Also, keep cash on hand and always be prepared – food and the like that is. If things ever get really bad we’ll have to depend on our friends, our families, and our reserves.

In the end everyone should prepare for the worst and hope/pray for the best!

Matthew April 2, 2009 at 10:27 am

“Everyone on Earth will die.”

That statement is as or more truthful than the title of the article, but neither addresses when such things will occur. There is a tremendous difference between everyone in the world dying tomorrow vs. comfortably living out their lives and dying of old age.

Likewise, causing hyperinflation is not something Bernanke et al. will willingly do later this year just for the heck of it. Demand for money has gone way up, and the amount of money banks create through fractional reserve banking has dwindled, thereby offsetting the addition of base money the author noted.

When confidence is regained (I predict that being years from now), the Fed will take steps to contract base money, precisely to avoid the hyperinflation being discussed. Which side they will err on is yet to be seen…more likely on the high side so that there will be significant inflation, perhaps like the 70s, but they will most certainly not allow Zimbabwe-esque hyperinflation. They’re not idiots.

To me, the only real threat of society-shattering hyperinflation is if we get to the point where the government has a choice between defaulting on Treasury debt or persistently and heavily monetizing it to avoid default.

Notwithstanding everything else I said above, I do think there’s a real chance of that happening. Obama’s deficits are misallocating resources trillions of dollars at a time, not to mention the $50 trillion NPV of the social insurance program liabilities (e.g. social security).

Paul April 2, 2009 at 11:53 am

As much money that is being created, it probably is not enough to overcome the deflationary pressures. I believe that deflation is in the cards for now, almost regardless of what the feds do. Deflation will either occur natural through forced liquidations or with the fed ruining their own balance sheet by printing money. The devaluation of Treasuries itself could likely be very deflationary.

That being said hyperinflation will eventually occur – in a few years. It will happen after all debts are purged and there is nothing left to deflate. Unlike deflation, governments will be unwilling to put a stop to hyperinflation because that would almost always mean an economic collapse.

zumppi April 2, 2009 at 12:04 pm

Excellent article and excellent comments.

My question: does anyone have a link to a graph showing correlation between some inflation measure, such as CPI, and monetary base (or lagged correlation would be even better)?

Doesn’t this test the Austrian hypothesis “In contrast, Austrian economists stress that inflation is a result of a rise in the stock of money. “?

AC April 2, 2009 at 12:52 pm

Matthew wrote:
“To me, the only real threat of society-shattering hyperinflation is if we get to the point where the government has a choice between defaulting on Treasury debt or persistently and heavily monetizing it to avoid default.

Notwithstanding everything else I said above, I do think there’s a real chance of that happening. Obama’s deficits are misallocating resources trillions of dollars at a time, not to mention the $50 trillion NPV of the social insurance program liabilities (e.g. social security).”

Me:
I definitely agree with your sentiments Matthew. The Fed’s plan to buy up some US Treasuries (about $300 billion I think), is not a good sign though. Put that together with the large deficits the current administration is budgeting, and I believe we may see in some 1970s era inflation in the next 12-18 months once the deficit spending from the new budget takes effect.

I do think that the Fed will try to remove some of the additional reserves they put into the banks. The problem the Fed will run into is how much they can pull back out without causing the banks to become insolvent again. After all, the banking sector has lost a great deal of money from the housing bubble collapse. Those losses are currently being “hidden” by the influx of the add’l Fed fiat money, without which many of the very large banks would be insolvent (and probably some regional and local banks that took loan losses or CDO losses). Those losses have to be covered by enough current and future profits in the banking sector in order for them to be able to “return” the recently added Fed fiat money. I just don’t think the banking sector will be able to make enough in the short time frame before the extra US deficit spending kicks in to be able to return the additional Fed money. How much they are able to return will help offset the additional deficit spending, but to what degree would only be a guess on my part.

