ART CASHIN TELLS VERY SCARY STORIES….
So I’m doing what I do every morning (reading every financial news story and research report I can get my grubby mitts on) when I come across an interesting piece from NYSE floor legend, Art Cashin. Like many people, Cashin has long worried about the actions of the Federal Reserve and their “money printing” ways. But this story sounded all too familiar. Like one I had read before. So I start googling around and I come across this hyperinflation story from Art Cashin which is essentially the same thing. But I know I didn’t read this story on Zero Hedge so I keep bouncing around. Then I find this story from 2009. It’s the same thing from October 14th 2009. It’s a pattern of course. He reprints it every year on the anniversary date of the Weimar collapse.
Now, I know that he titles this piece “An Encore Presentation”, but how long do we have to hear scary stories about hyperinflation before people begin to wonder if these fearmongers aren’t misrepresenting what actually happened in Weimar or other historical cases of hyperinflation (see here for an accurate portrayal)? How long does this hyperinflation story have to be dead wrong before investors and economists begin to wonder if their theories about the Fed & the workings of our monetary system aren’t entirely wrong? Or are we going to hear this same story repeated every year for the rest of eternity?
Clearly, the quest for a true understanding of our monetary system is being passed over in favor of spreading outright lies based on a misguided ideological perspective of our monetary system. Most people would rather be led by the misinformed than empower themselves through a better understanding of our world. Understanding the monetary system is difficult. I sympathize with those who don’t have the time to learn all of this. And I know it’s easier to follow the “experts” than to learn how the world works. But this is too important not to learn.
Don’t be fooled by these stories. They will not help you make better investment decisions and they certainly won’t help you better understand our world. While history is a good guide, it serves none of us when it is entirely misrepresented…. And while I have a huge amount of respect for Mr. Cashin’s work, he does no one any favors by implying that the USA is Weimar. Nothing could be further from the truth….
While it is definitely not happening now or any time soon, I am not prepared to write it off completely as impossible primarily because having read Bernanke’s 2002 white paper and helicopter drops, I think he will stop at nothing to get his way. He will be doing QE3 soon and then QE4 and so on (and while QE2 was an asset swap, it doesn’t take much to go to real helicopter drops of $$). One day my suspicion is that he could really go apesh&^ crazy and go really “all in”. That said, I am not betting my monies on that at this time, I am much more in the Japan like scenario – a deflating economy punctuated by brief bouts of reflation spurred on by Bernanke’s experiments (all of which will fail but still gets people energized for all the wrong reasons as you have pointed out).
And I am shocked that people still equate QE with “money printing”. Even data by the hyperinflation king himself shows that the money supply did not explode higher during the last few years. http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad&t=1318087264
Bernanke doesn’t print money. He just changes the asset mix. When will people realize this? He can do all the QE he wants and we won’t get hyperinflation. We’ll just get more cost push inflation courtesy of the speculators on Wall Street and it will drive us deeper into the hole. It’s as if people have learned nothing about QE.
Errr, excuse me for a dumb question. Couldn’t Ben actually helicopter drop through muni bonds?
For example, California could spend a trillion dollars and issue muni bonds to fund the spending (since states are currency users). The Fed could buy all the bonds under the assumption of a loss and reset their computer to zero.
I’m not saying it’s likely, just possible.
Only if he over pays for them, otherwise its just an asset swap. Real “money printing” only occurs when net new financial assets are created.
The states would have to increase their allotted budgets knowing that the Fed will finance them. It’s like Europe. The ECB isn’t printing money because the budgets are austere. If Greece knew they could run massive deficits and the ECB would buy all of their bonds then it would be inflationary. States in the USA have balanced budget amendments anyhow so this is kind of an unrealistic conversation in the first place. The Fed can technically do fiscal, but I’ve written about this in the past. I think they’d feel like they’re infringing on Congresses power of the purse. A big no no for a politically independent entity….
Does that make sense?
Yes. But those balanced budget amendment normally do not include pension liabilities. In California it is $560 billion according to Stanford. Assuming Stanford is off by a factor of 2, you’d still have to come up with 3x California’s annual budget from somewhere, albeit over a period of time in a balance sheet recession.
Hard to see how we escape those liabilities without the Fed stepping in. And when California steps in line, you know Texas and Alaska will want their share too.
Yes, but the funding will not come from the Fed. It will come from Congress writing a check. Just like they always do. Most people don’t know that Congress allots money to the states every single year. In other words, we already have Europe’s fix in place. That’s why you don’t see state solvency crises once every few decades….The Congress (like the ECB can) just writes the check and we all move along complaining about the myths of the way our monetary system works…..
If Bernanke started doing real helicopter drops without enabling legislation, whether buying trillions in muni bonds or just dropping freshly printed Federal Reserve Notes over Jersey Turnpike rest stops from helicopters, he would be impeached immediately.
Wont happen….
I suppose that cost-push inflation you sight could be construed as what Art Cashin talks about. How do you explain oil at $80+ dollars even when there are clear signs that the global economy isn’t doing well? Why is every low in oil higher than the previous low by such a wide margin? True scarcity could be an issue with peak oil and all.
I agree with what you say about QE just being an asset swap, however, if you have an asset swap of a 30-yr Treasury, one could safely say that those new swapped dollars will be in the system for a significant period of time and therefore could have the semblance of being new printed dollars with a 30 yr life expectancy. You can do a lot with money in 30 yrs.
The cost push inflation is mostly due to some combination of insufficient supplies, massive emerging market demand and speculative aspects to some degree. I don’t reject any of those ideas. In fact, if you look at the money printing ways of the Bank of China you’ll find some alarming facts. I have previously said that it is not the US Fed that people should focus on, but the BOC. They are the true money printers. They are the ones the hyperinflationists should all be scared of….
I was recently actually thinking of the Euro. I’ve begun to ponder whether some type of leveraging or some mickey mouse solution to eradicate the debt (such as inflating out of it) could cause a loss of confidence in the Euro. The Euro isn’t the reserve currency you know.
Reserve currency status is overrated. Hyperinflationists have been confused by this in Japan for decades. Just another tired old myth about how reserve status affords us some great ability to print money….
True. Good point on Japan. I’m curious to see how an aging population and selling of Japanese bonds by domestic population will affect their Treasury markets.
I wonder what the foreign ownership of Japanese bonds is vs European countries.
Foreign vs domestic ownership of bonds doesn’t matter to a sovereign currency issuers ability to fund itself…..
http://pragcap.com/whoa-thats-a-lot-of-private-sector-savings-i-mean-debt
http://pragcap.com/who-will-buy-the-bonds
a point and a question….
1) “before people begin to wonder if these fearmongers aren’t misrepresenting….” Ahh, see, you ARE teachable! you’ve dropped the extra “er” from “fearmonger”! see how much time it saves you! lol
2) OK, I have to admit I’m one of those people that seems to overestimate the value of the US$ being the world’s reserve currency, and the yen is not, yet Japan has no funding issue. But isn’t the fact that the US$ IS the reserve currency a reason that it remains in such high demand? And if it was NOT the reserve currency, wouldn’t our financial picture be much different?? Japan can get away with not having the world reserve currency because the savings habits of its citizens, which are markedly different that the USA, and because it is a net exporter. So, I don’t think you can compare Japan to USA and write off the value of the US$ being the reserve currency. If you have time to explain or direct me to the appropriate link, I shall try to be as teachable as you!
