Hyperinflation in the USA
I am 100% sure that the U.S. will go into hyperinflation. Not tomorrow, but the problem with the government debt growing so much is that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.
–Marc Faber, Bloomberg, May 2009
During the world’s last inflationary period in the 1970s, the West witnessed social unrest of the most acute kind, bordering at times on anarchy. If stagflation can lead to anarchy, hyperinflation can lead to and has led to much worse. Hyperinflation is the economic apocalypse many doomsayers pose as the logical end to the world’s experiment with fiat money.
In a letter to clients last June, Rob Parenteau of the Richebacher Letter wrote about Weimar, one of the worst episodes of hyperinflation:
"The Weimar Republic, born of a revolution in 1918, played host to a hyperinflationary breakdown of the German monetary system by 1923. Austria faced a similar episode of hyperinflation in 1921–2, and no doubt, the searing scars of these experiences deeply informed the thinking of Mises, Hayek, Haberler, Machlup and other leading contributors to the Austrian School in the 20th century.
"Hyperinflation episodes are characterized by rapidly accelerating inflation, a collapsing foreign exchange rate and, eventually, a widespread disorientation and disruption of productive activity. Keynes, writing in 1919, well before the terminal stages of the Weimar hyperinflation had been revealed, characterized the nature of the mayhem involved in such episodes as follows:
"As the inflation proceeds, and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."
Is this what awaits the US or the UK? Marc Faber’s quote to open this post is symptomatic of the kind of rhetoric which says yes. I love Marc Faber. I consider his interviews first-class economic entertainment. You will continue to see him featured in my posts on a regular basis. And I certainly share some of his concerns about inflation, bailouts, moral hazard (and so forth and so on, as he would say).
But, is Marc Faber an ideologue pushing a rhetorical line of argument to the point of hyperbole or should we take his warnings very seriously?
Let’s attack this question using Zimbabwe and Weimar Germany as examples. These are the two most extreme cases of hyperinflation that economic historians have ever witnessed. They are instructive regarding what causes hyperinflation and what does not.
Weimar Germany 1919-1923
After World War I, every nation which fought was broke because of the war’s cost. No country had enough gold assets to repay the billions of dollars they owed. And this was a multilateral problem. For example, Britain could not repay its debts to the US until the other Allies repaid their debts to Britain. The Americans were not sympathetic. The prevailing desire was recovering the over $25.5 billion the US had loaned to other nations during the war.
As a result of these debts, the war’s victors laid out draconian terms to punish the Germans in the Treaty of Versailles in 1919. War reparations were one third of Germany’s spending. Therefore, Germany’s budget deficit was half of GDP. (The situation in Iceland due to Icesave’s collapse comes to mind here). And to make things even worse, reparations were in a foreign currency.
It’s not as if the Germans could print off a bunch of Reichsmarks to make good on their reparations (The Reichsmark is the more legitimate currency that came into being after the hyperinflation). When the Germans defaulted on their obligations, the Belgians and the French moved in and occupied the Ruhr region, Germany’s industrial heartland. The result was widespread strikes and idled productive capacity. Afterwards, demand for goods in Germany far outstripped the productive supply.
So, with a huge portion of tax revenue going to pay reparations in foreign currency, the German government turned to the printing presses to make good on its domestic obligations. The surge in money supply and the lack of productive resources led to hyperinflation and collapse.
The key to Weimar’s hyperinflation was two-fold.
- The German government had a large foreign currency debt obligation.
- The German economy lost huge amounts of productive capacity causing prices to soar as demand outstripped supply.
While the facts in Zimbabwe are different, the underlying causes for hyperinflation were the same: foreign currency obligations and a loss of productive capacity.
Zimbabwe had established Independence from Britain in 1980. Yet, by the late 1990s 70% of productive arable land was still held by the small minority 1% of white farmers in the country. After years of talk about redistribution, in 2000, the President Robert Mugabe began to redistribute this land.
The redistribution process was a disaster, both legally and economically. Many whites fled as violence escalated. The result was an enormous decline in Zimbabwe’s agricultural production. With agricultural production having plummeted, Zimbabwe was forced to pay to import food in hard currency.
Meanwhile, the government turned to the printing presses to fulfil its domestic obligations. as in Germany, the foreign currency obligations, the loss of productive capacity and the money printing was a toxic brew which ended in hyperinflation.
Hyperinflation in the UK or USA?
So, that’s a brief outline of what happened in the two most notorious cases of hyperinflation. Notice that in each case you had an enormous foreign currency obligation and a massive loss in productive capacity. The U.S. has not suffered this kind of loss. In fact, productive capacity swamps demand for goods in the U.S. And, as the embedded presentation on hyperinflation from Marshall Auerback shows, the fiscal deficits in the U.S. are a far cry from the 50% of Weimar.
Will the US turn into a modern day Weimar Germany?
Marshall talks about this using an MMT framework. But, his three most compelling slides on pages 4 to 6 don’t depend on MMT. They simply demonstrate that without pricing power or a large fiscal deficit and large foreign currency demands, talk of hyperinflation is misguided. Crucially, Marshall writes:
Inflation is ultimately about competing distributive claims over real resources. The main limitation then, or rather the determinant of the limits of a "sustainable" fiscal policy, especially with respect to hyperinflationary risks, have to do with real resource constraints, not "running out of money" or absence of government financing, for countries possessing sovereign currencies.
The inability to tax and dependency on foreign currency are central to hyperinflation or national solvency. Moreover, in Zimbabwe and Weimar, it was the trashing of productive supply that created inflation (think supply versus demand).
So, that’s the economics. What about the ideology? Well, the MMT’ers say that the Austrians ideologues and the gold fetishists have a deflationary bias when inflation doesn’t change the real productive capacity of a nation. Clearly, the hyperinflation talk is a gimmick with which to discourage deficit spending. You should see this debate as about a specific policy prescription driven by ideology. The other side of this ideological divide was taken up by Dean Baker in the Guardian’s "Cliches won’t fix the financial crisis"
Nevertheless, inflation does alter business decision-making via accounting’s tie to nominal numbers and the money illusion. Moreover, inflation reduces relative wealth by transferring income from those who receive the money first like banks versus those who receive their money later, your typical widow living on fixed income bonds and annuities. Finally, inflation encourages the accumulation of debt by benefitting borrowers over savers. I see inflation as a problem to be avoided.