As for protecting or hedging against inflation, I’d stay away from gold since the Fed and other central banks try to manipulate it through selling gold when prices rise (and I don’t know how much they have left). If the Fed were to completely run out of gold, I’d take a different viewpoint. But for protecting against the next decade of inflation, I’d say various types of hard assets that produce goods or are components in production, i.e. farm ground (although it is still a bit high), mining, energy (natural gas, coal). Now if you can predict in what sector the next bubble will appear, then invest there and get out before the bust.

greg April 2, 2009 at 1:38 pm

Money is just a medium of exchange and wealth creation is based around increased productivity. You can see the money supply increase, but if your economy increases productivity at the same or greater rate, you will not have inflation as you have more money chasing more goods.

The hyper inflation that you saw in Germany was in part due to the increases in the money supply. But you did not see an increase in productivity. You actually saw a decrease in productivity as resources were used to replace the ravages of war. When you invest in a bomb, blow things up, you then have to invest in replacing the damn thing you blew up.

Now I agree that we are going to see inflation as the money supply is growing greater than productivity can grow. Plus the fact that a large part of the stimulus package is being spent on social welfare which is counter-productive. But we will have productivity increases that will take part of the sting out inflation.

On the business cycles, you had more cycles under the gold standard as you had under our current system. So does that make the current monitary system better? NO! The decrease in business cycles is not a factor of money supply, it is the development of technology that allows businesses to process data better to control inventory levels and forecast current market trends. JIT inventory control would not be possible without our current technology. There was no way a manufacturing company could operate in the 1940′s on 3 days inventory.

Technology, productivity, world free trade and peace is the key to advancing our society.

ehmoran April 2, 2009 at 2:07 pm

To have inflation, don’t you still need to have fiat money equal to something? Which, at this time, fiat monies are only valued based on an exchange rate.

If all the countries print more money and increase money velocities while maintain somewhat similar exchange rates and Central Bank Interests rates. I’m not sure you can get what we call “inflation”?

Nick E April 2, 2009 at 2:11 pm

@greg: I agree with the first part of your comment. Increasing the supply of the medium of exchange but not increasing the supply of things to buy with it gives you inflation, by definition.

I don’t, however, agree that the inflation will be offset to a significant degree by increases in productivity. It’s hard to have increased productivity without capital investment, which doesn’t so much happen in an economy starved of real savings. (To say nothing of the fact that you haven’t really increased productivity if there’s no demand for your goods once you’ve produced them.)

As far as your observation on the gold standard, technically, yes, the business cycle doesn’t vanish completely in a world with real money: entrepreneurs still fail, and people who invest in those entrepreneurs on a speculative basis still lose their money. The argument from the Austrian perspective would be that a hard-money world has fewer entrepreneurs (because lending only occurs in relation to the real savings rate), so these failures are less likely to create society-wide catastrophes.

ehmoran April 2, 2009 at 2:32 pm

From my previous statement, I think this is the Case for Social Engineering, where human actions/behaviors only are considered 2-dimensional: greed and fear, based on wealth.

This is how they would increase or decrease wealth in specific nations using a One World Central Bank and One World Fiat Currency………

greg April 2, 2009 at 2:52 pm

Nick,

Just want to point out when you look at the graph of money supply that has the recessions highlighed, you had a greater percentage of down years to up years during the gold standard. Does this mean that the gold standard is inferior, I don’t think so. The point I was trying to make is the decrease in recession years is more a factor of productivity.

Capital is important for productivity gains, but as it was put on a previous essay, productivity gains come from “think of thats”. It is ideas that give you the true gains. You can increase production by simply adding more equipment, but gains in productivity comes from producing more with the equipment you have.

Productivity has driven our economy over the last 100 years. A little fact that I heard on the History Channel stated that productivity in the US has increase over 1000 times over the last 100 years. And as long as people are free to dream up ideas and bring them to market for personal gains, this will continue.

On the topic of gold, I find it interesting that today the market is up 250 points, aluminum is up $5 but gold is down $20 and silver is down 15 cents.