I think you have to ask why the US$ is the reserve currency. Its not the reserve currency because of some magical powers of our currency. Our currency doesnt have its status because of confidence fairies or the like. It has its status because the USA has shown, since WWII especially, that we are serious about keeping our standard of living high ( I fear that is changing because of our Tea Party brethren but I digress) We are leaders in almost every field of human endeavor and for the most part we have remained committed to the idea that all Americans deserve a shot at “the dream”. We have gotten off track the last couple decades but I really think that the 40 years from 1940-1980 will be hard to overcome. Too many Americans really do buy into the ethos of our golden years. The rest of the world wants what we had in our golden years and so our dollar still represents that. Yes it has tarnished some but for the most part it still beats everyone else (Scandinavia would have a shot if it had better weather). A lot of our status has to do with the lack of competition. Yes we’ve deteriorated but not as bad as everyone else. Its ALL relative
The largest note printed is the 100RMB ($15.6USD), so one would expect the presses are running at full speed. That is a lot of red ink, no pun intended. Also consider there is >$11T in circulation and the convenience of personal credit/debit cards is not anywhere near developed, especially in rural area, for the majority of the population.
I know that was not your point about the “printing” BOC is doing, but it does give rise to understanding why the Chinese freak when counterfeit rumors start.
I’m more referencing their incredible money supply growth: http://pragcap.com/wp-content/uploads/2011/03/m2.png
Hi Cullen, could you elaborate more how China’s monetary expansion is inflationary or potentially hyperinflationary, contrasting it with US’s Fed? Thanks.
In regards to commodity markets and the huge moves that made fortunes for guys who used simple trend following strategies in the 1970′s and early 1980′s.
If you stating there will be no hyper inflation, then the abundance and magnitude of these big moves in commodities like the 1970′s is probably greatly diminished.
True or false?
Cullen,
I am sorry for getting into this, but it really escapes my mind why are you so concentrated on this statement about Bernanke “printing money”. YES, the fed does not “print money” during QE episode. And NO, the government (a part of which Fed is) DOES print money by running fiscal deficits! For some reason I never saw a discussion of this here (sorry if I missed it, would be glad if you provide a link).
This have not resulted yet in hyperinflation. Excellent! Could it happen in theory? Let’s imagine that, in order to solve all these stupid problems once and for all, the government passed a budget with $20 trillion deficit; issues corresponding amount of treasuries, and the Fed buys them all during QE 124 episode. What would happen to money aggregates, money velocity and general price levels? I assume you know the answer……
So, at $1.3 trillion deficit we do not have hyperinflation; at $20 trillion deficit we have. Now, could you, as MMT practitioner, say where in between these two numbers we would have a threshold between “moderate” inflation and hyperinflation? I do not know.
“Now, could you, as MMT practitioner, say where in between these two numbers we would have a threshold between “moderate” inflation and hyperinflation?”
It’s at the point where the economy approaches full employment. Which, conveniently enough, will automatically reduce the deficit on its own. I’m not sure in what scenario a $20T deficit is even remotely justified or necessary.
The point is that worrying about hyperinflation in the US is like worrying about an asteroid hitting the Earth. Could it happen? Sure. But just saying that it is possible is neither here nor there. I can go out and shout “End of the World is here!” till I am green, but if I cannot coherently explain how it comes about I don’t think anybody would listen. Same with hyperinflation. Please, coherently explain under what circumstances the American public starts precipitously losing confidence in the dollar. And this given the currently probable circumstances, with Treasuries rallying and such. Just saying “if we print trillions of dollars” is not enough, because you first need to lay out a probable scenario where we print trillions of dollars.
An old-school Latin American-type scenario is plausible in the USA. Congress votes dramatic increases in Social Security benefits, veteran’s benefits, Medicaid, SNAP, unemployment etc.; Medicare becomes open to all workers; state spending is bailed out by direct federal stimulus rendering state balanced budget requirements irrelevant; and the Fed becomes the Treasury market as it does whatever it takes to keep interest rates low, thus rendering the sterilization (I know it isn’t true sterilization) of deficits by the sale of Treasuries into an open market irrelevant. Payroll taxes are eliminated and income taxes cut dramatically as Americans realize taxes and the bond market do not fund federal spending; why destroy money and agregate demand unnecessarily? Capital flight and dramatic increases in velocity via loss of confidence, plus rapid cost push inflation in energy and imported goods, ensue. It isn’t Weimar, of course; it is Brazil in the 1980′s.
The legal infrastructure for the foregoing already exists in the USA and some aspects of it have happened already. The only thing stopping it from accelerating is self-restraint by the voting public and its elected officials; i.e., cultural norms and beliefs about money, thrift, work and the role of government. If you haven’t noticed, cultural norms are changing rapidly all over the West. This is why those shiny rocks TPC both scorns and owns will become 5%-10% of most US portfolios over time as a form of insurance against the Latin American scenario.
Sorry, I don’t buy it. Even if we assume that the public and the Congress indeed do a complete 180 degree turn form the current deficit hysteria (seriously, though?), the US is nothing like Brazil in the 80s. How can you even compare the productivity of the two? You’d need a totally unrestrained overspending on unproductive endeavors combined with spending binge by the public and combined with a serious cost push shock such as oil or food. Yes, could happen, but very unlikely. The risk is definitely skewed in the opposite direction right now – years of insufficient deficit spending and stagnation.
I would actually feel a lot safer if we did have an asteroid defense network. This is one area where government involvement does make sense due to the fact that it would to the public good and not profitable.
“It’s as if people have learned nothing about QE.”
Including the FED as they can’t seem to wrap their minds around, at least publicly, that QE doesn’t spur an economy suffering from too much debt. All QE does, as you point out, is lead to ever more cost puch inflation. Thus, further hurting stagnant wage earners.
IMHO, Art Cashin needs to retire. He hasn’t said anything noteworthy (of substance) in a LOOOOOOONG time. Good job catching that..
I’d advise you to read Lords of Finance: The Bankers That Broke The World. It was written by Liaquat Ahamed, a former World Bank economist and investment fund manager. He shows how the current financial crisis is similar to the ones of the 1920s and 30s. The Banking crisis of the 20s led indirectly to the Great Depression, Hitler and WW II. Those who cannot remember the past are condemned to repeat it. Also remember that for an idea ever to be fashionable is ominous, since it must afterwards be always old-fashioned. One day you too will be old-fashioned. What have you said of significance lately?
Yes, do read Lords of Finance. I just finished it. And while the author blames fixating on the gold standard for the depression (and clearly it did), there is the mention of what led to Weimar hyperinflation too. If a government decides to spend on say, a war, and Bernanke prints, you could get currency revulsion. Admittedly, unlikely at this time in the US, but if you read Bernanke’s 2002 paper carefully, that is where he may go….eventually. There needs to be an exogenous cause, but what is to say it won’t happen here. I am not saying it will or it is even going to, but Bernanke can really go all the way.
How will Bernanke cause this? By swapping bonds for reserves? Certainly by now, you do realize that doesn’t increase the net financial assets of the pvt sector? We’ve had this conversation here a million times. It should be abundantly clear that QE is not money printing…..
So you tell me that hyperinflation is impossible here in the US? Under any circumstance? I will point out the biggest fallacy that you and the MMTers have (or just plain ignore) – you CANNOT just deficit spend your way to prosperity even if you are the monopoly issuer of your own currency and you have debt in your own currency. This is plain and simply:
1. If it was so simple, everyone does it. And there are no more problems, recession – just spend some more of your currency and lo and behold, recession disappears.
