IS HYPERINFLATION REALLY POSSIBLE?
Time is compressing. Our collective attention span is contracting. Memory and imagination are being squeezed. What are the chances then that governments can act in our long term interest when their constituencies are driven by the here-and-now? This argument lies at the heart of those that foresee a hypernflationary outburst on the horizon.
Some clear thoughts:
1) The global economy is cooling – the economies of China, the US and Europe are all turning down.
2) Deflation has the upper hand
In this environment, it’s difficult to imagine inflation, let alone hyperinflation. Most major economies are in fact battling with debt deflation. Japan’s experience of the 90’s suggests that you might moderate the episode but that inflation is difficult to manufacture when you are caught in a liquidity trap.
But still, as Marc Faber has repeatedly repeated, the US has a money printer in the Fed. Ben Bernanke couldn’t be any clearer that, as an expert in matters Depression, a central plank of his strategy is to keep printing. Keep printing until you get inflation – this is written on the plaque above his door. That the Japanese and the UK have embraced the strategy without the same clarity of expression is simply a debate in semantics.
So the argument goes that governments will attempt to print their way out of their debt burdens. Create money to pay your debts, debase your currency, it’s not a default sure, just that your foreign creditors take a little currency haircut. The money printer with the quickest press wins the devaluation game. And the cost – ultimately – is inflation.
Okay that’s plausible, even if appearing remote in the current environment, but for hyperinflation we need something more. We need a supply shock. Money printing on its own won’t deliver this. Conceptually there could be a squeeze on real assets as money printing undermines paper money. But is that the same thing as a supply shock?
When hyperinflation emerged from the crucible in Germany, there was money printing and a currency crisis, but there was also the occupation of factories in the Rhur. It’s been argued that it was the resultant shortage in raw materials versus a ballooning money supply that fueled hyperinflation. This is what a supply shock looks like. It’s like the 70’s oil price shock with guns.
Conclusion
One thing is clear – risk will remain more expensive in this post-bailout economy. Whereas Japan’s decade long ZIRP was undertaken in an otherwise expanding credit universe (and helped to feed that machine), money printing has now gone global while credit has peaked. Combined with rising political risks, as politicians are stressed into action by their populations and balance sheets, investors must be compensated more for holding paper. The relative attractiveness of gold and other hard assets is easy to grasp.
But for hyperinflation to arise, we need our governments to lead us to the edge of the cliff. It’s possible. It’s happened before – the unintentional consequence of baby steps in the wrong direction. It’s presumably why Faber mutters about war and hyperinflation in the same breath when considering the ultimate outcome of today’s actions. Let’s pray that they are not – and hold that thought for longer than a nano-second.
There is already a global supply constraint on oil. If China and India continue to grow, that constraint will become more severe. If outright deflation resumes in the West, we could switch from deflation to severe inflation very quickly once Bernanke’s money printing fills the black holes in the banking system. Bernanke has actually been very cautious up to now, as his money printing hasn’t come anywhere near to filling the holes, and the environment is still deflationary. His policies to date have been more of a controlled deflation than anything else. However, he might soon lose the option of continuing that policy. He might have to monetize everything in sight and let his balance sheet expand by a factor of 100, instead of the mere doubling to date.
Agreed…..oil is the limiting factor, rather Peak Oil provides the supply shock that causes a switch from deflation to hyperinflation.
Thanks for this post…it helped to understand some things I was working on in my rudimentary way
This article is below even elementary high school economics. No more PC for me – just too dumb.
Bonne Chance.
“No more PC for me – just too dumb.” unsalted
door, ass, etc.
Besides TPC did not write this article though I admit it is rather lame.
What is it in particular that you dislike about the site? Is it the free content? Or is it the fact that financial theory and regular discussions of monetary systems is not complex enough for you?
If you’d like, I can make your absence permanent in case you ever get tempted to come back? Otherwise, thanks for reading.
Thinking operationally, I say hyperinflation would be extremely unlikely if banks were forbidden to issue new credit. Where would speculative credit money come from to drive it? Now MV = PY where
M = the total amount of money and credit in circulation.
V = average money exchanges per year = the velocity of money
P = the price level
Y = aggregate output.
Then P = MV/Y. Thus to have inflation then
1) M must increase and/or
2) V must increase and/or
3) Y must decrease.
3) a decrease in output is ABNORMAL, so let’s forget that. As for 2), just how fast can money move through the economy? I say there is a limit. So that leaves 1) as the remaining possible culprit.
Hence, hyperinflation would be near impossible without new credit extension, IMO. Actually having reserve requirements, preferably 100%, could prevent or halt hyperinflation, I’d bet.
F. Beard – great post. John Mauldin penned an expanded version of the concepts covered in your post earlier this year, it’s probably worth revisiting:
http://www.ritholtz.com/blog/2010/03/the-implications-of-velocity/
Thank you very much! It looks great. Not only have I bookmarked John Mauldin’s article but I printed it too. Now for a comfortable reading chair.