Kevin Hall April 2, 2009 at 3:01 pm

Hyper-inflation is a very real possibility and I always point to the M2 chart as evidence. The money supply is growing by leaps and bounds and will most certainly continue to do so for the forseeable future. The way the government continues to commit funds they do not have shows me that the decision makers have fired all their guns and are just praying for a target to appear and get in the way of one of the bullets. I think the really scary thought is what I am now referring to as “hyper-stagflation”; the economy comes to a virtual standstill all while prices skyrocket in a hyper-inflationary spiral.

AC April 2, 2009 at 3:05 pm

@ Greg

You make a good point about increases in productivity. Overall productivity increases cause overall prices to decline. Normally as productivity gains occur in the absence of inflation, people would be able to increase their savings without changing their standard of living, or to spend the producitvity gains and immediately increase their standard of living, or some combination of the 2. People would themselves decide how much of the productivity gains they would spend or save. And as more is saved, it would find its way into increasing productivity even further.

The evil of monetary inflation caused by a central bank / gov’t agency, is that it stops the prices from declining as productivity is increased. It amounts to stealing. They didn’t earn any of it. Stealing today, and stealing from the increased production that would’ve occurred tomorrow.

I would much rather have a scenario where prices declined due to increased productivity than where prices remained constant as productivity gains were offset by monetary inflation.

As to whether or not it’ll take some of the sting out of inflation. I’m sure it will take some of it out as we are tenancious at making a better mouse trap and making it more efficiently. But it also depends on how big that inflation stinger is.

fundamentalist April 2, 2009 at 4:01 pm

zumppi: “does anyone have a link to a graph showing correlation between some inflation measure, such as CPI, and monetary base (or lagged correlation would be even better)? ”

I’ll try to find a web site with the analysis, but I have an old text book that has a regression of lagged money supply on the CPI. It shows a very high correlation between changes in money and the CPI over 24 months. All of the lags are significant, but the strongest is at about 18 months. That shows that it takes about 24 months for new money to enter the market and spread out to all sectors to influence all prices, but the effect starts almost immediately and reaches its peak at about 18 months.

fundamentalist April 2, 2009 at 4:10 pm

zumppi: “does anyone have a link to a graph showing correlation between some inflation measure, such as CPI, and monetary base (or lagged correlation would be even better)? ”

I’ll try to find a web site with the analysis, but I have an old text book that has a regression of lagged money supply on the CPI. It shows a very high correlation between changes in money and the CPI over 24 months. All of the lags are significant, but the strongest is at about 18 months. That shows that it takes about 24 months for new money to enter the market and spread out to all sectors to influence all prices, but the effect starts almost immediately and reaches its peak at about 18 months.

greg: “On the business cycles, you had more cycles under the gold standard as you had under our current system.”

That fact can be interpreted a number of ways. But keep in mind that even those the dollar was tied to gold in the sense that people could convert paper to gold most of the time, the stock of paper dollars or bank credit dollars were not limited to the amount of gold in bank reserves. So investment wasn’t limited to savings because of fractional reserve banking. It varied, but the dollar volume of paper and bank credit to gold reserves could reach as high as 30:1 on the so-called gold standard. But in the depression the ratio would drop dramatically. So even under a gold standard you can have huge swings in the stock of money because of fractional banking.

So yes, business cycles still existed under a gold standard because of fractional banking. On the other hand the number of business cycles may have been greater under the gold standard because they didn’t go as deep or last as long. So fractional banking caused a greater number of cycles, but they were shorter and not as volatile, while under the Fed depressions go deeper and last longer, so they aren’t as numerous.

ehmoran April 2, 2009 at 4:27 pm

fundamentalist,

Doesn’t this have to do with the ease of access to the Fiat Money (In God We Trust): Interest rate and Credit Restriction?

The Feds can have as much money as they want in stock, but wouldn’t restrictions on how much is allowed to circulate eliminate economic bubbles and inflation?