Ideologically then, I see inflation as the increase in the money supply.
Economics. an increase in the VOLUME of money, which eventually leads to a persistent, substantial rise in the general level of prices and results in the loss of value of currency.
–What is Inflation?, Credit Writedowns, June 2008
And where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency.
So, people like me look at large government deficits in a fiat currency system as an invitation to print money and inflate the money supply. If you take this way of thinking to a logical extreme, you end up with what Marc Faber is talking about: hyper-inflation.
But, this is ideology – not economics. The claims of hyperinflation awaiting the US or the UK seem hyperbole at best, misinformation and deception at worst. Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. So, it simply isn’t credible to claim that Hyperinflation in the US or the UK is in the offing now or anytime in the immediate future.
As for Anarchy in the UK, that’s another matter.
Cue the Music.
The one certain outcome from the period of worldwide floating exchange rate systems for all major currencies is that it will be unprecedented in scope and nature.
If you follow Faber’s interviews, he has at least once provided that his caveat for the hyperinflation scenario is history’s evidence that politicians prefer inflation to outright default. I believe that anyone on this blog will agree that most politicians in the western countries will follow the path of perpetual increases in debt, and that the only question is how the world and the respective countries change once that ultimate debt-collapse is reached.
In the case of the U.S., there are two counterarguments I see to your comments about debt burden as a % of GDP and the productive capacity. First, combine the the U.S. debt burden with the interest rates of the 1980s and you’ll have interest payments alone that constitute 20% of GDP. (Assuming 14 trillion GDP/14 trillion Debt) This of course doesn’t count all the explicit and contingent liabilities from the entitlements, bailouts, and wars that will probably help to make the fiscal deficits even larger. The drop-off in GDP due to such rates would also be an interesting side-effect that would exacerbate the situation. Second, the U.S. productive capacity in output has been increasing, but the composition has changed dramatically over the past several decades. Last I recall, about 60% of our manufacturing was in heavy industrial goods (cars, trains, construction equipment), technological components, and health care equipment.
If the U.S. decides to print rather than raise rates, and foreign creditors demand payment in their own currency, the external cost of many of our essential goods, including oil, will go through the roof, and retooling our manufacturing base will take a LONG time in those circumstances. The real analysis needs to look at if the Federal Reserve would even consider raising rates to 20%, or higher, and the consequences to the world’s greatest debtor nation. I believe they won’t since consumption would just stop and our country would have to face the music. The politicians will print and to what levels of hyperinflation it leads us to is another interesting analysis – I do not believe it’ll be on the same levels as Weimar or Zimbabwe just because the U.S. still is productive. (I’ve seen varying definitions of hyperinflation, btw) I do believe the sudden transition away from the USD as the reserve currency will be tough for the entire world.
I think there is a tendency to misuse the word hyperinflation in a lot of conversation. Most often high inflation is meant instead.
We won’t have to worry too much about inflation while the private sector is deleveraging I don’t think.
Marc Chandler’s latest (the post after this one) shows that DE-flation is what is the near term risk. And this should make sense given high debt levels, high unemployment and relatively low capacity utilization rates. It doesn’t make a whole lot of sense to worry excessively about inflation when deflation is breathing down our neck.
In any event, my thinking is still along the lines of this post from last year:
We will see only cyclical bouts of inflation i.e. inflation that is not embedded and therefore not persistent. Warren Mosler says this isn’t inflation, which is embedded and persistent price pressure – a very different definition than I gave above. We both agree, however, that the deflationary forces of excess labor, capacity and debt are dominant.
10 year JGB at such low rates is also a real good example of this. So, ok, no hyper inflation in the US…agreed. MMT is an elegant theoretical concept yet is practically useless in trying to fix the problems. Ok, no hyper inflation, great, lets opt for Japan style 20 year no economic growth – Koo argues that this is the best they could have done, but is it? Other MMT proponents say, just print money and hand it out – ok, but as Edward has pointed out and I tend to agree, this will only lead to more malinvestment and yet another asset boom and bust. Furthermore, as long as the citizens of a country begin perceiving this as the “solution” to all their problems, they will just not bother working productively…why bother, pile on debt, live off asset bubbles where value does not depend on future cash flows but a ponzi like mechanism and when sh%^ hits the fan, govt will bail us out. This will lead to sloth and eventual decay of the society.
What MMT proponents fail to realize is that economic growth, or sustainable economic growth, has to come from productive assets becoming better and better at productive capacity (whether it is capital or labor productivity) and hence increase future cash flows. Just handing out some $ or some € will lead to malinvestment, asset bubbles, sloth and decay of the country. Even if it isn’t hyperinflation per se, that doesn’t sound like a good story at all!
Some MMT ideas coupled with some debt destruction (Austrain-Keynesian approach) seems to be the way forward….have to inflict pain on folks who borrowed too much to teach them a lesson so as to not take rising asset prices for granted in a ponzi like economy, but sterlizie the pain by keeping some social contracts such as a jobs program or a tax benefit/credit, unemployment etc. W/o any Keynesian backstop, rising unemployment and real hardships from destruction of debt can and probably will lead to social disturbances and anarchy.
I’m with you here on some kind of synthesis – and that’s where I am trying to go personally. Your last paragraph sums it up for me – as do the actions in Greece. Debt Deflation, internal devaluation, extreme austerity and all of that lead to anarchy. It always has. It did in the US in the 19th century. It did in the Great Depression. And it has in many other episodes.
But, the concept that we can have the government fine-tuning interest rates or taxation to control the economy leaves me cold. Obviously, this is a political statement as I have defined it, which is why I left it out of the article. But, that’s where I am on this.
Next up on MMT will probably be national bankruptcy – something Greece will probably suffer but that is not as relevant in the US.