Problem is that bank credit does not expand the money supply on a net basis. We see that today. There are record levels of outstanding private bank debts and we are facing deflation.
“Problem is that bank credit does not expand the money supply on a net basis.” Anonymous
Credit is a form of temporary money; it is created as it is lent out and destroyed as it is repaid. Thus all that is necessary for deflation is for the repayment of existing loans to be at a greater rate than the issuance of new credit. We are literally hooked on credit as a society else we would have a very small money supply.
Ah, I see. Just a question then, why do we have a small money supply when discounting credit?
Not sure I understand what you are asking. Please speak in laymen’s terms since I am an ex-engineer not a finance guy.
You said that there is a large gap between paying down debts versus taking on new credit. And this gap is responsible for the decrease in our money supply. Why does the money supply as created by credit dwarf the money supply as created by other means? Why can’t that ‘other supply’, so to speak, fill that gap?
“You said that there is a large gap between paying down debts versus taking on new credit.” anon
I did not say there was a large gap; I said if there was a gap then deflation would result.
“And this gap is responsible for the decrease in our money supply.” anon
Yes, the consensus I read is that the banks won’t lend and the population won’t borrow. Since debt repayment continues apace then logically the money in circulation must be shrinking.
“Why does the money supply as created by credit dwarf the money supply as created by other means?” anon
In a word, leverage, which has historically been around 10-1 but has been much higher recently.
“Why can’t that ‘other supply’, so to speak, fill that gap?” anon
It could. It is what I advocate, a free distribution of new legal tender fiat to every United States citizen combined with a ban on fractional reserve lending till we have genuine reform.
“I did not say there was a large gap; I said if there was a gap then deflation would result.”
-Well, a large gap must be implied for the money supply to shrink even with $1 trillion in government stimulus.
“It could. It is what I advocate, a free distribution of new legal tender fiat to every United States citizen combined with a ban on fractional reserve lending till we have genuine reform.”
-What would a new legal tender fiat have to do with our current economic problems? A free distribution would have the same effect as printing more and more dollars. Unless the current supply of US Dollars is voided as legal tender. Then in effect the money supply remains the same size as you replace dollars with the new fiat.
Why do you want to ban fractional reserve? Leverage is needed in our economy. But like you said, the level of leverage in the economy “has been much higher recently.” And that’s the problem. Banks do not look to their reserves when deciding whether or not to lend to a customer. If the customer is financially sound, then the bank lends, if not, they don’t. Reserves are settled at the end of the day. Credit grew to excess as noncredit-worthy customers received credit.
“We need a supply shock. Money printing on its own won’t deliver this.”
I absolutely unequivocally disagree with your second sentence.
Print enough money and you get your supply shock via dollars, electronic or printed.
One tenant of Mr. Faber’s thesis is the “race to the bottom” where all currencies are devalued in order to get a competitive advantage. This is similar to the mercantilism seen at the beginning of the great depression.
Today’s statement from China about it’s willingness to let the RMB rise undermines his thesis. Some will be skeptical because China would need to be willing to take a hair cut on the value of their international reserves – except for their gold reserves. There have been some reports for some time that China has been a big secret buyer of gold but they would still devalue their currency holdings. Why would they do this?
1) This would be a big step toward being able to issue debt in their own currency and creating a rival international reserve currency for the dollar.
2) They have deep pockets and can implement multiple economic stimulus packages if their economy slows down.
3) This would fix multiple economic imbalances within their economy including property bubble and persistent low personal consumption.
Seems to me that Mr. Faber, who was all along making political predictions and not economic predictions, will be wrong on this one.
So the argument goes that governments will attempt to print their way out of their debt burdens.
And that is a bad argument, as this is not why governments are engaging in QE.
The goal of QE is to increase output by increasing demand. The increase in output can then lead to the QE policy being canceled and reversed.
What the inflationistas forget is that central banks not only print money, they also destroy money. When the Fed and other central banks get around to raising interest rates, they will be effectively destroying money in the process. M1 does not simply move in one direction — the goldbug belief that it does is a fundamental mistake based upon a complete falsehood.
What the inflationistas forget is that central banks not only print money, they also destroy money.
Not everyone who expects serious inflation in the future (not necessarily hyperinflation) is as unaware of the ability of the Fed to head it off as you seem to think.
When the Fed and other central banks get around to raising interest rates, they will be effectively destroying money in the process.
That’s the trick, isn’t it? Many of us who believe inflation will become a serious problem in the future (not now but in the future, perhaps two or more years away) disbelieve that the Fed will withdraw liquidity soon enough to prevent inflation from grabbing hold. There are two obvious sources of this skepticism. First, the Fed shows every sign of being very concerned about shutting down the recovery by acting too early — they will very probably not take significant steps until the unemployment rate drops somewhat. On top of that, the Fed has good reason to fear for its independence if it takes very unpopular (with Congress and the Administration) anti-inflation steps at the expense of economic recovery. Reelection of our oh-so-concerned Congressional representatives goes much more smoothly when they can talk about an expansion of jobs and economic output instead of having to explain that heading off inflation at the expense of jobs is really in their constituents best interests (especially when those voters haven’t felt the inflation much yet). But if the Fed waits until the unemployment rate drops to a politically more comfortable level, there will already have been a significant pickup in economic activity accompanied by a significant expansion of credit. By then, the seeds of inflation will have already been sown.