2. Deficit spending, if not used productively, doesn’t create “value”. Again, otherwise, let every country just deficit spend their way out of every recession (after all by definition during a recession, there is ? No? Easy? Problem solved and everyone is happy ever after?
Granted, Weimar was a special case – war, war reparations, owing your debt in foreign currencies, gold standard, destruction of capacity due to war etc etc. So, I assign that to be a very minor chance of happening here. BUT, I am also convinced that Bernanke will do whatever it takes, literally, to devalue the $ down to whatever level he wants to (his own words, not mine). BoJ has bee buying up corporate bonds, REITs, ETFs….what is to say Bernanke won’t go to an excessive extent to destroy the $? And what is to say that at some point it won’t lose confidence?
I am just keeping an open mind that it could occur but I am also not hanging my hat on the hyperinflationists silly points, at this time.
Bernanke cannot create new dollars; you seem to either be ignoring or missing this point.
Congress is the only governmental entity that can authorize spending and create dollars(apart from the Treasury seigniorage loophole). The Fed cannot spend any money it does not have. When it “purchases” assets it is merely swapping those it has for those the private sector has. There are no net new dollars put into the system here. I repeat, only the Congress, via the Treasury, can put net new dollars into the system.
Also, your point about deficit spending and MMT is completely incorrect. There are innumerable references around this site about deficit spending needing to serve a productive purpose. The mechanics of MMT alone are predicated on a productive populace. Productivity is ALL that backs up a currency in a modern, free-floating, fiat system.
“So you tell me that hyperinflation is impossible here in the US? Under any circumstance? I will point out the biggest fallacy that you and the MMTers have (or just plain ignore) – you CANNOT just deficit spend your way to prosperity even if you are the monopoly issuer of your own currency and you have debt in your own currency.”
Have you read Cullen’s primer and piece on hyperinflation? That whole paragraph is one straw man fallacy as Cullen at no point makes either assumption you try to tear down.
It’s as if you haven’t taken the time to even understand the very basics of MMT. I am honestly flabbergasted that you and I have had this conversation so many times and you still claim that we say a govt can just deficit spend without any repercussions.
There are only a few bolded sentences in my MMT primer. They read:
Thus, government cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. It’s important to understand that government cannot just spend recklessly. This is important so I’ll say it again. This does not give the government the ability to spend and spend and spend. If they spend too much and tax too little they can create mal-investment and inflation.
The paper you reference in fact talks about the exact same things I have been talking about – if the government (and let’s face it, Bernanke is a tool of the government, albeit indirectly) corrupts the currency far enough, there could be a revulsion. It is highly unlikely, but not impossible.
“The value of these notes is ultimately determined by the goods and services
that are produced by the citizens and the value that other citizens are willing to pay for
these goods and services. Therefore, government has an incentive to promote productive
output. Otherwise, they risk devaluing the currency”
You’re just regurgitating your talking points. You’re not actually describing how Bernanke will corrupt the currency…..If you figure out how he’s going to do it please let me know. So far, he has failed with flying colors despite all the tricks that the hyperinflationists said would doom us…..
You are just obstinate in your refusal to even contemplate anything other than the theoretical MMT. MMT says this and that is all there is to it. Everyone else is an idiot.
It is plain silly to refuse to contemplate that other things could happen. You were similarly obstinate that inflation would not rise because of slack…not even to the 3%. And when it did, you came up with a post facto explanation – cost push. Whatever makes you look good….And what about UK inflation? Similar to Mervyn King, write it off as temporary and transient? Due to VAT tax increases?
I have repeatedly said, hyperinflation is extremely unlikely here. But I would be stupid to rule it out. I don’t know how Bernanke will do it, but I think he has the power and importantly the willingness. Here is perhaps one possible example – let’s say the intricate web of countless trillions of derivatives blows up (maybe because one bank has a problem and counterparty risk surges). Bernanke panics and pumps in all the liquidity to keep it from imploding. If the derivatives bomb (which no one knows how much and where the problems are) causes an excess in money printing by extremely large amounts, is it possible that there could be a run on the $? What if that was combined with some sort of war? My take is simply that Bernanke’s favorite and only way to deal with everything is to devalue the $. No one knows what he may do and what he doesn’t.
My favored scenario is Japan like stagnation for years (unlike your optimistic nonsense about US consumer recovering in 2013…whatever, rose colored glasses and then when it doesn’t happen, blame it on some event that occurred).
My humble suggestion – take off the blinders, your view is 95% accurate but be aware that there are extreme circumstances at play. Dismiss hyperinflation and gold bugs as you rightly do but don’t be overly focused on these people – they do what they do, but be aware that none of us knows what could happen and never rule it out. And finally, stop being so theoretical about definitions like money printing and the like. It is like saying US will never default on its debt…sure anyone with half ass decent understanding of the way this works will agree with that. But the word “default” as you define it is not paying the debt….as more sophisticated folks define it, it is inflating it away.
So, instead of being closed minded and repeating the same MMT and same highly technical “US cannot default” nonsense, talk about the next thing.
You can take these as good suggestions or dismiss me too. And then if and when something that you said would never happen, happens, conjure up some post facto explanation for it.
Wow, your comment is so off base I don’t even know where to start. I never expected you to become one of the readers who couldn’t explain their position so instead resorts to insult filled rants….You act all high and mighty when it’s clear that you’re not even remotely familiar with my positions or work. You are getting upset and misrepsenting the facts now. Let’s make a few things clear – I have never dismissed gold as an investment. I clearly stated that inflation would rise in 2011 in large part because of the speculators and the Fed (how any reader could have missed that is simply unbelievable). In Jan 2011 I was very clear about my inflation outlook (inflation was at about 1% YoY at the time):
I very clearly said that commodities would rise in 2011 and cause higher inflation. There was no “post facto explanation”. The nice thing about having a website like this is that I can just reference the facts every time someone like you gets upset with me and tries to lie about what I actually said.
You claim to back some Japan scenario which you obviously ripped off of my work because I’ve been saying that for 4 years. It’s practically laughable that you could claim that I don’t agree with the Japan thesis. The rest of your comment is just a veiled insult masquerading as constructive criticism.
I have a recommendation for you – next time you decide to completely discredit yourself with someone, try to at least understand a few facts rather than having your entire argument boil down to an insult filled rant based on:
And don’t try to claim you’re being “humble” here. You’re just laying into me because you can’t explain, for the life of you, why hyperinflation might occur. You quite literally can’t explain the mechanics of it even though I’ve repeatedly showed you that Ben can’t create net new financial assets, ie, print money. But you just keep towing the party line with “Ben = bad, Ben print money mean Ben bad”.
Next time, rather than tell me how I should live my life or behave, try constructing an argument that is semi coherent rather than this garbage which makes you look bad. Unbelievable that someone who has read the site for so long could so badly misrepresent me and at the same time insult me thinking they’ve accomplished something…..Don’t bother responding. We’re pretty clear where you stand on your opinion of me.
“And what about UK inflation? Similar to Mervyn King, write it off as temporary and transient? Due to VAT tax increases?”
I can assure you this is not just some sort of MMT excuse. I know first hand this is the absolutely prevailing view on the street.
What if the US got into a currency war with China. Bernanke could try to break the RMB peg by buying up unlimited quantities of RMB at a rate higher than China’s official rate. China of course strikes back in kind, and quadrillions of dollars and RMB are printed in a matter of days. This would not end well.