In the inflation/deflation debate there seems to be large confusion on currency and money. I think this is very important to understand the entire inflation deflation debate. It reminds me of Jon Externs inverse pyramid except only as it relates to M0 through M4. It seems to me (my thoughts) if the system is delevering you have to have a more squarish pyramid to create true inflation. The pointier the pyramid the harder it is to create true inflation. The reason is because the point above gold (cash or M0) is so much smaller to the base of the pyramid (in this case top of the inverse pyramid) that if the system is deleveging it can’t keep the surface area of the total space from shrinking. The Wiemar Republic created a fairly wide base where the entire monetary system was essentially M0. Money printing than increased inflation essentially 1 for 1. We would have to create billions/trillions of M0 to get inflation in our current system. The notional value of outstanding over the counter derivatives in June 2009 (the latest number) was 604 trillion (market value was 25 trillion) down from 683 trillion in June of 2008. When you have this sort of deleverging, assuming it continues you are not going to get inflation. You can get asset bubbles that look like inflation but the risk of deflation is still massive until the top of the pyramid shrinks to a proportion where crises won’t shrink the the surface area of the entire inverse pyramid. If the wrong thing happens we would have massive deleverging and deflation tomorrow. I could be wrong but it sure seems M0 size in relation to M4 plays a huge factor which I have not seen discussed anywhere.
Congratulations. You have intelligently fooled yourself about fiat money.
There is one more element to fiat money – and that’s trust. Not just trust here in the US, but trust abroad. Especially those pesky countries that export resources – you know, tangible stuff that governments can’t create out of thin air.
I think the Weimar/Zimbawe analogy is a red herring.
In Latin America, dozens of currencies have been abandoned after episodes of hyperinflation. New pesos, australs, new australs, cruzeiros, cruzados — you get the picture. There is plenty of experience there to mine without resorting to economies devastated by war.
Latin America teaches us that hyperinflation is simply the process of eroding confidence in a currency. Nothing magical or exceptional about it. In no case did a government set out to hyperinflate. In fact, a precondition of hyperinflation by a rational government is that people believe hyperinflation is near-impossible. That is, governments depend on “money illusion” when they print money to pay for goods and services; that “money illusion” in turn depends on anchored inflation expectations. So when I hear people say, “it can’t happen here,” I hear the basic requirement for a government to set on course towards debasing the currency.
The counter-argument against the Latin analogy is always that their debt was issued in foreign currency. This is essentially a call on the character of inflation expectations on the part of debt holders. Magically, the local currency debt holders of U.S. debt are thought to have highly anchored inflation expectations: boundless “money illusion”, such that they are willing to hold U.S. debt in the presence of any degree of deficit monetization. I’m not saying this view is necessarily wrong: just that its proponents, to my knowledge, provide little or no evidence for holding it.
The Latin American analogy is totally inapplicable.
Argentina adopted a rigid peg of the peso to the dollar and guaranteed
convertibility under this arrangement. That is, the central bank stood by to
convert pesos into dollars at the hard peg. They didn’t operate under a
monetary regime like the US.
The choice was nonsensical from the outset and totally unsuited to the
nation’s trade and production structure. In the same way that most of the EMU
countries do not share anything like the characteristics that would suggest
an optimal currency area, Argentina never looked like a member of an
optimal US-dollar area.
For a start the type of external shocks its economy faced were different to
those that the US had to deal with. The US predominantly traded with
countries whose own currencies fluctuated in line with the US dollar. Given its
relative closedness and a large non-traded goods sector, the US economy
could thus benefit from nominal exchange rate swings and use them to balance
the relative price of tradables and non-tradables.
Argentina was a very open economy with a small non-tradables domestic
sector. So it took the brunt of terms of trade swings that made domestic policy
management very difficult.
Convertibility was also the idea of the major international organisations
such as the IMF as a way of disciplining domestic policy. While Argentina
had suffered from high inflation in the 1980s, the correct solution was not
to impose a currency board.
The currency board arrangement effectively hamstrung monetary and fiscal
policy. The central bank could only issue pesos if they were backed by US
dollars (with a tiny, meaningless tolerance range allowed). So dollars had to
be earned through net exports which would then allow the domestic policy to
After they introduced the currency board, the conservatives followed it up
with widescale privatisation, cuts to social security, and deregulation of
the financial sector. All the usual suspects that accompany loss of
currency sovereignty and handing over the riches of the nation to foreigners.
The Mexican (Tequila) crisis of 1995 first tested the veracity of the
system. Bank deposits fell by 20 per cent in a matter of weeks and the
government responded with even further financial market deregulation (sale of state
These reforms loaded more foreign-currency denominated debt onto the
Argentine economy and meant it had to keep expanding net exports to pay for it.
However, things started to come unstuck in the late 1990s as export markets
started to decline and the peso became seriously over-valued (as the US
dollar strengthened) with subsequent loss of competitiveness in the export
Lumbered with so much foreign-currency sovereign debt the decline in the
real exchange rate (competitiveness) was lethal.
The domestic economy by the late 1990s was mired in recession and high
And then the “Greek scenario” unfolded. Yields on sovereign debt rose as
bond markets started to panic – a vicious cycle quickly became embedded.
In 2000, the government tried to implement a fiscal austerity plan (tax
increases) to appease the bond markets – imposing this on an already decimated
domestic economy. The idiots believed the rhetoric from the IMF and others
that this would reinvigorate capital inflow and ease the external
imbalance. But for observers, such as yours truly, it was only a matter of time
before the convertibility system would collapse.
Why would anyone want to invest in a place mired in recession and unlikely
to be able to pay back loans in US dollars anyway?
In December 2000, an IMF bailout package was negotiated but further
austerity was imposed. No capital inflow increase was observed. Duh!
The government was also pushed into announcing that it would peg against
both the US dollar and the Euro once the two achieved parity – that is, they
would guarantee convertibility in both currencies. This was total madness.
Economic growth continued to decline and the foreign debts piled up. The
government (April 2001) forced local banks to buy bonds (they changed
prudential regulation rules to allow them to use the bonds to satisfy liquidity
rules). This further exposed the local banks to the foreign-debt problem.
The bank run started in late 2001 – with the oil bank deposits being the
first which led to the freeze on cash withdrawals in December 2001 and the
collapse of the payments system.
The riots in December 2001 brought home to the Government the folly of
their strategy. In early 2002, they defaulted on government debt and trashed
the currency board. US dollar-denominated financial contracts were forceably
converted in into peso-denominated contracts and terms renegotiated with
respect to maturities etc.