Forgive me, I know this sounds Keynesian…..

fundamentalist April 2, 2009 at 4:48 pm

ehmoran, I think you’re right. I think depressions were milder in the 19th century because there were more banks, so the level of monetary inflation was more limited. The entire purpose of creating the Fed was to create a cartel of banks that could as one large bank and expand credit to the max. As Huerta de Soto points out in his book on banking and money, the smaller the bank is, the more reserves it has to maintain. A nationwide bank needs almost no reserves at all, which was the goal of the Fed. Depressions under the Fed have been much deeper and lasted longer because the Fed can expand the money supply to a much greater degree than banks could without the Fed.

ehmoran April 2, 2009 at 4:58 pm

fundamentalist,

I fully agree with everything you and others say. What I’m trying to do is get a head start, or catch up, on these Oligarch Ruling Elite and try to figure out what the heck they’re doing or going to do…… (Although it is nice to theorize and philosophize about)

This whole IMF and Globalization thing, and where do the World’s Money Changers fit in?

Are they truly altruistic or ruses? (I suspect the latter).

Didn’t mean to butt in……

fundmentalist April 2, 2009 at 7:02 pm

zumppi, The textbook I mentioned above quoted from a Federal Reserve Bank of St Louis article, “The Lag from Money to Prices.” It’s available at http://research.stlouisfed.org/publications/review/80/10/Lag_Oct1980.pdf. I was wrong about the lags. I remembered the analysis being in months, but it was quarters. The impact of new money is spread over 20 quarters with the largest effect taking place at quarter 14 for the data set used. Of course, the coefficients would change if you used a different data set, but it gives the general idea.

Another Fed article is “Oil Price Shocks and Inflation” available at http://www.frbsf.org/publications/economics/letter/2005/el2005-28.pdf. The Fed shows that money, not oil prices cause inflation.

However, the idea that increases in the money stock cause price inflation is primarily a monetarist theme. Friedman said that price inflation is always and everywhere a monetary phenomenon. Monetariest follow the formula MV=PQ, where M is money and P is prices. Monetarist think the effect is spread over the entire economy at the same time. They like to picture the effect as if they dropped money from thousands of helicopters over the entire country at the same time.

Austrians take a more subtle approach. An increase in money generally causes an increase in prices, but not during depressions. The effect is strongest during booms after the idle resources of a depression are used up. And the money isn’t evenly spread over everyone in the economy. It enters the economy at a particular place, usually the government or financial institutions. Then it spreads out slowly. It enriches those who receive it first and impoverishes those who receive it last. Also, it distorts the relative prices of consumer and producer goods which kicks of the business cycle.

Monetarists see no harm in inflation. Austrians see nothing but devastation.

fundmentalist April 2, 2009 at 7:05 pm

ehmoran, I can’t judge the intentions of the world’s money changers because I don’t know them, but I would guess they are merely stooges of Keynesian economics. They think they are doing the right thing because the only economics they know is Keynesian.

The Rev April 2, 2009 at 7:11 pm

Fantastic article! I’ve been taking an intense interest in the ongoing inflation v. deflation arguments in the forums, and am, myself, trying to figure out what is going on so that I can be prepared.

I have considered investing in gold, but the caveat by AC above has given me pause. Can anyone point me in the direction of good data on the gold stocks of the the various central banks and how they match up against gold on the market?

Thanks,

The Rev

ehmoran April 2, 2009 at 7:12 pm

fundamentalist,

Truth, but I wonder if its not Marx…….

fundmentalist April 2, 2009 at 7:20 pm

Anyone looking for empirical support for the ABCT, I have found the following articles very good:

Arthur Hughes, “The Recession of 1990: An Austrian Explanation” Review of Austrian Economics no.1 1997.

Robert Mulligan, “An Empirical Examination of Austrian Business Cycle Theory” Quarterly Journal of Austrian Economics vol. 9 no. 2 Summer 2006.

