As far as I understand it, Austrians say that inflating the money supply only makes economic crises go away temporarily, but that a bigger crisis is soon to follow. Well, recently the money supply has been inflated by unprecedented amounts, wouldn’t that imply that a big crash is about to come? How bad will it be? A minor market adjustment like the 2008 recession, or a complete devaluation of the Dollar and complete meltdown of the world economy?
It would be a melt-up: the ultimate rush to cash in the casino chips (all fiat currencies and bonds promising payments in same) at the small Gold (and Real Property) window when everyone realises that the chip-based casino games are over, the casino is about to close, and its chips won’t even buy you a burger on the street outside.
No complete meltdown, I hope so. You guys must have heard these theories about how the Dollar is super-inflated because it’s the reserve currency. There are these huge amounts of Dollars in foreign reserves, and once they loose faith they’re going to dump them and it’s going to hyperinflate and the economy will collapse.
It’s one thing to say there will be inflation and recession, but another to say there will be hyperinflation and depression.
Hyperinflation is triple digit inflation and depression is more than a 10% fall in economic activity. Inflation is merely any rise in price level and recession is merely any negative increment in economic activity. Are you guys actually serious about such things happening in a First World country? Because it’s precisely the lack of such unstable situations that distinguishes the rich world from the poor world.
The recent recession had a 4% fall in economic activity, and US had its most severe depression when Jefferson ended all trade with Britain. The Great Depression was just barely above 10% in terms of fall in economic activity and nowhere near in terror and misery to 19th century panics.
The worst inflationary situation in US during the 1960s to 1970s was not even close to what happens in actual hyperinflation - such as Argentina’s 1000% inflation before the dollar-peso peg.
On the other hand, abnormal inflation in US means anything above 3%.
I am hoping everyone here will give much stronger reasoning for why something without precedent will somehow happen. Remember, the burden of proof is on you guys, not me.
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Good point Nero, about the reserve currency changing and dollars being dumped here. I suspect there are a lot of threats backstage warning countries not to do this. China and Russia took a small step in freeing themselves of the dollar, maybe because they are used to fighting us militarily over the years and so fear us not.
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Prateek, a quick visit to Wikipedia under Hyperinflation shows that plenty of European countries had hyperinflation in the 1920’s and the 1940’s. And Argentina was a very rich country when it got its hyperinflation under Peron.
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What distinguishes the rich countries from the poor countries is a free market. But all countries have no problem whatsoever getting them some hyperinflation, because [according to Wikipedia on hyperinflation], "‘Hyperinflation has its root cause in money growth, which is not supported by growth in the output of goods and services. Usually the excessive money supply growth is caused by financing of the government budget deficit through the printing of money.’ [I disagree with the “not supported by growth in the output of goods and services part”, but that’s just me.]
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Trying to understand your reasoning, can you explain why being rich and First World is a magic amulet against hyperinflation? What is the causal relationship?
It is my opinion that we are simply watching a game of monopoly while the real situations are being played out behind our backs. I believe that the current state of affairs, republican vs. democrat, wars, attacks, famines, so on and so forth are orchestrated as distractions. Granted the turmoil, deaths and poverty are real, I believe we are completely distracted on what “the others” want us to be distracted by.
I don’t know who they are or what they’re doing, but I believe we are wasting our time addressing issues as they appear. Nothing is as it appears, and hyperinflation and the threat of depression…although they may be accurate in a relative system of our current economic state, relatively speaking, if I lose all my monopoly money, I’m bankrupt. But not really.
I just view all these new stations, arguments, breaking news stories and everything to be a continued elaboration of a plot to keep us emotionally involved in the distractions that “the others” throw at us. Again, I don’t know who they are or even if they exist, but I believe they do and I believe what they are doing is working.
In other words, to take a similar metaphor to Plato’s Allegory of the Cave, I’ve stopped being concerned with watching what’s on the screen and I’m more concerned with who’s running the projector.
There is no causal relationship, Smiling Dave.
The rich world is still rich now, partly because they have not allowed too many crack-brained busybodies come into power to mess around too much with the economy. That isn’t to say that they don’t have such annoying busybodies who do so, but their hands tend to be a little tied.
United States, for example, still has an independent central bank. Of course, there are still problems associated with the fact that there is a central bank at all. But if US allowed politics to directly interfere with monetary policy, they’d be having QEs every day, not just occasionally. Then there’ll really be a hyperinflation situation. The fact that this has been the situation for several decades probably indicates that the Federal Reserve will remain independent for another few decades, and that you will not see someone far worse than Volcker, Greenspan, and Bernanke. There will be no Dennis Kucinich or Bernie Sanders managing Fed for sure. That’s why I find it unlikely for a rich country to experience Zimbabwe-style hyperinflation.
If you compare Germany with, say, Brazil, you’ll find that German financial institutions are giving loans for periods of 30 years while Brazilian lenders probably would not give a loan for period longer than 1 or 2 years, and would request regular renewals of loans.
That’s because executives in German finance are confident that inflation will not run over the roof in Germany in the period of the next 30 years. This is so because the German government is so severe on matters of money that it will not allow its own legislators too have too much influence over it. Its own rules and conduct prohibit it. In Brazil, they can’t be sure of what new unstable economic situation will be introduced by the next government, since the next government will have all the power to change monetary policy with no restrictions, and since every new government will have a new experimental idea about how to run things.
My point: If a German financier were to see that things have changed in Germany and German politicians are finally eager to mess around with the money supply, he would start withdrawing a few loans in the country and start going somewhere where there is harder money. If hyperinflation ever comes to Germany again (and it won’t), German finance would have seen it coming and would have long bailed out from the country. That would have already had far worse consequences before hyperinflation even set in.