This default has been largely successful. Initially, FDI dried up
completely when the default was announced. However, the Argentine government could
not service the debt as its foreign currency reserves were gone and
realised, to their credit, that borrowing from the International Monetary Fund
(IMF) would have required an austerity package that would have precipipated
revolution. As it was riots broke out as citizens struggled to feed their
Despite stringent criticism from the World’s financial power brokers
(including the International Monetary Fund), the Argentine government refused to
back down and in 2005 completed a deal whereby around 75 per cent of the
defaulted bonds were swapped for others of much lower value with longer
The crisis was engendered by faulty (neo-liberal policy) in the 1990s – the
currency board and convertibility. This faulty policy decision ultimately
led to a social and economic crisis that could not be resolved while it
maintained the currency board.
However, as soon as Argentina abandoned the currency board, it met the
first conditions for gaining policy independence: its exchange rate was no
longer tied to the dollar’s performance; its fiscal policy was no longer held
hostage to the quantity of dollars the government could accumulate; and its
domestic interest rate came under control of its central bank.
At the time of the 2001 crisis, the government realised it had to adopt a
domestically-oriented growth strategy. One of the first policy initiatives
taken by newly elected President Kirchner was a massive job creation program
that guaranteed employment for poor heads of households. Within four
months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created
jobs for 2 million participants which was around 13 per cent of the labour
force. This not only helped to quell social unrest by providing income to
Argentina’s poorest families, but it also put the economy on the road to
Conservative estimates of the multiplier effect of the increased spending
by Jefes workers are that it added a boost of more than 2.5 per cent of GDP.
In addition, the program provided needed services and new public
infrastructure that encouraged additional private sector spending. Without the
flexibility provided by a sovereign, floating, currency, the government would
not have been able to promise such a job guarantee.
Argentina demonstrated something that the World’s financial masters didn’t
want anyone to know about. That a country with huge foreign debt
obligations can default successfully and enjoy renewed fortune based on domestic
employment growth strategies and more inclusive welfare policies without an
IMF austerity program being needed.
The clear lesson is that sovereign governments are not necessarily at the
hostage of global financial markets. They can steer a strong recovery path
based on domestically-orientated policies – such as the introduction of a
(https://e1.newcastle.edu.au/coffee/job_guarantee/JobGuarantee.cfm) – which directly benefit the population by insulating the most
disadvantaged workers from the devastation that recession brings.
However, the other lesson that Rogoff and his ilk don’t emphasise – is
that pegging a currency to another, guaranteeing convertibility and then
allowing the financial sector to “dollarise” your economy (drown it in foreign
currency-denominated debt) – is a sure way to force the country into
It has nothing to do with the volume of public debt issued in the local
currency by a government which has sovereignty in that currency.
In a message dated 5/4/2010 15:03:42 Mountain Daylight Time,
Argentina’s abandonment of convertibility, while cataclysmic, is not (yet) an example of hyperinflation. For that, one has to go back to the Austral/Nuevo Austral/Nuevo Peso regimes. As I mentioned above, there are were also successive abandonment of currencies in Brazil, Mexico, and other countries from 1980 to the early 1990’s. Some of these occurred following “dirty floats”, and some floated freely. Certainly, my intent was not to argue that a convertibility regime is preferable: every system has its failings, most of which have to do with the nature of the polity (in Argentina’s case, that nature is a cultural yearning for a European welfare state without the benefit of European productivity! As an aside, the joke about Argentines is that they are Italians who speak Spanish and think they are British.)
I think the valid argument you offer is that Latin economies have large tradeables sectors. This makes it easier for devaluation to translate into inflation. This doesn’t mean that economies with large services sectors are not prone to hyperinflation: it just means the governments have to try harder to (inadvertently) produce it.
As to the point that, local or foreign-currency debt notwithstanding, what really matters is the inflation expectations of debt holders. MMT proponents seem to argue a priori that the inflation expectations of local currency debt holders are somehow naturally well-anchored. Again, this may be valid, but I haven’t yet read a justification for the view, other than, in the case of Japan, that local debt holders are culturally more willing to hold JGB’s. MMT proponents, again, are arguing for permanent money illusion: debtholders will ignore that the Central Bank is debasing the currency to repay them. Taken to its logical conclusion, this view holds that the Fed could finance the U.S. Treasury’s purchase of all of the goods and services produced globally in a year without creating any inflation. Somewhere between that absurd conclusion the hair-trigger hyperinflationary reaction to deficit monetization lies the truth.
Interesting argument, which makes a lot of good points.The issue is that
whenever we present the operational realities of MMT, invariably the charge
of “Weimar” or “Zimbabwe” comes up. If you read the vast bulk of comment
threads that emanate from my pieces, you’ll see that canard repeated
regularly. So, in one sense, you are right. Weimar and Zimbabwe are red
herrings. They have no real relevance, but because the charge is so often made, I
felt the need to respond to it. But you bring up some interesting examples.
It’s nice to have a civilised, knowledgeable exchange with someone,
utterly devoid of abuse.
I still don’t accept the “inflationary expectations” argument, but it’s
late and all I want to say now is that inflation will only be a concern when
aggregate demand growth outstrips the real capacity of the economy to
respond in real terms (that is, produce more output).
After that point, growth in net spending is undesirable and I would join
those demanding a cut back in the deficits – although I would judge whether
the public/private mix of final output was to my liking before I made that
call. If there was a need for more public output and less private then I
would be calling for tax rises.
This is not to say that inflation only arises when demand is high. Clearly
supply-shocks can trigger an inflationary episode before full employment is
reached but that is another story again and requires careful demand
management and shifts in spending composition as well as other measures.
In a message dated 5/4/2010 18:22:42 Mountain Daylight Time,
David Pearson (unregistered) wrote, in response to Marshall Auerback:
Argentina’s abandonment of convertibility, while cataclysmic, is not (yet)
an example of hyperinflation. For that, one has to go back to the
Austral/Nuevo Austral/Nuevo Peso regimes. As I mentioned above, there are were
also successive abandonment of currencies in Brazil, Mexico, and other
countries from 1980 to the early 1990’s. Some of these occurred following “dirty
floats”, and some floated freely. Certainly, my intent was not to argue
that a convertibility regime is preferable: every system has its failings,
most of which have to do with the nature of the polity (in Argentina’s case,
that nature is a cultural yearning for a European welfare state without the
benefit of European productivity! As an aside, the joke about Argentines
is that they are Italians who speak Spanish and think they are British.)