Second, what is the track record of the Fed in more recent decades? Have they done the “right thing” in withdrawing liquidity? Volcker was able to get things under control (and didn’t get reappointed because of it), but he seems to be an exception. Greenspan certainly didn’t. Bernanke is an acknowledged money printer, and his track record gives no indication he will be anxious to reduce the money supply before the unemployment rate drops somewhat.
Thus, it’s hard to see why we should believe that the Fed will somehow get it right this time, given the extreme trickiness of the current environment and the political difficulty in doing the right thing at the right time. It’s certainly possible that the Fed will get it right, but I don’t believe it will. Perhaps you and many others trust them more than I do. I guess that’s what makes a market…
Many of us who believe inflation will become a serious problem in the future (not now but in the future, perhaps two or more years away) disbelieve that the Fed will withdraw liquidity soon enough to prevent inflation from grabbing hold.
And given the Fed’s track record, there are no tangible examples of their previous behavior that should lead us to believe that. Volcker defeated inflation, Greenspan’s policies didn’t cause inflation, and Bernanke has spent most of his tenure fighting deflation.
If you are going to believe something, you ought to have a good reason for believing it. There is no reason to expect a monetarist such as Bernanke to tolerate anything close to hyperinflation when that would fly in the face of his management philosophy.
… Greenspan’s policies didn’t cause inflation …
I guess that depends on what qualifies as “inflation.” Very good arguments have been made that Greenspan’s easy money policies played a critical role in the housing bubble. You may disagree that the Fed had much to do with it, but that wouldn’t invalidate those strong arguments.
If you are going to believe something, you ought to have a good reason for believing it.
I think I do have good reasons for believing inflation will become a significant problem, and I outlined some of those reasons. I’ll add to those reasons the observation that Bernanke apparently didn’t see the housing bubble even though many other smart people did (and he still hasn’t acknowledged that the Fed may have played an important role in its occurrence). If he missed something that important, why should we trust he will get the timing right: withdrawing liquidity soon enough to prevent serious inflation, but late enough to avoid cutting off the weak recovery with its accompanying loss of many jobs. Unfortunately you didn’t make an attempt to refute my rationale, other than to say that
There is no reason to expect a monetarist such as Bernanke to tolerate anything close to hyperinflation when that would fly in the face of his management philosophy.
First of all, let’s be clear that we’re talking about (significant) inflation, not hyperinflation, and that this inflation will not be immediate even if the Fed embarks on a new round of quantitative easing. I think we both agree that hyperinflation is a low probability event, and that the Fed would use whatever tools it has available to make sure it doesn’t occur. (Your comment that stimulated my comment mentioned inflation but not hyperinflation; I wasn’t talking about hyperinflation either.)
I like new things to think about that help me assess/reassess my views, but assurances that “There is no reason to expect a monetarist such as Bernanke to tolerate anything close to hyperinflation when that would fly in the face of his management philosophy” doesn’t really speak to my arguments. Bernanke is no idiot, and I believe he really wants to and intends to do the right thing. But political realities mean that realistically he can’t do what he wants when he wants (see my previous comment), and the hand he has been dealt is exceedingly difficult and tricky to play even if politics weren’t an issue. I believe the Fed will err on the side of waiting too long to withdraw liquidity to the extent necessary for reasons I gave in my previous comment. Arguments against those reasons will be appreciated! (I WANT to believe the Fed will get it right, but…)
Very good arguments have been made that Greenspan’s easy money policies played a critical role in the housing bubble.
I have yet to hear such an argument. I don’t see how Alan Greenspan was responsible for a global housing bubble that impacted most western and many developing countries, not just this one.
I have seen politically loaded charges from Austrian “economists” and born-again conservatives who suddenly decided to disavow George Bush as if he wasn’t a “real” conservative (despite his dedication throughout his term to supply side economic.). But I have not seen this from people who seem to actually understand markets, housing and global macroeconomics.
The Fed did not cause the housing bubble, nor could have it done much about it. It was caused by a global equity bubble that ended up funding the mortgage markets, not just in the US but throughout the planet. The US isn’t the only nation on earth, and there were plenty of other nations with higher overnight rates that experienced very similar issues to ours.
I’ll add to those reasons the observation that Bernanke apparently didn’t see the housing bubble even though many other smart people did
Central banks are usually supposed to be reactive, not proactive. If you claim to fear a central bank that would actively work to create inflation, then the last thing that you should want is a proactive policy.