Robert Mulligan, “A Hayekian Analyis of the Term Structure of Production” The Quarterly Journal of Austrian Economics vol. 5 no. 2 summer 2002

James P. Keeler, “Empirical Evidence on the Austrian Business Cycle Theory,” The Review of Austrian Economics 14:4 2001.

ehmoran April 2, 2009 at 7:22 pm

The Rev,

When you find the data, let me know.

The U.S. Govt owns no Gold as reported to Congress in 1982; the Federal Reserve (a private banking organization) owns what the Govt used to own.

All other reported Gold reserves in other countries are only estimates (or whatever they want you to know). I believe this kind of info is considered Top Secret or a State Secret (no pun intended).

The Rev April 2, 2009 at 7:25 pm

“What the rise in base money has done so far is prevent prices of banks’ security holdings to decline to free-market levels. In other words, the money injection helps to keep asset prices at artificially elevated levels, thereby preventing prices in financial markets, credit markets in particular, from adjusting.”
-Quote from the Article

Could someone elaborate on this statement? It seems to me that banks invest primarily in their debtors, so with interest rates at all time lows, I don’t see how their assets (measured in their accounts receivable) are kept at elevated levels. I suspect that there is something else that I need to know to understand the author’s point.

Thanks,

The Rev

ehmoran April 2, 2009 at 7:35 pm

The Rev,

That statement is exactly CORRECT. Besides other relevant info, Google the Plunge Protection Team.

The Govt also buys Preferred Stock, and other kinds of securities, along with currencies. Heck, there’s even a report (1992) about how the Feds could prosper in the Futures (Options) Markets.

The Govt (likely the Feds) substantially intervenes in this Market. Greenspan even stated in his infamous book that the Feds injected $100 Billion into the Financial Markets immediately after 9/11…..

Matthew April 3, 2009 at 12:18 am

@ Matthew
“Demand for money has gone way up”

Allow me to correct you. The Demand for credit has gone up.

Maybe you will see this as a chicken and egg argument, which came first.

You believe that somehow the demand for Credit has risen and thus we had to address this by creating more of it.

What we are saying is, the demand in Credit was created by fixing the price of the commodity known as credit.

The same rules would apply if we fixed the price of Banana’s at an insanely cheap rate nation wide. Say .25 cents a pound. Banana’s would sell like mad until there was a shortage. Same rules apply with Credit.

The demand for credit, or as you call it, money was created by lowering interest rates. We wouldn’t have near the type of bubble that we do had interest rates been allowed to move freely at a market level, just as banana’s are. :)

ehmoran April 3, 2009 at 12:51 am

Matthew,

In other words, the Central Banks (World Money Changers) print enough money to Supply the Demand for Debt?

(But I think I forgot exactly how I stated that, though it was something like that….)

However, I guess they don’t need to print the actual money because of the Fractional Banking System or, how about, Electronic Transfers (Cyber Money).

filc April 3, 2009 at 1:13 am

@ all

In regards to people trying to justify a central bank by stating that it can be controlled and was simply mis managed. Or that you can inflate just enough but not to surpass productivity. Yet the same folk who claim that productivity is stimulated by the influx of credit. Therefore isn’t productivity always playing catchup with inflation?

Hyper-inflation is a result of an addictive dependency to the expansion of credit and money.

The central bank knows that it has over inflated and that their system will collapse unless they feed the monster they created. It is in their best interest to perpetuate the situation as it prolongs the bust and further legitimizes their position and employment. Likewise politician’s are encouraged to prop the bubble for as long as they can so that the failure will fall on the next administration. Each round becoming more dangerous and even more volatile

Credit is very much like an addictive drug. You can take it casually for a number of years but eventually it gets carried away and then your trapped in addiction. Thats the best analogy I can create.

The Bubble is built on excess credit. It is un-sustainable and more credit is needed to sustain itself. This is where the dependency is created. During this time things are so volatile that you see large bankruptcies and abnormal fluctuations in various investment vehicles, and across business in general.