Please parse this quote please that led to Ben Bernanke getting the nickname Helicopter Ben:
“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
I would also agree that this has not happened yet but is a logical path that might be chosen. Technically speaking, a policy of upholding or expanding the money stock in an environment where banks are no longer willing to extend credit and issue new money appears to be technically possible. An economy’s production structure will be turned upside down once the hitherto relentless rise of money, injected by bank circulation credit, slows down, or even starts contracting, one of the central banks’ current conundrums. Once the credit growth dries up, the monetary induced “boom” will turn into “bust”. The bust can cause market interest rates to go up as people’s time preference and required risk premiums increase. Then rising interest rates threaten to bring down leveraged financial system. Defaulting banks would reduce the money stock. So to prevent the money stock from declining in a bust, the central bank then has to keep market interest rates super low. This has already started to occur. As the crisis proceeds, the central bank would then resort to purchasing ever-greater amounts of debt, thereby issuing ever-greater amounts of money. The ongoing attempt to keep down the interest rate to prevent the money stock from declining could easily lead toward a policy of purposeful higher inflation and if unchecked could lead to hyperinflation. This has been done before. I did not say it was occurring yet BUT given the quote and current predicament, the current deflationary debt spiral we are presently in, central bank re-inflation or reflation is one logical sequence particularly if accompanied by fiscal profligacy.
Ben thinks he prints money. But he really just swaps assets. He works under the old paradigm that says the Fed can fund the govt. Nonsense.
rosie has a piece about paying attention to transactions at the margin. you would agree, cullen, that having an active fed buying treasuries is the introduction of a new transaction participant at the margin, whose effect is similar to simply printing money, wouldn’t you? i am not talking about money supply aggregates, but rather activity at the margin.
Totally agree with Cullen, what do u think of commodities, I have shorted copper, but it has bounced back, some sort of short squeeze, or are they going to keep going up due to “precieved” inflation fears. I know copper fell 60% in the 08 crash, even without a crash the slow down in China must add to the deflationary pressure on commodities as a whole.
Lets be honest about this.
We would be better off if we just sent congress home and let the FED run both fiscal and monetary.
” How long does this hyperinflation story have to be dead wrong before investors and economists begin to wonder if their theories about the Fed & the workings of our monetary system aren’t entirely wrong? Or are we going to hear this same story repeated every year for the rest of eternity?”
Yes, this is going to be a very painful death of these ideas (not painful to the people that perpetuate them though). From the media I monitor it is deadly obvious that these ideas are just as firmly entrenched as they were before QE2. It should not be a shock at all.
Gee I wonder where all this misinformation originated??????
M2 growth rate annualized over the last 3 months is 25%. Looks like a stealth heli drop to me.
The M2 components that are surging are components that would be offset by M3 data. But the Fed doesn’t produce M3 data. So there is the appearance of a surge in the money supply and some people are using this incomplete data set to try to scare people. Same thing happened in the M2 data after QE1 when deposits jumped. So deposits are up about $500B and small time deposits are down 60B, inst money funds down 140B, commercial paper down 50B, asset backed down 30B, and the rest is likely made up by the components they no longer report.
This is confirmed by the Shadow Stats M3 data which is showing a marginal YoY increase despite the explosion in M2: http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad&t=1313329241
The only thing that’s stealth here is the ability of the people using this data to get away with scaring people about it without being called out on it.
Why in these discussions is it that government spending is never mentioned?
Government spending, a large piece of the GDP picture, increases every year. That money goes into the general population. And because the economy is too weak to implement higher taxes to drain those monies back out, that is inflationary.
Now we also have deflationary forces at work also in the form of deleveraging, but despite the pressure being asserted by deleveraging, prices at present, continue to rise.
One day, I do not know exactly when, the forces of deleveraging will begin to subside, and unless government spending decreases with it, we will have a rapid increase in inflation.
Now when you take into consideration that the government has no real option except to print the money for the obligations it has assumed, the probability of having problem inflation at some point in the future is elementary.
When deleveraging subsides, that means more income is available to spend thus increasing sales(demand). When sales goes up, hiring goes up. When hiring goes up, automatic stabilizers go down, which means gov’t spending goes down. When everyone is working and output is maxed out, then we can worry about the “elementary probability” of inflation. That is indeed at some point in the future!
Bernanke himself admits that bank reserves have surged, but that currently the reserves are not being deployed in the economy, and so are not causing inflation.
Whilst he is wrong about inflation (as the govts of the world just exclude all of the items that the man on the street has to buy, like food and power), he is right that the reserves currently are not flowing.
He also makes assumptions that eventually Fed policy will ‘normalise’ and the Fed’s balance sheet will reduce.
As history proves it is the belief of central bankers that they are in control of events that eventually leads to hyperinflation.
I will have a bet with anyone that we never see the Fed’s balance sheet reduce, it will just continue to expand. ‘Normalisation’ will not return, things will just get more and more ‘abnormal’, until eventually investors and US citizens will lose confidence in the dollar. Maybe when the dollar index falls to sub 70?
It will be loss of confidence that causes hyperinflation, the lack of confidence will be met with more QE, and so the spiral goes.
I would argue that the rising gold price since 2001 is a sign that confidence is already eroding in the dollar. Ironically the Euro benefits, as it marks its considerable gold reserves to market every quarter. The Euro is just ready to step in as the next reserve currency. Oil producers will demand it eventually.
Ultimately any country that consumes more than it produces is headed for some sort of disaster, and no fiat country has ever voluntarily accepted austerity and deflation, so I am sure the US will be no exception, and will go down in flames instead.
Thanks for the good laugh.
Actually, it’s not funny anymore. And when I stop laughing, everyone should pay attention. Because I am beginning to think we can actually talk ourselves into hyperinflation if everyone keeps talking about it. Maybe I really do need to buy that gun. You know, I was just kidding!
I’m so not laughing.
“Ultimately any country that consumes more than it produces is headed for some sort of disaster, and no fiat country has ever voluntarily accepted austerity and deflation, so I am sure the US will be no exception, and will go down in flames instead.”
So everyone needs to just consume whatTHEY produce and nothing more eh? Or are you saying that every countries goal should be to produce MORE than they consume? If so who are you producing it for if no one will consume it?
In the not too distant past (pre 1971) debtor countries would have taken payment for your excess consumption by way of gold reserves.
One day in the not to distant future the US will again have to give up a fair chunk of its gold reserves. But at a vastly higher gold price than today. China will be paid, just not in fiat currency.
No such thing as a free lunch, despite governments not being like households!
Reserves don’t get “deployed”. You still dont understand even the basics of monetary ops Gary. This probably has to do with why you’ve been coming around here for years trying to scare people with your hyperinflation theories…..
Cullen,
He’s reciting the Stansberry goldbug video. Unfortunately, pre 1971 is etched permanently into the crania of the masses.
Please skeptics, just take the time to read some MMT literature. If you only get to the monetary operations portion of the program, you’re ahead of the game. Get that far and then chime in with any remedies you deem politically feasible. Cullen, Warren Mosler, Randy Wray, Bill Mitchell. Just read their primers. The operational realities and sectoral balances are factual. That’s really how it works with a sovereign currency with a freely floating exchange rate. No pegs. No commodity base. Yes, driven by tax and dare I say it “debt”.
Everyone hates waste. Everyone hates crony capitalism. Everyone hates bailouts. Everyone hates bureaucracy. Everyone hates inflation. Everyone hates taxes. But, correct me if I’m wrong, most of us love thriving. And we want others to thrive as well, that is, have a decent standard of living. Just get the facts straight and prescribe solutions with public purpose in mind. Then we can debate.