If you want someone who can predict markets, then find a trader, as that is not the role of a central bank, nor should you want a central bank to act like a trader. Only at the extremes should we want a central bank to maneuvering the economy as if its a sports car on a twisty road, and then only when it appears to be hitting the wall.
assurances that “There is no reason to expect a monetarist such as Bernanke to tolerate anything close to hyperinflation when that would fly in the face of his management philosophy” doesn’t really speak to my arguments.
It speaks exactly to your arguments. You were claiming previously that the Fed had a track record of creating inflation, when the exact opposite of this is correct.
I believe the Fed will err on the side of waiting too long to withdraw liquidity to the extent necessary for reasons I gave in my previous comment.
Your reasons are based upon a track record that is the opposite of what you claim it to be, and because Bernanke has been engaging in QE, as if he shouldn’t be.
Bernanke has been aggressively engaging in QE because he had to. He didn’t do it until he had no other choice. There is no reason to believe that a monetarist such as Bernanke would use QE into perpetuity, or that he shouldn’t have used it when he did. It would appear that you just don’t like QE policies, even though his use of them has been sensible and well in line with his school of thinking.
Inflation is largely a function of wage growth. U-3 unemployment is currently above 9%. Given that, there is not much reason to fear inflation, and plenty of time to deal with it. There will be plenty of time for the Fed to respond to the U-3 figure, as it is published monthly and can be expected not to plummet. Bernanke would have to completely abandon his management tact for him to not respond to that data within a reasonable period.
I have yet to hear such an argument.
Check out “Greenspan’s Bubbles” by Bill Fleckenstein for one such argument. It’s a relatively quick read. (Fleckenstein is a hedge fund manager who I’m sure you’ve heard of, but probably disagree with.) It first discusses the equities bubble circa 2000, showing a very strong cause-effect relationship between Greenspan’s rate adjustments and surges in speculative behavior. It then argues (with data, not mere speculation) how the Fed, in an effort to mitigate the effects of the stock market bubble bursting, used monetary policy to substantially increase liquidity. The easy money was a crucial factor in the housing and commodities booms (but certainly not the only factors).
I’m kind of surprised you haven’t heard this general argument before. I’ve REALLY truncated it; read the book or similar arguments from other sources if you want to understand a viewpoint different than the one you already have.
I don’t see how Alan Greenspan was responsible for a global housing bubble that impacted most western and many developing countries, not just this one.
I think you’re minimizing the leadership role the US has played, and continues to play, in global finance and trends. Fed policies directly or indirectly affect most of the world, not just the US. If you can show that housing bubbles in other countries preceded rather than followed/accompanied the one in the US, then I will find that very interesting and strong evidence for your viewpoint…
It speaks exactly to your arguments. You were claiming previously that the Fed had a track record of creating inflation, when the exact opposite of this is correct.
Your comment was about Bernanke in the context of hyperinflation; this didn’t speak to my arguments because I wasn’t even talking about hyperinflation. (I don’t equate inflation and hyperinflation.) Actually, I was claiming previously that after Volcker, the Fed didn’t have a good track record for “getting it right” (especially interest rate policy), but I can see where I wasn’t real clear about that. While I agree that Bernanke did many things right to head off implosion of the financial system last fall, his monetary policies before then seemed largely to be a continuation of those of his predecessor, and did little to address the housing bubble.
As far as the “exact opposite of this being correct,” I guess we just disagree. Since you seem to believe that Fed policies weren’t crucial to the housing (for example) bubble, you have no obvious reason to agree that the Fed “didn’t get it right” during the last decade. I think much of our disagreement boils down to this very basic difference of viewpoint. Given that, I don’t know that we can avoid talking past each other.
Wow! I continue to be amazed that folks can’t see that the banks ability to counterfeit is the root of all bubbles. Mr. George Soros seems to understand:
Billionaire investor George Soros has been an active promoter of the relevance of reflexivity to economics first propounding it publicly in his 1987 book. [2]
Reflexivity is discordant with equilibrium theory, which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected. In equilibrium theory, prices in the long run at equilibrium reflect the underlying fundamentals, which are unaffected by prices. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles [3] from http://en.wikipedia.org/wiki/Reflexivity_%28social_theory%29
Check out “Greenspan’s Bubbles” by Bill Fleckenstein for one such argument.
Fleckenstein is just another Austrian. Blaming the Fed for anything that goes amiss comes straight out of the Austrian playbook — Austrian “economics” is not an economic model, but a political philosophy that starts by blaming government, and then seeks to rationalize that premise.
The American Austrians need to figure out that (a) the world does not revolve around Alan Greenspan, and (b) bubbles existed before him, and will exist after him. Amazingly enough, we had bubbles and depression even when there was no central bank — in fact, we had quite a few of them.
Here’s a suggestion: Look at global trends in the substantial increase in gross global product over the last 30-40 years. Give some consideration to what alternatives were available for that money, where it ended up, and how it got there.
We didn’t just have a US housing bubble, we had a global bubble in just about everything: equity, debt, commodities, you name it. It came from astounding levels of output and economic growth in corners of the world where there used to be virtually no productivity at all. That money would have been made, with or without Greenspan, and it would have been looking for havens, with or without Greenspan.