A credit expansion does not boost productivity either. In this country’s example it has discouraged produce(manufacturing) and encourages the spend now mentality. The whole point of credit is so that you can avoid the savings portion. Typically you do this as a risk assuming that your investment will yield a higher return. Now days credit, instead of a business/investment tool, has become a normal standard of living. Required to get an education, house, or car.

Can you honestly tell me that in today’s economy we are becoming more productive? And that the inflationary standpoint has somehow encouraged production? Or has the opposite occurred. Mind you I’d like to point out our Trade Deficit to support my argument.

In fact the exact opposite has occurred. Because of our adaptation to a society that is heavily leveraged on credit we have become the consumerist nation. We are the consumers of the world. We stopped producing our own goods and used credit to purchase from others.

Manufacturing has left the country, not necessarily because it’s cheaper cross borders(And i’d like to point out that labor costs have also gone up because of credit) but also because American’s no longer wish to produce themselves. They wish to finance everything and have it imported. Better for someone else to make it.

A credit society encourages consumerism. And as Hazlitt points out an economy is like an enclosed ecosphere that is limited in resources. As you take a piece out of the pie in one area so must other areas shrink, as we are all sharing the same resource pool. To repeat, as some industry’s grow, others shrink or get pushed out of existence. As the retail industry in this country exploded manufacturing and building goods dwindled. Do I need to point out the explosive growth of the retail industry over the past decade?

We we’re infact encouraged NOT to produce by having a high availability of credit. We we’re encouraged to Buy today rather then save for tomorrow. We encouraged spending, and China and other country’s stepped up to meet the demand.
Ironic that we should purchase their goods with their own coin.

So all of this nit picking over whether the fed has dealt their hand of cards correctly or not is silly. When you play with fire you will eventually get burned. It’s inevitable.

Take the Robin Crusoe analogy.
Crusoe is encouraged to engineer ways of producing food and rationing it for storage so that he could create time of leisure later on.

However, if the hand of god swoops down and hands him free food, is he encouraged to engineer and ration anything? Or is he encouraged into gluttony and consumption? What happens when God’s hand moves away? That dependency is broken in a harsh manner. That is what we are going through. Unfortunately it will be easy for Mr Crusoe to pick himself up and get to work. In our case since we are in a large dept with the world it will be much harder.

I hope I made some sense. Thx.

beo April 3, 2009 at 1:22 am

ehmoran

I think it was meant to be a rebuttal to Matthew. His argument being that lowering the cost of credit increases demand. I think he was stating that the demand for money came AFTER the interest rates were lowered, not before.

With FRL you still run into the problem of when banks drop below their reserves due to irresponsible lending. more extreme your capital ratio becomes the faster inflation is grown from banks.

Normally this could work in reverse but when banks are lending to each other, the new money that was created to be lent out then becomes a new deposit into another bank. That deposit then can be counted as a part of the reserve. Which in effect creates the permanent existence of new money. Even if the original debtor pays back his obligations.

JB April 3, 2009 at 5:46 am

There is another point of view by Antal Fekete, an expert on the gold standard, that a deflation is more likely due to the amount of debt required to fund much of the expansion of the money supply.
http://www.financialsense.com/editorials/fekete/2009/0330.html

fundamentalist April 3, 2009 at 8:05 am

ehmoran: “Truth, but I wonder if its not Marx…….”

That too. I’ve been puzzled for a long time as to why mainstream econ refuses to even look into the monetary theory of trade cycles. Back in the 40′s they decided that business cycles had to be “endogenous”, or part of the real economy, and that money wasn’t part of it. That’s where this nonsense about supply shocks and demand-pull inflation comes from. I couldn’t understand why the insistence on excluding money as an explanation. Then I read yesterday where Mises wrote that all non-monetary explanations of the business cycle were Marxist inspired. I think that explains it. Marx insisted that the business cycle was a natural part of capitalism, so mainstream econ, following Marx, decided to invent a theory that forced the trade cycle to be part of the free market. The monetary theory of trade cycles demonstrates that Marx was wrong, and mainstream econ does not want Marx to be wrong.