Yay thriving!
And! Yay thriving for the young people: the ones who are supposed to be supporting the old fogeys in their dotage? It severely pisses me off that THESE are the ones who are really getting screwed, whilst we fiddle about the deficit and say brave-sounding things like “we’re just not as wealthy as we thought we were. (sry about your student loans…”)
Talk about eating your seed-corn!
It seems to me like if people really, really believed in hyperinflation, they’d be telling all their buddies to take out mortgages. Right? Because you could pay those things off with depreciating cash and come out, more or less, Owner of the Dang-Freakin Universe?
That would be my plan, anyway. Also, fire up the credit cards!
Alas my money keeps going into its boring little bond-fund. The v. boring investment strategy of stingy old ladies.
Jane, please spend some time reading this,it adresses your point re property related debt, and many more regarding hyperinflation:
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
*scratches head* I’ve tried to read that link a couple times now, but it’s sort of sprawling and full of fairly random capitalizations and links that say how awesome the author is. I just can’t read that kind of thing; my brain has sort of a built-in crank filter that refuses to accept it.
So basically your point is that wages may fall way behind the rising prices of everything else and that thus you may run out of money on basic necessities before you can get to debt service? I can dig that, though it is my understanding that rising prices are mostly driven by rising wages, so it’s hard to have very high inflation AND stagnant wages. I mean, that’s the basic argument against raising the minimum wage, right– that higher wages simply drive up the cost of everything else and that it is thus mostly an exercise in futility?
I’ll try to read the link again after I’ve had a few more drinks. cheers!
I have nothing against MMT as a descriptive theory that explains the world as it exists. But, to go from there to this argument that hyperinflation is impossible is a giant leap of faith. The point about germany and zimbabwe is that inflation created a vicious cycle accentuated by their governments that ultimately led to hyperinflation. Certainly, the US isnt at that point. But, dollar denominated debt isn’t some sort of panacea. Sure, congress can spend money into existence without limit, but faith in money is all that holds any monetary system together, including this one. Debt of 150% with inflation of 15% and a hyperinflationary spiral is yours. For inflation to go from 3 to 15 isnt even a black swan. The future poses legitimate risks. In particular, japan has continuously avoided that fate by maintaining a current account surplus, low unemployment and by failing to stoke mid-range inflation. In an attempt to reduce unemployment, the age old wage price spiral could return. The issue of money is simply an issue of trust, store of value, fairness. Undermine those conditions enough and the “that was a crazy situation created by an insane government” scenario comes about quite quickly.
This is all something that can be resolved and relatively benign while households are crunched. But, there sre legitimate dangers that MMT in itself doesn’t overcome.
Guys,
If you’re going to reject something at least read the full body of work and understand it first. I have only written a few things on hyperinflation. The paper I tend to send to people clearly concludes:
“Could the US government become corrupt and incompetent to the point of resulting in a rejection of the sovereign’s currency? Sure, but I don’t think that’s a very realistic outcome given the current environment.”
I have NEVER said hyperinflation can’t happen. No MMTer would ever say anything so foolish….
Cullen,
I took away something altogether different from Zerohedge. I thought the author was trying to equate Germany’s nightmare of hyperinflation with our nightmare of 30% unemployment during the depression. He was equating Germany’s reluctance to bail out the PIIGS with Eurobonds with our government’s efforts to do anything and everything possible to avoid double digit unemployment. Both nations were scarred between the wars and the different experiences has led to different policies for the last 70 years.
I wish I could gather the same conclusion Mark, but here is his very explicit 2010 conclusion:
“But drink fast, prices change radically after happy hour. And, tell Fed Chairman Bernanke that it was the “German Experience” that caused many folks to raise an eyebrow when he alluded to the power of the “printing press” a few years ago.”
Cullen – what is it about the human condition that makes people just eat up these kinds of stories?
People love rumors, the scarier the better. And even worse, the more they pass them around, the more they believe them.
And when I try to discuss MMT theory with them, they bring up stories like this one.
Somewhere in there is something called – opportunity.
It’s a good question OD. It’s probably a few things.
The events that make the most impact are the ones we always worry about the most. Part of it is a survival instinct. An attempt to learn from our mistakes. Even worse, you have people who use these events to push their own agendas. The hyperinflation story is one told almost universally by people who hate the govt and want to convince the rest of us that the govt is out to get us. And the uninformed public eats up this easy to understand story and propagates it. So, you get a scary event, an easy to understand explanation and someone eloquent enough to tell the story and you have an environment ripe for a huge audience of willing listeners…..Sadly, most people don’t even take the time to inspect the story for themselves. I mean, hyperinflation has been around for hundreds of years. So why am I the first person to ever notice that hyperinflation always occurs around these strange exogenous events? I’m not an economist. So why hasn’t a professional economist ever noticed this simple fact, that hyperinflation is always more than a monetary phenomenon? It’s bizarre. And in my opinion, it’s because not enough people have taken the time to challenge the conventional wisdom on the causes of hyperinflation.
Old Dog.
Firstly, it is not a ‘story’, it is a fact, something that happened in history.
Secondly, just spend some time googling other countries/empires that have debased their currency until confidence totally vanished (i.e. hyperinflation).
Thirdly, the marketplace for US Treasury bonds is in such a parlous state that the Fed has been buying $600b during the last 12 months. Is that a sign of a healthy market?
No, that’s what many would call an exogenous event, when the state starts monetizing its own debt.
And before someone quotes me ‘the Fed is just swapping reserves for treasuries’ we all know those reserves are created out of thin air at the push of button.
At least the Bank of England is honest about its monetizing and money creation:
http://www.bankofengland.co.uk/monetarypolicy/pdf/qe-pamphlet.pdf
(page 7 is where they come clean).
Maybe the UK will hyperinflate before the US. Hence I buy gold.
Ok, I’ll bite. I will say upfront, I am not familiar with England’s economy. But that won’t stop me from talking about it.
Sooooo. Let me summarize: The BoE is going to buy assets from the private sector in exchange for cash. This includes non-banks. In the hopes the private sector will either spend that money or buy other assets, thereby stimulating the economy or increasing the price of other assets ((because more speculation is what the world needs now).
These assets the BoE is purchasing…are the markets currently illiquid? Is the BoE going to be overpaying for them? Because if not and a company needs cash, why do they need to wait for the BoE to purchase their securities? Couldn’t they have just sold the securities on their own when the need arose? So you have an interest earning security that has been sold, now sitting in cash earning no interest. That’s an asset swap. And not unlike Dorothy, these companies always had the ability to click their heels 3 times and make this happen.
And yes, this will create reserves. But so what? Banks don’t lend their reserves, they just accumulate until a bank finds the demand of creditworthy borrowers to lend to. And then they lend. The pamphlet eludes to this. Which is why they are including non-banks. If I am understanding this correctly.
But to me, this is more asset speculation as opposed to generating any real consumer demand in the economy. What am I missing?
Hi Ms M.
No, I don’t think you’re missing anything. It is a futile and pointless effort by a central bank to try to encourage borrowing by lowering interest rates.
They flower it up as ‘pumping money into the economy’, but if demand for credit isn’t there, there’s nothing they can do about it. It’s the same pretty much the world over.
This is why I feel globally the game is over, and we either head straight into a deflationary depression, or we get there via hyperinflation first.
Why couldn’t we directly employ/cut taxes? I actually think that’s what the US will wind up doing– let this mess drag on long enough and someone will find us a fat juicy new war to get all these Gen Y whiners into gainful employment. From slackers to soldiers!