Unless the world decides tomorrow to stop making money, it’s going to happen, and at that point, you won’t have Greenspan to kick around for it. Mind you, I don’t particularly care for Greenspan, but trying to make him responsibility for the capitalist desire around the world to make money is simply wrongheaded.
“Unless the world decides tomorrow to stop making money, it’s going to happen, and at that point, you won’t have Greenspan to kick around for it. ” Angry MBA
Now I’m angry. While I was taught that “making money” meant earning it; I now more than ever understand that for bankers “making money” is literally true. No wonder we hear so little about counterfeiting, it is legal!
I now know why engineers, who are some of the smartest and best people in the world, live in modest homes while bankers live in mansions. I guess I always knew but considered that there were more important things in life than money. But now the bankers dare plunge the world into another Great Depression?! That’s way tooo much.
Fleckenstein is just another Austrian. Blaming the Fed for anything that goes amiss comes straight out of the Austrian playbook — Austrian “economics” is not an economic model, but a political philosophy …
I expected you wouldn’t regard Fleckenstein’s views very highly because they contrast somewhat with your own. However, you are dismissing his arguments without indicating you have actually studied them: he is “guilty by association” with a viewpoint you think wrong and “therefore his arguments are likely to be wrong.” (I’m not suggesting these are actual quotes from you!) I don’t think that is fair — if you haven’t studied the merits of the arguments irrespective of the source, you are passing judgment based on prejudice (and maybe ignorance). That is a very reliable way of making sure that you can continue to claim that “I have yet to hear such an argument.” In any case, if you don’t like Fleckenstein, there are various other careful thinkers who have a similar take on the Greenspan/Bernanke years; you could read their arguments instead.
We didn’t just have a US housing bubble, we had a global bubble in just about everything: equity, debt, commodities, you name it. It came from astounding levels of output and economic growth in corners of the world where there used to be virtually no productivity at all.
We agree on that point.
That money would have been made, with or without Greenspan, and it would have been looking for havens, with or without Greenspan.
Here we have a different perspective. As I see it, the US played a powerful role in stimulating the “astounding levels of output and economic growth in corners of the world where there used to be virtually no productivity at all.” The easy money of the Greenspan Fed coupled with the rollback of oversight (Greenspan supported reduced regulation too) led to a growth of liquidity and debt risk that fueled the US housing boom. Existing homeowners found they could tap into that liquidity through easy refinancing, pulling out extra cash for short term and long term purchases alike.
The amount of money spent carelessly by US consumers thanks to home equity withdrawals, and amount of activity due to booming new home construction, were HUGE. But why not consume: after all, housing prices “only go up.” Many of the purchased goods were made outside the US, which fueled economic expansion elsewhere, which led to more consumption within other countries, booms elsewhere, and so on. So while bubbles and booms arose throughout the world, the activity originating from US consumers played the most important causal role in my view. And without the easy money policies of the Greenspan era, I don’t believe the boom cycle would have unfolded as it did, definitely not to the degree to which it did.
you are dismissing his arguments without indicating you have actually studied them
No, I am dismissing them because his arguments are not particularly good. I’ve read his work on this and on other matters, and he’s not very good. I would not rely upon him for analytical work.
I never claimed to have not heard any arguments that blamed the Fed. What I said was that the arguments that those arguments that I had heard were poor and politically loaded. Well, sure enough, Fleckenstein counts among those who makes bad, politically loaded arguments.
Why you see fit to like him or to find him credible, I don’t frankly know, as I see little of value in what he has to say. The Austrian narrative is simply next to useless, and he is a stereotypical Austrian.
As I see it, the US played a powerful role in stimulating the “astounding levels of output and economic growth in corners of the world where there used to be virtually no productivity at all.”
And you have no reason to see that vis-a-vis the US central bank. You apparently don’t understand why the world has become a more productive, capital-driven place, you just attribute to Greenspan as if the profit motivations of everyone on the planet are driven by a single guy in Washington.
You are just trotting out the customary Austrian framework, which is a lousy, unusable framework. Your arguments are rooted in the presumption that markets are puppets to central banks, and that they would be perfectly rational in the absence of central banks. That’s a political viewpoint, not one grounded in valid economics or in economic history, which is why I repudiate it.
The fact is that bubbles have long been an integral part of market economies — they are not aberrations, they are normal — and they exist because of human nature, for reasons that have little or nothing to do with central banks. Bubbles occurred even when there no central banks, and they were often worse in the absence of central banks. This reality does not fit the Austrian framework of perfect markets that can only be derailed by bad central bankers and the occasional immoral villain, of course, but it is more accurate and useful in evaluating why things go poorly when they do.
“The fact is that bubbles have long been an integral part of market economies — they are not aberrations, they are normal — and they exist because of human nature, for reasons that have little or nothing to do with central banks” Angry MBA
No, I doubt it. How could bubbles occur with 100% reserve requirements? Bubbles are caused because banks drive up prices and then use those increased asset prices as the basis for extending even more loans till they end up with a balance sheet filled with over-priced assets. Eventually the bubble busts.