I think the valid argument you offer is that Latin economies have large
tradeables sectors. This makes it easier for devaluation to translate into
inflation. This doesn’t mean that economies with large services sectors
are not prone to hyperinflation: it just means the governments have to try
harder to (inadvertently) produce it.
As to the point that, local or foreign-currency debt notwithstanding, what
really matters is the inflation expectations of debt holders. MMT
proponents seem to argue a priori that the inflation expectations of local
currency debt holders are somehow naturally well-anchored. Again, this may be
valid, but I haven’t yet read a justification for the view, other than, in the
case of Japan, that local debt holders are culturally more willing to hold
JGB’s. MMT proponents, again, are arguing for permanent money illusion:
debtholders will ignore that the Central Bank is debasing the currency to
repay them. Taken to its logical conclusion, this view holds that the Fed
could finance the U.S. Treasury’s purchase of all of the goods and services
produced globally in a year without creating any inflation. Somewhere
between that absurd conclusion the hair-trigger hyperinflationary reaction to
deficit monetization lies the truth.
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For all those that don’t care. This is how I learn this shit so you get my opinions posted on Ed’s site.
* Despite the elegant war reparations argument, the debt was based in gold marks, not marks so printing was an incentive, from the sources I read, there were some laymen policy makers at the helm who reasoned that they could not pay salaries because there was not enough currency to pay so the solution was to print more currency to pay the salaries. I guess we know more about velocity today, but do we know more about not paying paychecks? Marshall says wager earners are as able to command price increases so that’s an attempt, I’m just pointing out that policy makers may not take the enlightened viewpoint when shit hit the fan. When hungry people need money, are policy makers going to embrace MMT or will they provide the money?
* Going to Taleb, “Fooled by Randomness”, there are two types of theories as attibuted to Karl Popper, p. 126
1. Theories that are known to be wrong, as they were tested and adequately rejected (he calls them falsified).
2. Theroies that have not yet been known to be wrong, not falsified yet, but are exposed to be wrong.
I’m only commenting on Marshall’s confidence on this one. He is arguing against a binary outcome and not an economic one, which makes the argument more scary. It is much more difficult to disprove an ambiguous economic forecast than this one. Who says the 1000 red ball in a row will not be followed by 1 black ball?
* I find it disheartening that the lynchpin of this theory is compulsive taxation. Why does that work though? It works, because if inflation sets in, the government can tax and reduce aggregate demand. The only way to reduce aggregate demand in this case is if taxes are not recycled into government spending and are used to retire debt (I definitely could be incorrect on this one). So, for a Keynsian, how likely that this ever happens?
* A counter point to the above is that by making us pay taxes in a currency, we must use dollars and then we are unable to abandon valuing the dollar because we have liabilities to the government in the dollar. Not only is this disheartening as a libertarian, but there is always the chance that the individual’s valuation wins this argument. Whether it’s black or grey markets or outright rebellion, do we need to take a chance and see if that is the null hypothesis?
* Finally, 36 months of 10% inflation is over a 30% loss on savings. Who cares about hyper-inflation even under that scenario. Retirees definitely do.
I think the onus on the MMT crowd is not to prove that the mechanisms are in place to prevent hyper-inflation. Volcker may be all we need for that, not a complex theory, but to prove how MMT can induce enough growth to make us all prosperous and to prove how their solutions to hyper inflation do not include decisions that defeat growth if we do cross that bridge. It’s not comforting.
At some point, especially in a peak resource world, every house sitting idle or every bridge to nowhere gets us closer to that point that the Weimar was in where they were sitting on a destroyed nation. Nominal profits induced by government spending may one day be unable to maintain the debt payments and future investment needed to maintain growth because resources become depleted. At that point we will have to take a pause and go back to Robinson Crusoe land and save up some reserves to give us time to build a new shelter because we were to busy patching holes in the broken one when we could have already been saving by now. I’m sure we can keep going for a while, but all these theories work until they work no longer.
Is there any other kind of taxation? Do you think we pay our taxes
voluntarily? I’m sure that many do, but without the sanction of the state, it’s
hard to believe that people would gladly pay their taxes. As for the
broader point on hyperinflation, I was merely pointing out some important
historical distinctions. I do readily concede that if the US polity reaches such
a state of dysfunction that the ability to tax is no longer enforceable,
then we could get hyperinflation, much as occurred during the Confederacy in
waning years of the US civil war.
But I’m not prepared to concede that we’ve reached that point yet.
In a message dated 5/4/2010 19:54:54 Mountain Daylight Time,
I find it disheartening that the lynchpin of this theory is compulsive
taxation. Why does that work though?
You have admitted the possibility of failure which I like even though you are not willing to concede failure yet. Otherwise you would be a loser.
Second, out of all my points, you decided to respond to compulsive taxation, which from an expert on MMT, means that that is really important to the theory. I like that honesty too.
Enough ass kissing.
Deficit terrorism aside, how do we create growth without savings? I’m not speaking in terms of the general theory where entrepraneurs or business owners don’t invest because they don’t see profits on the horizon, I’m speaking in terms of Robinson Crusoe land. If we want to build a raft, we have to save food to accomodate us during the time we’re building the raft. I perceive Keynes as a counter cyclical genius and nothing else. He is not an institution that deficit spends until it cannot deficit spend any more.
Give me some hope. We’re 30 months into this shit and we’re still not growing outside of stimulus so we need to look at new options.
Well, Scott, I am hugely appreciative of your generous comments. I’m glad
you don’t think I’m a total loser, not that I particularly care about your
judgement of my character, since we’ve never actually met. Now on to your
questions, answered with neither abuse, nor sarcasm.
On taxation, there is always compulsion. Even under a different kind of
monetary regime, taxation is compulsory. It was so under a gold standard
system. MMT has nothing to do with it.