(complete with renewed goodies for the defense contractors!)
(yes, I’m drinking again. hiccup.) Anyway, it makes me smile and sob; my country! Don’t you see that that money would have been better-spent on solar-powered hydroponic pot farms?
Also, I know Trixie will opine that my punctuation/parenthesis are all on the wrong side, but I can’t help myself. It just looks wrong the other way. That poor period, out in the cold like some impoverished orphan.
(Many, many apologies) .
Cullen I sincerely appreciate your work on this site and have become very interested in MMT lately because of your published articles.
There is one thing that I can’t seem to explain or wrap my head around when thinking about why deficits or govt spending do not matter :
There exists $100 worth of goods/services in the private sector
The government buys $100 worth of goods/services from the private sector & issues bonds to a private investor to cover the charge
The FED purchases the $100 worth of bonds from the private investor
The private investor now has $100 to purchase additional goods from the private sector
1. How is this not inflationary? What am I missing about $100 being added into the economy in this type of scenario?
2. In this scenario, isn’t the govt misleading the private sector into believing there is future demand for their goods/services?
3. Since the FED makes it easy for govt to spend in this type of scenario, how will the govt be able to show restraint in doing so?
4. If the govt were to continue purchasing goods/services without competing with private demand, won’t the private sector gradually raise prices knowing there will always be a purchaser(the govt) of their goods/services? Doesn’t this harm future private demand as prices continually travel upwards?
Thanks very much for your response in advance.
Best Regards from Japan – Frank
When the Fed buys bonds from the public they are literally swapping bonds in exchange for reserves. So, the pvt sector doesn’t have MORE money. They just have an altered mix. Is a checking account different from a savings account? The Fed is essentially just changing savings accounts into checking accounts when they buy bonds.
Plus, it’s important to note that the Fed bond buying doesn’t make it easier for the govt to spend. You might review the primer section on bonds for more on this.
Thanks for the reply Cullen, I really do appreciate this website. I tried searching for the primer on bonds, and found the tools & research link instead. I’m definitely going to read through your older material this weekend.
A quick question : If government should pick up where the private sector drops off, how is the economy ever allowed to correct consumption-induced bubbles? I frequently see Japan’s running deflation cited as a warning to western economies if govt’s don’t respond forcefully enough. But they rarely mention Japan still being the most expensive country in the world to live in. By far. I can walk into my neighborhood grocer and still see a a melon for $30, a single stalk of celery costing $4, a 200g steak for $50. A 6 pack of Asahi is $23, if I want something foreign I can expect to pay $35-40. I bought 3 tomatos this morning costing $7, something I would have never seen in California. If I decide to take my wife to the movies tomorrow, we’ll pay close to $24 each for the ticket. Popcorn & a drink, and we’re talking close to $100 for 2 people. Gas is $8/gallon, my ETC Card says I paid roughly $550 this month in highway tolls to drive 3,500km (2 big trips). I could go on but my point is – this is 2011, I can’t for the life of me imagine what the cost of these things would be if Japan did not have the deflation it has had. We have terrible demographics in this country because the cost of raising children in Japan is unbearable for most families. Most single adults live with their parents since rent prices are astronomical. Buying an apartment is out of the question for most families. Prices have yet to reach levels capable of supporting common wages here in Japan. They should continue to fall in my opinion, I’m sure most Japanese would agree.
If prices spiral out of control, why is deflation a bad idea? Why should the government assist the private sector in propping up prices that were bid too high in the first place?
“I tried searching for the primer on bonds, and found the tools & research link instead. I’m definitely going to read through your older material this weekend.”
http://pragcap.com/do-bond-markets-fund-our-spending
I have started a bookmark folder where I save direct links to important “primer” articles or posts from this site as I find the search function sometimes a little lacking.
I am going to build an archive of important articles by subject. Just need to find the time.
What, you can’t give up more sleep or family time for us!?!?! (kidding)
Try this Frank: http://pragcap.com/resources/understanding-modern-monetary-system
I’ll be doing a video on bonds in the coming weeks when I can find some time. Keep an eye out for it.
Frank,
There is good inflation and bad inflation as there is good deflation and bad deflation.
Good inflation (associated with most fiat monetary regimes) is low and comes with normal economic growth. Bad inflation is typically caused my excess demand (over spending overall) and no attempt to control or mitigate it (and hyper-inflation is actually in a class all of its own).
Good deflation would be something like falling prices in technologies where manufacturing improvements and efficiencies of scale lower overall costs and prices.
Bad deflation is when prices are falling because of low demand which typically also means falling wages. Remember debts are always nominally denominated so if wages are falling the real costs of all debts are increasing which also means demand for all other goods and services is falling as disposable income is consumed by rising real debt servicing costs (leading to bankruptcies and defaults). Your get a downward spiral which is dangerous.
Overall its not that deflation is a bad thing, its why is there deflation and all the repercussions that go with it.
Cullen – please correct me if I am wrong about this but I believe a VERY important distinction between the Weimar Republic and another scary story – Zimbabwe is that neither nation ever had an active credit market where they regularly sold national debt securities. So one could not quickly get a read from the marketplace (through interest rates) of the quality of their debt (because there was none). Normally when the interest rates on a nations debt begin to soar a self correcting chain of events begins.
Clearly the market place is stating that there are very few concerns today about the quality of US Treasury securities.
Could it be that Bernanke and The Fed are really not as crazy as everyone thinks? Asset injection into the economy drove up asset prices (see any equity index over the course of QE1 AND QE2) and kept debt prices artificially low (see treasury yields over the same period). While real cash flow was unessentially changed, the ability to deleverage was maximized in spite of apparent inflationary pressures (see PPI). What QE1 and QE2 have done is to basically allow the economy to deflate without experiencing the problems of deflation.
Hi Cullen,
knowing your view on hyperinflation in the US I would be interested in your thoughts on the possibility of hyperinflation in Europe. Can you imagine a scenario where the ECB finances government deficits in a large scale via its open market purchases of PIGS sovereign bonds which in turn might trigger a complete breakdown of trust particularly of Germans which results in a Weimar like blow-off spending boom pushing not only asset prices but also everyday consumer goods?
P.S: thanks for this great site
I have no sympathy for Chartalism.
Their theory shall be tried and shall fail with devastating consequences.
Who does not like a free lunch?
But the truth is there is no such thing as free lunch.
Anyway, here is is my take in hyperinflation / inflation debate (sorry for long post, quiet Friday in the office today) :
On hyperinflation…
The factors driving this phenomena are not purely based on the money supply. Sure if every bank account was credited a few hundred grand without any provision to pay it back, then yes that would result in an immediate case of hyperinflation. But you have to ask yourself why this occurred. Such an event will only occur once the system breaks down. So hyperinflation must involve a situation where the masses lose complete confidence in the financial system and government. The US having the burden of issuing the reserve currency of the world must uphold their promise to maintain the dollars value whether they like it or not. There are too many international forces preventing a total collapse of the dollar.
But what we are experiencing today is something unique. We have low interest rates yet no one can or is borrowing and therefore the money supply (inflation) can not be expanded through the credit windows. This will last as long as there is debt default or as soon as the banks start lowering their lending standards. Two situations unlikely to occur anytime soon.
On Inflation…
Ordinary inflation is an artifact of commercial activity. Commerce expansion funds itself by lending money into existence. As the market for goods increases the amount of funds also increases alongside so that the individual purchasing power of each unit of funds is proportionately diminished. This diminishment in currency value is also inversely proportionate to the increase in the overall value of the commerce being funded.