All of this is possible because bankers use a government enforced monopoly money supply. It is not market economics, it is monopoly economics.
Why you see fit to like him or to find him credible, I don’t frankly know, as I see little of value in what he has to say.
I am pretty sure he would accord a similar level of respect for you as you have for him, and find your analysis and viewpoints as wrong as you find his. But so what? That doesn’t make either of you right or wrong, just because you both have strong opinions and a lot of confidence in the correctness of your respective views.
The Austrian narrative is simply next to useless, …
Given the absoluteness of your statement, apparently this is an objective fact, observable by all and hence not open to argument or difference in view. I guess that’s why every intelligent, well informed individual completely agrees with this observation of yours. After all, why bother with qualification and nuance when there is no room for disagreement?
You very well could care less, but I don’t see myself as a card-carrying sympathizer of the Austrian school. But that doesn’t mean I see it as having nothing to offer either.
You apparently don’t understand why the world has become a more productive, capital-driven place, you just attribute to Greenspan as if the profit motivations of everyone on the planet are driven by a single guy in Washington.
This is both insulting and a misrepresentation of my views.
I really don’t think there is much point in continuing this discussion. We obviously have different perspectives, which doesn’t bother me. What does bother me is that you appear (to me) to be so certain you are correct in your views that no real conversation can take place. I’m sure you have your own gripes about me as well. The discussion has been interesting, but I don’t really enjoy (or find it productive) when opinions become facts and a tone of mutual respect leaves the discussion.
That doesn’t make either of you right or wrong, just because you both have strong opinions and a lot of confidence in the correctness of your respective views.
What makes him wrong is that he begins with a pre-determined political viewpoint, which he uses as a starting point for his economics. He gets it wrong because he puts ideology above analysis.
I don’t see myself as a card-carrying sympathizer of the Austrian school. But that doesn’t mean I see it as having nothing to offer either.
I find Austrian “economics” to be about as helpful as Marxist economics. What the two have in common is that they are both political belief systems that generate an economic theory to match their politics, rather than starting with the facts given to us by the markets and leaving out the politics, as they should.
So no, the Austrians with their erroneous, politically driven theories, their unwillingness to learn anything from history, and their eagerness to ignore whatever facts that they find to be inconvenient, only detracts from good analysis. It isn’t credible, and it’s fair to point out that it isn’t credible. Not all schools of thought are equally valid.
What does bother me is that you appear (to me) to be so certain you are correct in your views that no real conversation can take place.
What bothers me is that people can make presumptions about the alleged powers of one individual in one city on the planet, without bothering to look at the underlying data, but then justify that failure to look because it conforms with the Austrian narrative.
The only way to justify focusing on that one individual is to begin with a political philosophy that always resorts to a pre-determined narrative (the central bank is always to blame whenever the economy misfires) and then to stop looking for more data. Austrians always blame the central bank, just as Marxists always blame capitalism and the bourgeois power structure – neither one is a predictable or helpful approach.
In 2000, global product was $39.2 trillion. By 2006, it had reached $46.6 trillion, triple what it was in 1970. In a typical year, we’re adding over a trillion dollars in output to the world, amounts that are unprecedented in human history, and with more of that growth in Asia than in the US. It should be no surprise that all of this newly created wealth would look for places to go where they could be turned into even more money.
The only way to believe that the US is the puppet master of this whole thing is to ignore what everyone else on the planet is doing, with or without us. China and India didn’t open up their markets because of Alan Greenspan. The money that was created by this growth didn’t seek out investments because of Alan Greenspan. The investment banks didn’t create products to capture that growth because of Alan Greenspan. The lenders didn’t shift their business model from portfolio lending to servicing and securitization as a means of capturing that money because of Alan Greenspan. The Europeans didn’t decide to create a unified currency because of Alan Greenspan. Australian consumers didn’t decide to pay some of the highest prices on earth for suburban real estate because of Alan Greenspan, and more importantly, the lenders didn’t lend to them because of Alan Greenspan.
Global securitization tripled between 2000 and 2005 to unprecedented levels, with the US figures behaving similarly. Retail lending in the US and many other western countries became more aggressive as banks sought to capture that investment by tolerating higher levels of leverage. By the time that the recession was in full swing in 2009, the securitization market had fallen apart, and lending tumbled along with it, while lending standards returned to what they were in the past.
No reasonable person who reviews the data and compares it to the corresponding lending activity can miss this clear correlation between changes in the behavior of lenders and changes in their access to equity in the capital markets – the relationship is unmistakable. Yet wouldn’t you know that the Austrians could find a way to miss something as obvious as this.
A narrative that presumes that one central banker pulled the strings and seduced the rest of the world into madness simply has no factual basis on which to stand. There is a large world and economy outside the US, and they are having increasing influence on what happens with us.