“United States, for example, still has an independent central bank.”
Laughing Out Loud!!
The last I checked, Federal Reserve has both instrumental independence and policy independence?
Even if the entire US government were in favour of using inflation to somehow repeal unemployment temporarily, the Federal Reserve can still refuse and say no and no over and over?
And even if the entire US government was heavily anti-inflation, a pro-inflation Federal Reserve can say no and no over and over?
The US Federal Reserve is a lot more independent than Zimbabwe’s central bank. Like Volcker did in the 1970s, they will raise interest rates when things are clearly getting out of hand. That’s why we’re not going to have hyperinflation, and the Austrians who have been predicting hyperinflation for the past few years have already been proven wrong.
At worst, once banks start lending their excess reserves, we’ll have double-digit inflation and higher unemployment - similar to the stagflation of the 1970s.
TY Prateek, now we are on the same page, but for one detail. You think that legal independence of govt means the Fed wont suck up to the govt that appoints them. I dunno. Maybe, but I’m sceptical.
As for Germany, our Euorpean correspondent here, kakugo or krazy kaju [don’t remember which], wrote that to this day people there are terrified with the memories and stories handed down about the Weimar hyperinflation. The guys in charge know that they dare not let that happen again.
The people in US can still be fed the story that there is no inflation when there is, and that deflation is the worst enemy, and do not go into an uproar when Bernake says he wants at LEAST 2% inflation every year. Contrast this with the German guys, who talk about at MOST 2%.
Bottom line, nobody in the US has gotten badly burned yet, neither the people nor the bigwigs. My working assumption is that the only way people learn something is the hard way.
To Sukrit: Volker has a sounder underlying economy to work with. Meaning neither the govt, the banks, nor the majority of Americans were in debt up to their eyeballs, and so could raise interest rates to 20%.
Let’s look at the govt. According to wikipedia:
As of March 25, 2011, the Total Public Debt Outstanding of the United States of America was $14.26 trillion and was 97.3% of calendar year 2010’s annual gross domestic product (GDP) of $14.66 trillion
At an interest rate of 7%, that’s a trillion dollars a year just to pay off the interest. At 10% that’s a trillion and a half. At 20% that’s 3 trillion dollars a year.
Most of the US debt has to be rolled over every two or three years at the latest. So on top on everything else, the govt will have to cough up a trillion to 3 trillion dollars a year just to stay in the same place. Without spending another penny or spending 2 trillion dollars more than they collect every year [as Obama has promised us and delivered]. Where is that money coming from? Already the Fed is lending the US [=printing money and giving the govt] 70% of the money it constantly gobbles up by issuing Treasuries [=IOUs].
Bottom line, it’s not as easy to dodge the bullets now as it was for Volker.
That was the Nixon administration, and Nixon was desparate to do anything to maintain popularity during times of inflation - price controls, ending Bretton Woods and so on. He would definitely keep the threat of taking away Fed independence in order to get his way.
Contra Alan Greenspan as Federal Reserve Governor during Bill Clinton’s time; here we have two men with very different agendas. Already by that time, the Federal Reserve was far too strong to be cowed down by a mere President.
Oh, and nobody yet addressed this:
How on earth can you have both hyperinflation and depression?
Yes, we have had recessions and inflation together, but hyperinflation AND depression is an unseen combination. Both are extremes of their own kind.
You guys are talking about something with zero precedent.
I meant hyperinflation and then depression. It wasn’t so much a question about hyperinflation specifically, but about the possibility of an economic collapse. I wanted to call the thread “The end is near?” at first. I would like to hear some opinions about the the possibility of a collapse of the US economy in the near future, since that is what some people in libertarian circles are predicting. Essentially what this whole money printing thing is going to lead to. Any comments are appreciated.
Actually, the two go hand in glove. And it happens all the time. Do you think Zimbabwe has a roaring economy with full employment, or anything close to it? Do you know of any country that had hyperinflation and a humming economy?
Reason the two go together: Hyperinflation comes from money printing. Money printing causes booms and busts, too. But the hyperinflation cannot reinflate the economy. Only mild recessions can be offered temporary illusions of relief by inflation.
It was not some confused forum guys here who made up the word “stagflation”. Sure Keynesan theorists and that IS-LM curve all said that inflation must equal high employment, but the Nixon years are exactly the reason those guys had to slink away into the darkness, when their theories proved fantasies.
There’s plenty of precedent for the unprecedented to have occured, though. This planet has never had an unhinged cartel of fiat currency creators walking the tight-rope between collusion (G-7, G-20: “Let’s be careful here, we’re all in this together”) and self-interest (“If I print more faster, I get to claim more real assets than the rest of them.”). The equillibrium of “stability” is extremely precarious. It takes just one cartel member blinking first (China?), throwing in the towel and lifting all offers on gold, oil, commodities, and real property. The rest of them would have no choice but to fire up the printing presses and join in the mad dash as the value of their paper evaporates to zero, the cartel agreement be damned. This scenario is as unprecedented as the situation that leads to it. That doesn’t make it unlikely.
Money supply expansion has been exaggerated, in my opinion. M2 hasn’t beeen inflated that much compared to what we’ve done in the past and M1 was inflated more in the late 80’s. The only thing I know that’s been out of the ordinary was the more than doubling of the monetary base (~$850 billion to $2 trillion) in 2008 and 2009. We are just now seeing CPI inflation (8.1% annualized over the last 3 months) but I’m not sure core inflation has changed that much, although I know it is up. Hyperinflation seems unlikely, but the economy won’t get much better anytime soon.