In other words, as the value of commerce increases, the purchasing power of currency that is used in that commerce decreases proportionately. You have valuable commerce or valuable money, not both at the same time.
Along with market expansion, the type and utility of goods is also increased so that the purchasing power lost in the expansion of the money supply is offset by the increasing utility of the goods. The dollar has less unit purchasing power than did its 1913 gold counterpart, but the 2010 dollar buys goods and services unthinkable of in the earlier period.
Ordinary inflation is the cow pie of progress. As the value of commerce increases in value, the value of money declines and becomes negative. This ‘negative’ currency value relative to the expansion of commerce is the measure of inflation. As commerce expands by a certain amount, money value declines by the same amount. Inflation is simply big word for growth.
Currently, money authorities are trying to ‘reverse engineer’ commercial activity by cheapening currency. They can only do this relative to other currencies since promoting commerce is a long term activity subject to inputs of all kinds. Commerce is really a dead duck because of very high input costs.
When commerce diminishes the currency that would be the proxy for it becomes a proxy for something else such as an input. Ordinarily, commerce is far more valuable than any of commerce’s inputs. Not so, now. Inputs have become so expensive that commerce is unprofitable so the currency becomes a proxy for the input, in this case crude oil.
Early in the Great Depression, currencies became proxies for gold. Commerce was abandoned in all the advanced countries except in Japan which abandoned the gold standard in the 1920′s. Currency arbitrage substituted for normal business activities.
This is also the case now. Currency arbitrage in all its forms has become the substitute for otherwise unprofitable commerce. The dollar/crude peg makes the dollar a defacto hard currency. Note the dollar and ‘liquidity’ shortages world- wide. People hoard (save) hard currencies making them scarce. As they become more valuable those who sell goods for dollars will accept nothing else. The process amplifies itself. The outcome is a vanishing dollar.
What about central bank printing? Surely that would increase the dollars in circulation?
Adding dollars to circulation without first restructuring the gigantic debt overhang would simply put more dollars into the bank vaults and safe deposit boxes of those with ‘first access’ to dollars. An outcome of this would be the acceleration of deleveraging to the point where it becomes chaotic. Let me be clear, the Fed is constrained as obvious money printing would trigger ‘runs’ on any securities that could be changed for dollars. Instead of adding liquidity, the effort would starve liquidity as there are far too many unstable debts for the Fed to ‘service’ regardless of how fast it prints. Printing would be the invitation to panic and the Fed would be overrun.
A ‘subtle’ printing scheme would have similar results. Any dollars escaping the liquidity traps would pour into crude oil and other ‘investments’ to successfully unwind teetering ponzi schemes in these markets. Crude prices would rise rapidly to crash the real economy and destroy commercial demand for crude.
I see deflation near to midterm.
Who does not like a free lunch?
But the truth is there is no such thing as free lunch. casanova
The lunch has already been paid for with our own stolen purchasing power. The problem now is to prevent that lunch from being destroyed.
And there is a free lunch; it’s called comparative advantage. What might be difficult for me might be easy for you. And vice versa. So we trade. And we use money to do so. The problem is that the medium of exchange, money, is lent into existence and goes out of existence as it is repaid. But an economy with a shrinking money supply is as healthy as a person bleeding to death.
So away with pious concerns about “free lunches.”
Sure if every bank account was credited a few hundred grand without any provision to pay it back, then yes that would result in an immediate case of hyperinflation. casanova
That depends. First, a lot of that money would disappear into debt repayment. Second, any resulting price inflation would be a one-time occurrence if the banks were forbidden to create any more “horizontal money” – so-called “credit”.
Sure if every bank account was credited a few hundred grand without any provision to pay it back, then yes that would result in an immediate case of hyperinflation. casanova
Actually, the entire population could be bailed out of all credit debt with NO change in the size of the money supply (base money + credit) IF all further credit creation was banned and IF monthly and equal bailout checks were sent to all adults, including savers, equal in total to the amount of credit paid off the previous month.
Hyper-inflation can occur everywhere. Even in the US. MMT or no MMT. Reserve currency or not. All it takes is government/central bank/country to pursue a reckless economic policy like:
1. starting/waging a war and losing that war (e.g. Germany 1914-1918, US 2001-????, Serbia 1991-1996)).
2. other disastrous economic policies. Like in Zimbabwe.
3. interest rates going through the roof. (Greece anyone ???)
or any other suicidal economic policy.
The common denominator in all these cases in the destruction of (the) credit market(s).
When the credit market has been destroyed or when there’s no credit market or a very small one then a government is forced to literally print banknotes to let the financial system function again. But only when a central bank decides to let the printing presses run wild and flood a country with banknotes (like in Zimbabwe or Weimar Germany) then and only then a country will experience Hyper-inflation.
In the current situation the US simply won’t literally print money/banknotes because it would destroy the credit market as well. Then people would simply pay down their debts and lead to a decreasing amount of outstanding credit or even the disappearing of debt.
Seriously? This again? Since we’re speaking in hypotheticals, the U.S. government, if it wished, could simply end the bond auction system. It could change the law and simply fund all its spending by … wait for it, simply spending. If the U.S. decided to to this, how would it ever be at the whim of the credit markets?
Firstly, I note that Bond Vigilante wasn’t actually talking of hypotheticals, he was talking about historical real-world facts.
You wrote:
‘the U.S. government, if it wished, could simply end the bond auction system. It could change the law and simply fund all its spending by … wait for it, simply spending’.
Yes, that’s the route Zimbabwe and Weimar Germany took (worked out well for them didn’t it?), and the U.S. isn’t far away from that point right now.
Tick tock, time is all it will take to see the result.
Thank you again Cullen for your work in educating people about MMT. It’s all convincing to me–but on another level it’s discouraging to me that Ivy League trained economists and Nobel Laureates can all be so off base. If your work was not so coherent and measured, I’d be suspicious of it all. I’m an academic myself (not economics!) and respect the academy and university training–so the end result is that I just despair that our state of learning is so bad. Krugman said the same thing about the state of economics recently. I happen to be pretty good friends with Kotlikoff and know he’s a smart guy and all, so it makes me wonder how a guy who write, The Coming Generational Storm and advances this business about intergenerational accounting can get so far astray from the facts. The only thing I can figure is that it’s a kind of orthodoxy that is something similar to a religious commitment.
On a completely different note–and because I’m an English Professor I really try to avoid being the “grammar police” but I wish that writers would use the American convention of always putting the comma inside the quote mark–always. Only the Canadian and Brits put it outside (the way you do) and I know you are not a Brit!
Dan
“On a completely different note–and because I’m an English Professor I really try to avoid being the “grammar police” but I wish that writers would use the American convention of always putting the comma inside the quote mark–always. Only the Canadian and Brits put it outside (the way you do) and I know you are not a Brit!”
Oh no. Sorry to have to step in on this one, but I do have my limits. I won’t allow him. Because if he does “this,” he must do “that.” UGH. Just make it stop. I know the prominent style guides insist on putting commas inside quotes. #%&@ ‘em. It’s a stupid rule based on typographical reasons that no longer apply in the electronic world. This resistance lives on outside of Britain. This IS one thing they actually got right.
Besides, he is already a double-spacer after periods. I kicked that habit not that long ago. I look beyond this though just as long as he keeps the ‘order of operation’ correct with his commas. I will turn inside out otherwise. And no one wants to see that.