On the other points. Simple question: where does the money come from?
I’m not speaking of theory but operational realities. As a matter of
accounting between the sectors, a government budget deficit adds net financial
assets (adding to non government savings) available to the private sector and a
budget surplus has the opposite effect.
There can be no net savings of financial assets of the non-government
sector without cumulative government deficit spending. In a closed economy, NX
= 0 and government deficits translate dollar-for-dollar into private
domestic surpluses (savings). In an open economy, if we disaggregate the
non-government sector into the private and foreign sectors, then total private
savings is equal to private investment, the government budget deficit, and net
exports, as net exports represent the net financial asset savings of
It remains true, however, that the only entity that can provide the
non-government sector with net financial assets (net savings) and thereby
simultaneously accommodate any net desire to save (financial assets) and thus
eliminate unemployment is the currency monopolist – the government. It does
this by net spending (G > T). Additionally, and contrary to mainstream
rhetoric, yet ironically, necessarily consistent with national income accounting,
the systematic pursuit of government budget surpluses (G T) would be required..
How long before we get out of this? I frankly don’t know. We haven’t
really deployed fiscal resources toward the real economy, but toward restoring
the status quo ante and then relying on the Fed’s monetary policy to blow
serial asset bubbles. I’m against this, as I’m sure you are as well. I
have proposed some ideas to get us off this track, (such as the Government
Job Guarantee Program, or a New Deal style HOLC, where the government,
instead of supporting the banks’ balance sheets, actually buys the housing stock
directly and then lets it out to the occupier). Until we get sensible
policy, it’s hard to see how we get out of this mess, but surely the European
experience demonstrates the futility of simply cutting back government
expenditures. Consider the case of Ireland as Exhibit A.
Ireland began cutting back deficit spending in 2008, when its banking
crisis began to spread and its budget deficit as a percentage of GDP was 7.3%.
The economy promptly contracted by 10% and, surprise, surprise, the
deficit exploded to 14.3% of GDP
(https://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22042010-BP/EN/2-22042010-BP-EN.PDF) ). I would wager
heavy odds that a similar fate lies in store for Greece, given the EU’s
inability to understand or recognize basic financial balances and the
interrelationships amongst the various sectors of the economy in terms of how they
impact one another. Neither a government, nor the IMF, can predict with any
certainty what the outcome will be – ultimately private saving desires
will drive the outcome, as Bill Mitchell has noted repeatedly
Why do we have a deficit of about 10% of GDP right now when it was less than
2% about 3 years ago? The reasons are: the Obama stimulus, the TARP, and
the slower economy, which leads to lower revenues (less income=less taxes
paid since most tax revenue is based on income, and lower tax brackets) and
higher spending on the social safety net.
What will happen as the economy improves (assuming it does, which I don’t
necessarily, but that doesn’t contradict my points here)? The Obama stimulus
and TARP go away in a few years regardless. Tax revenues increase and
safety net spending falls. We’re back to “normal” with deficits around 2-4%
depending on the state of the economy, which is where we’ve been for the past
30 years aside from 1998-2001. Even CBO agrees
(https://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf) ), though what happens to the Bush tax cuts will have
an effect of about + or – 2% of GDP (depending on whether they are
extended or ended, respectively). And CBO gets to this number by projecting real
GDP growth of only a bit over 2% for the next 2 years, which would be slow
for a typical recovery (and slower than the economy has grown over the past
year; they’re estimate is above 4% for 2013-2014, which is more typical for
On to the first question, which is, why won’t these deficits be
inflationary? The reason is that once the recovery is underway and the economy gets to
a significantly higher capacity utilization where price pressures could
emerge, the deficit will be declining substantially, and be at least a
partial offset, as per the previous paragraph. The faster the economy grows, the
smaller the deficit becomes. And by the time we get to a point where we
might have inflation, the deficit is back to 2-3%, which again is where we’ve
been for the past 30 years while average inflation has been about 2%.
And if spending in the private economy grows slower, than the deficit can
be that much larger before getting to full employment and inflationary
But I admit that we’ve got to move away from the kind of predatory crony
capitalism we are practicising today. Now, I’m happy to respond to any
other queries you might have, but let’s keep the abusive tone out of it, because
it doesn’t really further the debate.
In a message dated 5/6/2010 00:11:46 Mountain Daylight Time,
You have admitted the possibility of failure which I like even though you
are not willing to concede failure yet. Otherwise you would be a loser.
Second, out of all my points, you decided to respond to compulsive
taxation, which from an expert on MMT, means that that is really important to the
theory. I like that honesty too.
Enough ass kissing.
Deficit terrorism aside, how do we create growth without savings? I’m not
speaking in terms of the general theory where entrepraneurs or business
owners don’t invest because they don’t see profits on the horizon, I’m
speaking in terms of Robinson Crusoe land. If we want to build a raft, we have
to save food to accomodate us during the time we’re building the raft. I
perceive Keynes as a counter cyclical genius and nothing else. He is not an
institution that deficit spends until it cannot deficit spend any more.
Give me some hope. We’re 30 months into this shit and we’re still not
growing outside of stimulus so we need to look at new options.
Scott (and Marshall), if I may butt in?
Youve made some interesting comments here Scott that I think need some fleshing out and maybe we can come to a new understanding.
“You have admitted the possibility of failure which I like even though you are not willing to concede failure yet. Otherwise you would be a loser.
Second, out of all my points, you decided to respond to compulsive taxation, which from an expert on MMT, means that that is really important to the theory. I like that honesty too.”
When has Marshall nor anyone associated with MMT NOT admitted the possibility of failure?? I see this claim made often that “MMTers think if you just print money everything will be all right!”
This is an absurd statement. Whether “everything” turns out to be all right has NOTHING to do with money and everything to do with our COLLECTIVE efforts. If we all work to making a better place it will be better if our efforts are placed towards increasing conflict and controversy, THAT will be the outcome. MONEY IS IRRELEVANT to those outcomes. Do you maintain that “everything will be alright if we just balance govt budgets or run govt surpluses”? If so you are a complete fool.
And what failure are you asking him to concede? The failure of bond markets to serve as facilitators of necessary expenditures in difficult times?