So the world’s central bankers, and the economists at the World Bank and IMF, have swallowed the neo-Marxist kool-aid that money plays no role in the business cycle. That’s why they feel free to manipulate money as much as they want. In their minds, it does no harm, only good.

George April 3, 2009 at 10:58 am

To me, the only real threat of society-shattering hyperinflation is if we get to the point where the government has a choice between defaulting on Treasury debt or persistently and heavily monetizing it to avoid default.

Notwithstanding everything else I said above, I do think there’s a real chance of that happening. Obama’s deficits are misallocating resources trillions of dollars at a time, not to mention the $50 trillion NPV of the social insurance program liabilities (e.g. social security).

We’re there.

The US Treasury needs to issue around 5T of debt in 2009, about 2.5T of roll and 2.5T of new debt (ignoring debt internal to the goverment).

I think that this makes it clear that increasing taxes to cover the spending isn’t politically possible.

The size of the amounts are too large to actually sell — no one has that much money (except the Fed who can print it).

The only constraint on printing I can see is the dollar being refused.

PS: We were already on this path before the recent financial problems, the 50T to 100T of social insurance programs were already starting to bite — the cash basis surplus from the social taxes was already decreasing. Congress wasn’t about to cut it’s spending of this “surplus”.

pbergn April 4, 2009 at 12:23 am

Excellent article!

newson April 4, 2009 at 3:09 am

to jb:
well, fekete is a real-bills doctrine subscriber. austrian economists reject rbd as crankism.

Brian Macker April 4, 2009 at 10:24 am

We’re there,

Yep. That’s even if the banks take their $800 billion and do as the article states:

“So commercial banks may wish to monetize government debt, as the latter does not require putting equity capital to use. “

If they do that then as inflation kicks in they will be able to pay off their long term debt, but not as the article states: “banks need to generate income to be in a position to pay interest on their liabilities (demand, time and savings deposits, and debentures).”

Problem is that the demand and savings deposits will be pulled out or will demand more interest to keep it in the bank.

ehmoran April 4, 2009 at 5:07 pm

FYI

“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930′s”.

Greenspan (1966)

ehmoran April 4, 2009 at 5:16 pm

AND MORE:

“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard”.

Alan Greenspan
[written in 1966]

The Rev April 4, 2009 at 8:46 pm

I can’t believe this guy ended up as Chairman of the Fed. It’s like Ayn Rand becoming the Premier of Soviet Russia. How could someone who once defended, vociferously, the property rights of man, end up in charge of the most powerful organization on Earth devoted to bleeding them away?

The Rev

ehmoran April 4, 2009 at 9:39 pm

Amazing, isn’t it……

JB April 5, 2009 at 12:16 am

Newson,

I understand that Mises rejected the RBD as inflationary, but that doesn’t mean that all Fekete writes is crankism.

newson April 5, 2009 at 8:11 am

to jb:
well, i’ve read his articles and find his logic incomprehensible. for example, that monetary experts have overlooked the difference between the discount rate and the interest rate (i’m going from memory here…).

rbd tends to diminish the role of gold, in any case (other assets being collateralized).

Matthew April 9, 2009 at 9:36 am

@Matthew (the other one), your choice of words, of credit vs. money is better than mine. I basically agree with you. To quibble just a little bit, it’s tough to distinguish between the two with our fraction reserve system, but again, yes, your choice of words is more precise.

@George, I’m still not convinced that “we’re there.” There haven’t been any failed auctions for the Treasury yet, and despite their perennial stupidity, I’m convinced that credit markets are smart enough to know if the Treasury is going to be faced with default within the next year. I expect it to be years before all of those who subscribe to faulty economic theory realize that their fiscal and monetary stimuli will have made things worse and that default is imminent.

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