“If you are going to believe something, you ought to have a good reason for believing it. There is no reason to expect a monetarist such as Bernanke to tolerate anything close to hyperinflation when that would fly in the face of his management philosophy.” Angry MBA
From a different tack, why should the powers-that-be allow the destruction of what they hold so much of? So now, are they abandoning the ship into the gold life boat? Then let them. Let US instead allow genuine money alternatives that require neither precious metals nor government coercion except perhaps with regard to government monies. In that case the government monies would only be legal tender for government debts, not private ones.
“-Well, a large gap must be implied for the money supply to shrink even with $1 trillion in government stimulus.” anon
Oh yeah, I forgot about that, seriously. I suppose a lot of the “stimulus” money disappeared into debt repayment without increasing the velocity of money on Main Street.
“It could. It is what I advocate, a free distribution of new legal tender fiat to every United States citizen combined with a ban on fractional reserve lending till we have genuine reform.” FB
“-What would a new legal tender fiat have to do with our current economic problems? A free distribution would have the same effect as printing more and more dollars. ” anon
Yep, exactly. But if given directly to everyone equally then velocity would be irrelevant. Printing money cannot create wealth but it sure can prevent the destruction of wealth, I’d bet. Borrowers could pay down their mortgages to market prices and savers would be compensated for years of suppressed interest rates. The banks would be fixed in nominal terms and state tax revenues should be restored. To prevent hyperinflation, stick limits on leverage could be imposed. With all that new money and possibly the restoration of velocity, why would the banks even need to leverage for a while?
“Unless the current supply of US Dollars is voided as legal tender. Then in effect the money supply remains the same size as you replace dollars with the new fiat.” anon
No, I don’t believe in money destruction.
“Why do you want to ban fractional reserve? ” anon
In a government enforced monopoly money supply, FRL is theft of purchasing power. However, the ban would only be temporary till we had genuine reform. Then the banks could practice it in their own private money supplies.
“Leverage is needed in our economy.” anon
Let’s have genuine liberty in money creation and we shall see. In any event, banks would be free to practice leverage in their own private money supplies.
“But like you said, the level of leverage in the economy “has been much higher recently.” And that’s the problem. Banks do not look to their reserves when deciding whether or not to lend to a customer. If the customer is financially sound, then the bank lends, if not, they don’t. Reserves are settled at the end of the day. Credit grew to excess as noncredit-worthy customers received credit.” anon
Now we are talking “prudent” FRL. If we return to that, then banks need to be ruthlessly, even gleefully subjected to liquidation if they miscalculate on who is “credit worthy”.
But I don’t believe in “prudent” theft. Even if a bank does loan carefully, there is still the pesky “little” moral problem of borrowing the purchasing power of all money holders including the poor WITHOUT their permission.
“The discussion has been interesting, but I don’t really enjoy (or find it productive) when opinions become facts and a tone of mutual respect leaves the discussion.” Marty
Marty,
I don’t much care for Angry’s insults, having been on the receiving end of them, but he has a point with regard to the Austrians. They seem to think deflation and even hoarding is good. As for debt forgiveness, their version is foreclosure. They claim to be in favor of competitive currencies but then assume that the free market would pick gold and silver. When I suggest common stock is an ideal money form, I get ridiculed.
I learned a lot from the Austrians but they are currently falling short. They need to get behind a debtor and saver bailout and be for TRUE liberty in money creation, usage and acceptance.
“What the two have in common is that they are both political belief systems that generate an economic theory to match their politics, rather than starting with the facts given to us by the markets and leaving out the politics, as they should. “ Angry MBA
BTW, excellent comment overall, but it is impossible to leave politics out of economics. Chiefly because our money system is a government backed monopoly. Then add to that the large amount of government spending, the power of public service unions, crony capitalism, hedonic inflation measurements, the social effects of wealth concentration, the social effects of the boom-bust cycle, etc. How do you separate those effects out? With a huge amount of error prone analysis is my guess.
It’s a shame we disagree. We are both anti-deflation and anti-gold and we both like high growth rates. I insist on a fundamentally stable system though and am repelled by theft of purchasing power, even if for the “general good”, and by the boom-bust cycle which is very dangerous, btw, to world peace. I think it is possible to have steady growth without a boom-bust cycle much as a turbine produces steady power compared to a reciprocating engine which produces power that is steady only on average.
it is impossible to leave politics out of economics.
For those among us who are not dogmatists, it is actually quite easy. I would agree that there are many people who have consciously decided to make it impossible, but they do so at their own peril.
I would suggest that those who are politically driven by this stuff should set up personal trading accounts and put some real money on the line. It should become very clear, very quickly, that Mr. Market couldn’t care less what your politics are. The market rewards us for good decisions and good timing (and luck), not for being true blue to any given political philosophy.
“I would suggest that those who are politically driven by this stuff should set up personal trading accounts and put some real money on the line. It should become very clear, very quickly, that Mr. Market couldn’t care less what your politics are” Angry MBA
Yep. That cleared things up for me in the Peter Schiff vs Mish Shedlock debate. I hope the goldbugs lose a shirt or two for worshiping a metal.