The failure of govts to set up rational money systems which provide them with the flexibility needed to meet the needs of their electorate?
I think he would admit those failures.
Your comment on compulsive taxation is an interesting one and shows you know nothing about modern fiat money systems. Like it or not taxation is the prime way a currency is enforced in a currency area. Are you like the moron I talked to earlier today that wonders “why cant every city or business or bank issue their own currency. Why are we forced to use our govts currency?”
Surely you recognize why an entity that is responsible for defending US, policing US, setting up a justice system for US, building and maintaining roads and power grids for US, educating US, negotiating international agreements for US, preventing private interests from poisoning OUR air and water…….. might get some say in what we get to use as currency. After all all the public servants are paid in that currency. Certainly the degree to which all the forementioned are funded is negotiable but I think you see my point. Negotiating the level of funding though is a PURELY political not a monetary phenomena. The money which we spend on those services is never “not there”.
So if you understand money in the modern sense you would know that Marshall was never hiding taxation, and needed to “admit” it. Its part of the understanding. Again that seems to be a real sticking point for some but hey, tough. Thats the reality of our monetary system. Fight to change it if you must (but be careful what you wish for) but while we have it AT LEAST know how it works and dont let politicians or paid terrorists like Pete Peterson tell you we can “run out of money”
Excellent comments, and thank you for the eloquent defence. Needless to say, I concur with everything you say. None of us in the MMT camp claim to have a monopoly on the truth.
Well, you certainly dont need me getting your back Marshall but I can be a little more coarse when I see a comment I cant just let go. You are always so polite (I need to learn to be more so) and thats why you are a great advocate for this paradigm.
What I’m constantly stunned by are these wild assertions that get attributed to MMTers.
People dont read well.
Plus the more thought I put into this whole money thing (thats the core of the disagreement, what is money) I realize that while the Austrians like to paint wild eyes on you, Warren and Bill it is they that have the most absurd notion of money, not that it grows on trees but that it grows underground and needs digging up!!
Well, I’m a live and let live guy (I get that from Ed, bless his liberal soul). Also, I am trying to encourage serious and intelligent debate, and naively hope that if I don’t respond in kind, I might win a few converts. At the very least, debate conducted at that level is more worthwhile for the bulk of readers, than a torrent of abuse. But thanks again for the eloquent comments.
OOPS I forgot to comment on your other (more interesting) part.
“Deficit terrorism aside, how do we create growth without savings? I’m not speaking in terms of the general theory where entrepraneurs or business owners don’t invest because they don’t see profits on the horizon, I’m speaking in terms of Robinson Crusoe land. If we want to build a raft, we have to save food to accomodate us during the time we’re building the raft. I perceive Keynes as a counter cyclical genius and nothing else. He is not an institution that deficit spends until it cannot deficit spend any more”.
It seems your talking about a “first principles” problem. How did we ever get wealth to be created? The origins of money? If you know this then we’ll know how to get our currently underutilized capacity working without creating inflation. Is this right?
You seem to be saying that Robinson cant deficit spend like Keynes suggested, he needs to do something else like save first.
Right? Are you likening our economy to Robinson Crusoe? I’m going to assume yes to that question and go from there.
First off we are NOT like Robinson Crusoe. We have wealth, we know what is valuable not just to us but to others. Robinson only needed a raft and he had food (which he didnt have to PAY for with money) He built the raft by finding the things that were necessary to build the raft and putting the effort in. Yes he needed more food due to the greater effort but that was not a problem for him. The better question here is how would Robinson get someone else to build the raft. How would he incentivize them? They would need to be ‘paid” something first, right? Or at least have the promise to pay something later. So if Robinson pays them food out of his bounty he is “deficit spending” food. His negative sign on his food balance book might sat “-12coconuts” while the builder would be “+12 coconuts”. Coconuts are valuable so the builder feels better and does the work. In this example coconuts are not rare for Robinson but they are for the builder.
There is no expense to spending for Robinson nor does he need to acquire the coconuts to spend from his builder first.
Like I said though we are not like Robinson at all. We are not starting form scratch. We have idle productive capacity that simply needs to be paid to produce. And in our modern monetary system what we pay with is ubiquitous and cheap however once it is spent to the users they can drive up prices of things since what we pay with is how things are priced. The more they use those things the more prices go up.
Thanks for a lively thread that is assumably now dead. Marshall’s comments were difficult to read only because of formatting, the others I got.
My point on Marshall conceding is just a personal battle these days. Everyone has a different opinion and everone is correct. I don’t believe that we can always be correct at the same time so we need to at least admit fallibility. His articles are much more pointed.
As for robinson and inflation and deflation, I’m questing two things here. First is the stock of real capital. I mean what feeds us. All this flow theory and stuff never takes into account any stock measurement, period. Second is a quality factor. We know the difference between a fat girl and a hottie in life, why don’t we know the same in econ?
Good luck all. If the “real pool of savings” theory pans out, it won’t be fun.
“As for robinson and inflation and deflation, I’m questing two things here. First is the stock of real capital. I mean what feeds us. All this flow theory and stuff never takes into account any stock measurement, period. Second is a quality factor. We know the difference between a fat girl and a hottie in life, why don’t we know the same in econ”
The stock of real capital isnt necessarily a fixed amount. If you go by “what feeds us” (food) that amount increases every year. Is there a limit to food production? Of course. Are we anywhere near it or is that point calculable? Doubt it. If you are talking about the stock of something else of real wealth (gold, or platinum?) what does it matter? If gold disappeared tomorrow or by some strange misunderstood mechanism transformed to lead would we be any poorer? Is gold of higher quality then lead?
Not if you are making a wall to be impenetrable to radiation.
Your fat girl/hottie dichotomy fails because there are those that think a fat girl IS a hottie. Now I dont think so but I also dont think a fat girl is “worth” any less.
Seems to me that too many people think there is some “universal arbiter of whats worthwhile” somewhere out there. There isnt so what we do is allow someone to create a universal “pricing” mechanism (money) and then let people express their own preferences by saying how much of that money they will use to get it. This is far from perfect but its far better than trying to force everyone into a system which puts a universal value on something (like gold) which doesnt have universal value. The first system will be messy and hard to manage the second system will be a LIE! It might have been a useful lie at one time but not anymore.