LOL!!! I can’t spell (god bless spell check) and I never know when I’m using the right punctuation… Single spacing???!!! Ugh I don’t know if I’ll ever conform!
Anyhow, I always tell people who complain “I’m an economist not an English major.”
Anyhow, I always tell people who complain “I’m an economist not an English major.”
See? You just did it. YOU just did IT.
(Bawls). Even though it should be: (Bawls.)
Order of Operations people. ORDER OF OPERATIONS.
Vive la Revolution!
“The only thing I can figure is that it’s a kind of orthodoxy that is something similar to a religious commitment.”
A sad fact. After the crisis in 2008-09 I actual made it my mission to figure out what was missing from my understanding of economics. I read Fischer and Minsky and Keen and stumbled on Bill Mitchel. And then I found Cullen and Scott and Randall. On top of it all I work for a bank so I’ve been able to operationally confirm a lot of what I’ve learned (which really pisses me off about most economist – they don’t have a clue how a bank works any yet they’re the “monetary experts”?!?!?).
I’ve learned a lot in 2 years. Far more than most economists have learned in their entire post doctoral years (very sadly).
My sense is that the Academe has become overly subject to the all-too-common resistance to any threat to the status quo, which for those with a comfortable position in it, operates ‘unconsciously’ across levels. Someone who has built a reputation on a theoretical position resists challenges to it; established professors resist new ideas coming from brash youngsters; questioning that poses challenges to the political/social/economic order is forestalled.
Psychology at the U. of Chicago, as at other top universities, has been dominated by an insistence on quantitative methods. In practice, this has resulted in a discipline with no social, political, ethical, or spiritual implications. Graduate students were prevented from pursuing interesting questions, and relegated to serving in the labor-intensive role of running experiments and doing data analysis for the professors’ research (professors did not even need command of the complex statistical techniques – that was for graduate students and computers. In some disciplines, there was also often a ‘Chicago School of _____’; juniors were expected to ‘toe the party line’.)
The parallels I have come to understand with economics are chilling. Not only was anyone who did not deal in complex math sneered out of the lecture halls, but the mathematical models were based on unacknowledged/unchallenged assumptions, such as the ‘Efficient Markets Hypothesis’. Theoretical approaches like ‘Monetarism’ based on such assumptions arguably acted to support the economic status quo, and the interests of those who benefited most from it.
PS: Adam always tells people, “I’m an economist not an English major.”; that punctuation makes sense to me – the period goes with the declarative statement inside the quotes.
Yeah, ok, put the periods and commas anywhere you want. Actually, I do agree that it’s a convention that is changing–soon we’ll all be putting them outside the quote marks I guess.
But, yes Adam, it’s puzzling isn’t it? But I don’t think this sort of thing is limited to the discipline of economics either. Academia rewards originality over problem solving. The result is this vice of having to say something new all the time instead of solve real problems. And so much of the discourse in politics has a cultish ring to it that I think that bleeds over into the academic culture as well. What puzzles me even more, however, is the large number of presidential candidates who think merely by virtue of being a candidate that they can speak authoritatively about economics or anything else they happen to know nothing about.
And one more thought . . . so much of the language and structure of our economic lives is bound to certain outmoded metaphors: the “household” or even the very idea that we pay FICA tax “into Social Security.” These kinds of structures perpetuate modes of thought.
Yves Smith’s explanation of hyperinflation here makes a lot of sense to me:
http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html
According to Smith, in Zimbabwe and Wiemar Germany there were two factors that combined to form hyperinflation: foreign currency obligations and a loss of productive capacity. It seems to me that we could conceivably lose a lot of “productive capacity” if we get into some kind of trade war with China. It is conceivable that other countries might also begin to demand obligations be stated in a foreign currency, although that seems unlikely for the foreseeable future. Based on Smith’s explanation, I would rate the possibility of hyperinflation very low. That still does not mean we won’t see higher inflation, just not hyperinflation.
Depends on when you look at it. The world is not all macro-economics, and Art should know better by now.
“It is very similar to late Weimar Germany,” Chomsky told me when I called him at his office in Cambridge, Mass. “The parallels are striking. There was also tremendous disillusionment with the parliamentary system. The most striking fact about Weimar was not that the Nazis managed to destroy the Social Democrats and the Communists but that the traditional parties, the Conservative and Liberal parties, were hated and disappeared. It left a vacuum which the Nazis very cleverly and intelligently managed to take over.”
Apr 19, 2010
http://www.truthdig.com/report/item/noam_chomsky_has_never_seen_anything_like_this_20100419/
I do love MMT, no need to raise interest rates to stop inflation, raise taxes. No need to solely subsidize industries to promote public policy, give payroll-tax credits to the workers. Congress can write monetary policy by taxing and spending.
I see some possibilities that could push the US into hyperinflation. All involve exogenous or extreme political events.
– A currency war with China where the Fed buys unlimited quantities of RMB at rates higher than the official rate, and China retaliating in kind.
– Consolidation of petroleum under a nuclear armed superpower that demands escalating amounts of real wealth in payment. For instance, a Caliphate or a new Russian Empire could require payment in physical gold for purchase of oil.
– The US loses its technological edge in military matters or a foreign superpower develops a breakthrough technology that results in US defeat. The US is forced to pay annually escalating tribute to the victorious superpower in gold or commodities.
– A Congress and President are elected who opt to spend wildly and insanely to keep the voters happy during a time of an incredible rise in gasoline prices (due to real global shortages). Once wages, benefits, and interest rates are generally indexed to inflation, this kind of money printing feeds on itself and spirals out of control.
I remember the 1970s, and how indexation started to make inflation rise uncontrollably. We are fortunate enough that the political system allowed Paul Volker to turn the screws to kill the inflation before it really took off.
Just saw a Steve Keen video on Zero Hedge. Is Tyler reconsidering his monetary viewpoints? Maybe its a small step, but based on his comments on gold, he has a while to go.
http://www.zerohedge.com/news/steve-keen-keynes-and-failings-neoclassical-school
Also, the video is the first I’ve heard of “Debt the First 5000 Years” by David Graeber. Sounds fascinating, I’ll try to pick it up this week. Anyone read it yet?
Here is the UK’s explanation of QE that Gary UK cited:
“The MPC’s decision to inject money directly into the
economy does not involve printing more banknotes.
Instead, the Bank buys assets from private sector
institutions – that could be insurance companies, pension
funds, banks or non-financial firms – and credits the seller’s
bank account. So the seller has more money in their bank
account, while their bank holds a corresponding claim
against the Bank of England (known as reserves). The end
result is more money out in the wider economy.”
I think of US QE as the Fed “unsterilizing” federal deficit spending. Federal law requires federal deficits to be accounted for by Treasury “borrowings” in the form of Treasury bills, bonds or notes; this is a gold standard concept. This converts pure vertical money (federal deficit spending) into quasi-horizontal money (a debt corresponding to the deficit spend is created, even though in a pure fiat system divorced from the gold standard, it is unnecessary). QE thus “unsterilizes” the federal deficit spend and turns it back into vertical money.
QE at its core is an asset swap and a duration-shortener, as TPC says; but under the vertical vs. horizontal “sterilization” analysis, it is something more than that. However, it is also something far less than “printing banknotes” in a pure vertical process and distributing them to favored constituencies with a 100% effective transmission mechanism; i.e., a wheelbarrow. QE should make us a prudentially nervous (look at the herding into commodities it caused), but the fear and hype surrounding it is misplaced.