“For those among us who are not dogmatists, it is actually quite easy” Angry MBA
Don’t be so proud of that. Our money system is based on borrowing purchasing power WITHOUT permission, supposedly for the greater good. Yes, it works after a fashion in raising living standards but caused the Great Depression and WWII among other evils. A few well chosen principles could form the basis for an ethical money model that would have high (optimal?) growth rates in addition to being economically and socially stable.
Greenspan kept rate low very low. He was able to do this because contrary to past experience the inflation was in control. It was not in the Fed Manual of instructions to look at other danger. Inflation traditionally was the principal reason for raising interest rates.
So what is wrong with this scenario?
What is wrong is this:
Inflation is base on consumer prices not asset prices. Can any one guess where my TV set is made, my running shoes are made? Every thing including my Hamilton beach blender is made in china. We have had a low wage working force at our disposal. Greenspan was in paradise he could keep rate low and brag about the low consequence of insignificant inflation. The money suply was exported.
When it came to assets he would mention that Americans where getting richer as the equity on there house was increasing.There was no mention that interest rates where going in the exact opposite direction of the underlying loan risk.
Notice that it was also self serving and very convenient that the cost of housing in the inflation statistic is base on the cost of rental or the monthly cost of financing your homes. So as the Maestro took rates lower the monthly cost would actually go down or not even move up when price increase. “Magic no inflation”
He manipulated rates in the opposite direction of commonsense or market forces.
Greenspan said that there was too much short term borrowing and we all know that it can be dangerous to borrow short for longer term commitment but did he not seriously contribute and encourage this by sending a wrong signal and inciting people to take advantage of very low short term loans.
There where even Mortgage Back 30/60/90 day’s commercial paper out there. Give me a break.
It’s as if Greenspan was driving a car with is foot down and saying look friend the statistic meter says that the engine is not eating let try to go faster.
You can’t have it both ways he was in charge.
“But if given directly to everyone equally then velocity would be irrelevant. Printing money cannot create wealth but it sure can prevent the destruction of wealth”
F. Beard
There his no wealth destruction to prevent.
Wealth does not destroy it self.
Where did it go? You may ask?
Imagine a public company in which we purchased one million shares this afternoon. This company has 100 million shares outstanding and our purchase moved the stock up by .50 cents.
Do you thing that we created 50 million dollars worth of valuation?
Lets say some Saudi billionaire decide to purchase five houses in your street and all home price start to move up by $350,000 the following week do you think wealth has been created?
If you are one of the five lucky or one or two smart persons to have sold at that time you now know where that money did despaired.
As you can see it did not.
All the other that did not sell never had this money it never existed so there is no wealth destruction.
It was a mirage and now its over.
Unfortunately people borrow against this perception.
That’s what the phony rate did.
There his no wealth destruction to prevent.
Wealth does not destroy it self.
Where did it go? You may ask? First
Wealth most certainly can be destroyed. It is not static but dynamic. Consider the human body. Now shock the heart till it no longer pumps blood. Has wealth been destroyed? Money is the lifeblood of an economy; massive destruction of it should not be allowed.
Unfortunately people borrow against this perception.
That’s what the phony rate did. first
What choice did people have? Were they supposed to just park their money in a savings account and be priced out of the market by negative real interest rates?
Wealth most certainly can be destroyed. It is not static but dynamic. Consider the human body. Now shock the heart till it no longer pumps blood. Has wealth been destroyed?
Ha Ha Ha… come on F. Beard it will be transfer to you wife. The valuation is there if you lose it you will always lose it to some one. It is still there. Do you think buildings in New York disappear when some one dies? Gold is at $1250 if it falls it will simply be a transfer nothing is lost. We tend to look at it after the fact but every buyer of gold is presently transferring is wealth to a seller of gold. If it goes up he mau win but if it goes down is wealth was transferred to the buyer.
When a country goes bananas a new one gets richer.
“What choice did people have?”
I agree none I am not blaming people.
I am living and investing in what is. Certainly not what I witch or should be.
As an engineer you are likely a very rational person but unfortunately reality as little to do with human behavior. It’s not like balding a bridge.
Politicians understand that to win there election being irrational is a definitive plus.
We must not hope we must act in our best interest with people that have no morals.
The valuation is there if you lose it you will always lose it to some one. It is still there. Do you think buildings in New York disappear when some one dies? first
In the Great Depression, 25% of the population was unemployed. Was the productive capacity of those folks lost as long as they were unemployed? Did the GDP go down? Was wealth destroyed?
Wealth is dynamic. Unoccupied houses rapidly deteriorate. Unused fields fill with weeds.
My point about the human body was that a functioning one can be immensely valuable (Albert Einstein for example) but a dead one is worth about $1.98 in minerals.
Correction.
If it goes up he may win but if it goes down is wealth was transferred to the seller.
Correction.
If it goes up he may win but if it goes down is wealth was transferred to the seller.