First off, you should change the headline of this post. It makes it look as if MMT is calling for hyperinflation, which is ridiculous and completely false.
Anarchy is a functioning society free of government controls. That is individual persons operating together in harmony based on freely reached agreements concluded between individual members and groups of a society. Anarchy is simply a free society. Anarchy is not the result of a statist-government failure; that would be chaos.
Central planning organizations based on a monopoly on the use of violence cause chaos when they inevitably fail, usually due to the hubris of the “rulers” and the power vacuum that follows. Calling these conditions birthed from the failure of statist-government rulers “anarchy” as a writing prop reveals a bias towards statist myths and/or a profound ignorance of individual liberty. I expected more here.
As to the Marc Fabers prediction that the Central Planners in Banking will do what they always do, print more money to support the political big spenders while avoiding default, it is just a matter of time. All fiat currencies end up the same: worthless. Of course, timing is everything. Prepare for chaos, but don’t blame it on free people going about their personal business; blame it on the bankster state central planners wreaking havoc on free markets (including free-market money).
You’re the best, Ed. Excellent summary…
The definition of inflation as an increase in money supply is simply ideology – also it simplifies and ignores some fairly obvious economic fundamentals.
The first is the question of velocity – if turnover decreases, a larger money supply is needed to maintain price level, otherwise prices decrease. This includes the price of labor, so incomes decrease. Too bad debt levels don’t also decrease, but that’s another story.
Velocity is the hardest thing to measure in the economy. It appears that velocity is a function of supply, but it is a complex function – and different markets respond differently. You can’t just assume a velocity to be constant or linear related.
It is a gross simplification to state that an increase in money supply increases prices – and anyone saying such without explaining what they think velocity will do doesn’t know what they are talking about.
The other fallacy to avoid is explaining something by its definition. Saying that the definition of inflation is an increased money supply and that the cause of inflation is an increased money supply demonstrates intellectual deficiency. Yet, you hear it all the time – another indication of the ideological/emotional issues surrounding money.
Also, the old gold standard – store of value – concept of money is another source of confusion. Another way to view this is confusing stocks with flows. If money is an intrinsic value store while also being a medium of exchange – then it serves two roles – as a stock and a flow. Fiat currency can only be viewed as a flow – it keeps score – but has no intrinsic value.
Again, flow is related to velocity – you can’t increase the quantity of a flow – you can only increase its speed – the assumption (unconscious) that people make is that increasing the quantity is equivalent to increasing the flow – it is NOT.
Also, it depends on what the increase in money is used for – which is determined by how it is injected into the economy.
Simplistically speaking, government spending that puts money into households increasing savings and stimulates aggregate demand for consumables. Government spending that puts money into firms stimulates business formation and job creation. Government spending that puts money into finance stimulates asset prices and debt creation (remember that increased reserves is NOT putting money into the hands of finance).
MMT is not a panacea – it simply describes how the monetary system works and demonstrates how most of today’s economic policy goals are in direct conflict with their methods. Now, such policy makers are either ideological/deliberately hypocritical or simply mistaken. Many of us think it is the latter, but we need to call them out, destroy their credibility and demonstrate just how wrong they are – but not engage in no-win discussions about hyperinflation.
I like that you are looking into MMT. I don’t know of any wise person who doesn’t look at a subject from all possible angles. Here is what I think you can add:
“Ideologically then, I see inflation as the increase in the money supply. Economics. an increase in the VOLUME of money, which eventually leads to a persistent, substantial rise in the general level of prices and results in the loss of value of currency.”
I wonder why you don’t look at the velocity/inverse of savings. These fluctuate as a result of changing cultural attitudes. The steady decrease in savings rate is why we didn’t have this crisis 10 years ago.
“And where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency.”
You have to define money supply. Which M something is it? What the federal reserve does is set interest rates. It’s deficit spending (G>T) that creates new wealth for the private sector, taxes do the opposite. Sure some ponzi finance bubbles can occur, but the solution shouldn’t be to kill the whole economy with high interest rates because a bubble is forming in one sector. Getting banks to serve their public purpose, to make loans that will be repaid, will do the most to prevent these kind of bubbles.
I don’t look at velocity because i am as concerned with asset price inflation as i am with consumer price inflation. And asset price inflation is not dependent on velocity.
Bank lending isn’t reserve constrained! Level of bank reserves effect interest rates, but why use such a blunt tool such as interest rates that will cool off an entire economy when it’s just once sector that is in ponzi mode?
Excess spending drives up demand, not to worry about idle balances in savings accounts at the fed called tsy secs. only should those balances get suddenly spent and we get past full employment will the spending drive up prices, and then not anywhere close to hyper inflation unless there is a particularly stupid policy response. more likely automatic stabilizers automatically raise taxes in the boom created by the spending.
now an external shock like a nuke from iran or an oil price spike is another story- not hyper inflation but a nasty supply shock that would drive up cpi considerably
It is very naive to think that monetary authorities will do the right thing when the current belief system of mainstream economics and policy is very much aligned with Faber’s thinking.
“Excess spending drives up demand, not to worry about idle balances in savings accounts at the fed called tsy secs.” That’s where I agree 100%. The worries about hyperinflation is an ideological canard – that even after my post people are trying to defend in the comments.
you can get asset price inflation without anything trading. i’ve seen stocks and houses gap up as the sellers simply change prices higher, maybe due to lower interest rates or some news event. so velocity isn’t a factor. it’s just the bid and offer rising
Please go to http://www.richebacher.com and read sample issue (see lower right hand corner). Both history and theory suggest very unique conditions are required for a hyperinflation episode to arise and be sustained – which is the reason why they are relatively rare.
It is not just fiscal deficits – they may be a necessary, but are hardly a sufficient condition. It is not all demand side or monetary developments either- there also tend to be supply side “shocks”, both exogenous and endogenous.
Hyperinflation hyperventilalists need to look into this. The recipe for hyperinflation is not so simple as many alarmists would have you believe. More likely, as the eurozone predicament is demonstrating precisely along the lines I predicted and forewarned, a hyperdeflation will arise a la Latvia.
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