The Age When Being Wrong (Again & Again & Again) Just Doesn’t Matter

For the better part of 5 years now we’ve heard repeated predictions for hyperinflation, US Dollar collapse, economic collapse, bond market collapse, stock market collapse, etc.  All of these predictions were wrong.  And they all started with the same general ideas – the Federal Reserve system is a scam, the US government is “printing money”, government debt will be the end of the USA, etc.  All of this stuff has been wrong.  And not just a little bit wrong.  It’s been devastatingly wrong.  There has been nothing close to hyperinflation.  There has been nothing close to a bond market collapse.  There has been nothing close to a dollar collapse.

For some reason these people continue to garner all the praise and attention.  For instance, just look at this video I posted over the weekend and how many likes vs dislikes it has.  8500 likes vs 200 dislikes!!!!  That means 98% of the people who watched this video thought it was good.

fail

 

I don’t understand this.  And I have to admit, after having been debunking these sorts of predictions for the better part of the last 4-5 years, I feel pretty discouraged by the progress (or lack thereof) since the crisis.  It appears as though the only thing that’s been learned since the crisis is that fear sells and people seem to really like to buy into it.  Even when it’s pure unadulterated poppycock.

NB – And don’t get me wrong.  There’s nothing wrong with being wrong.  I embrace being wrong.  That’s a big part of how we learn.  But being wrong for 5 years straight with nothing learned and just the same regurgitated wrong message time and time and time again?  At what point do we start to wonder why these people have been wrong?  Better yet, at what point do we start to say, “how can we learn from what they got wrong?”

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • http://howfiatdies.blogspot.com/ Vincent Cate

    Cullen, if you have never debunked hyperinflation. You have never even addressed the mechanisms for hyperinflation. All you have done is looked at some of the ways that countries get out of control deficits, which lead to hyperinflation.

  • http://www.joefacer.compblog Joe

    Hell, I’m convinced. Ya ain’t gonna change a closed and locked mind. The only success you will have are with open minds, willing to learn. They may be rarer than you think.

    Or maybe readers like me found it so open and shut that there wasn’t any great need to rally behind you, while those who felt threatened felt, well threatened. And were compelled to react.

  • Dctodd27

    Cullen -

    Realistically then, what are the unintended consequences Americans need to worry about as a result of years of ZIRP and an open-ended $1T per year QE program?

  • Suvy

    Hyperinflation is usually not just an economic phenomenon, it’s a socio-economic phenomenon. Hyperinflation requires a lot of stuff to happen and most of that stuff hasn’t happened yet. Even to this day, our on balance sheet debts are less than 5-6 times revenues. However, if we keep going down this path, very high inflation and maybe even a more severe recession are possible.

  • http://orcamgroup.com Cullen Roche

    A credit bubble? Margin debt bubble? Stock market bubble. Lots of potential problems. I don’t say QE can’t causes problems. But it won’t cause hyperinflation or a collapse of the dollar like so many people predicted….

  • Geoff

    As mentioned in the previous thread, this has been going on for much longer than just five years. Gold bugs have been around forever. Guys like James Grant, Jim Rogers and Richard Russell have been calling for the collapse of the US dollar and scaring the daylights out of their readers for decades.

  • Auburn Parks

    Possibly higher asset prices? Seriously, this is the debate. Does QE’s push to force people to reach for yield push up the prices of different asset classes and is this a net more powerful force than the interest income channel that has been choked off due to extended ZIRP. I’ve yet to see any sizable group of economics commentators and market participants coalesce around a definitive answer.

    Another thing with QE. If you want the Govt to “pay off its debt” aka redeem T-bonds and not issue any new ones, then that would be QE to $17 trillion. All the T-bonds would ultimately be swapped for reserves and bank deposits. So if you don’t think QE is a net benefit, you probably shouldn’t want us to start net redeeming T-bonds. I’m not saying that you personally do, but there sure are plenty of confused people out there who believe this would result in economic nirvana.

    Of course, it there were no Govt deficits the dollar would skyrocket on the FX markets and we’d have an even larger trade deficit which people mistakenly think is a bad thing. Lets just put it this way, most people are seriously confused about macroeconomics and monetary operations (probably why so many people watched and liked that ridiculous gold bug video Cullen is referencing).

  • Dctodd27

    In your opinion, what kinds of fiscal/monetary policies would have to be implemented to make hyperinflation and/or a currency collapse a possibility? I’m not asking to make a point, I’m genuinely curious…

  • Auburn Parks

    Something that were to destroy domestic production by about 50%.

    Or

    Have the Govt deficit spend 50% of GDP every year no matter whats going on in the private and foreign sectors, that would probably do it.

    Or

    An imminent global catastrophe (like a massive asteroid impact or alien invasion) that prompted everyone to spend every dollar they had right now.

    Other than those crazy things, nothing.

  • http://orcamgroup.com Cullen Roche

    @ AP, yeah, that would get us to hyperinflation. But as you noted, that ain’t happening.

  • http://orcamgroup.com Cullen Roche

    Plus, Vincent, I explained several years ago why hyperinflation predictions were wrong. I wrote an entire paper on it and explained the transmission mechanism for hyperinflation in detail. And I explained that the likelihood of hyperinflation in the USA was very low. This was years ago. You’ve been coming here for years repeating the same message about hyperinflation being right around the corner. It’s been totally wrong. If “success” is all you’re worried about then why do you keep repeating this tired of failing message?

    I don’t know why anyone on the planet takes a hyperinflationist seriously. No group of people have been more wrong in the last 5 years.

  • Dunce Cap Aficionado

    “The truth never wins, but eventually it’s opponents die off”

  • Dctodd27

    Do you think QE results in greater wealth inequality?

  • http://howfiatdies.blogspot.com/ Vincent Cate

    I have been here some of the time and not some other times. Perhaps I missed this paper where you explained the transmission mechanism for hyperinflation. Could you link to it?

    My message for some time now has just been how hyperinflation works and not focused on making predictions.

  • http://orcamgroup.com Cullen Roche
  • Auburn Parks

    Maybe. To the extent that the people who are wealthier typically have more assets than those who are poor. And so if asset prices go up, and there is no corresponding aggregate demand increase leading to lower unemployment and thus higher wages, the asset increases would only benefit those who already own assets.

    Working and middle class people probably don’t have alot of bank deposits that are getting squeezed by the low interest income.

    But then again, if you are in the middle class, you are able to afford a home with a smaller % of your income going to debt service costs, so that would be helpful.

    I’m not good enough at math to figure out and weigh all the derivative effects of QE, so I can honestly only reply that I don’t know.

    Traditionally, the only thing that has spurred significant real median income growth over the last 33 years has been when unemployment got to or below 5%. QE certainly hasn’t helped accomplish full employment.

    http://en.wikipedia.org/wiki/File:US_Real_Median_household_Income.PNG

  • Anonymous

    Simple loss of confidence.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    You actually talk about hyperinflation being a cycle and describe a feedback loop without calling it that. Then you say “What’s important to note here is that the printing press exacerbates and ends the cycle rather than actually initiate it.” Cullen, you are so close! It is a cycle. A cycle that can go on for years. A cycle is like a circle. There is no start or end to a circle. It is a feedback loop that includes making new money. You are not as far from me as you think. :-)

  • http://orcamgroup.com Cullen Roche

    Confidence in an entire system’s currency doesn’t just evaporate. There are real transmission mechanisms that cause a loss of confidence. Historically, those causes have been:

    Collapse in production.
    Rampant government corruption.
    Loss of a war.
    Regime change or regime collapse.
    Ceding of monetary sovereignty generally via a pegged currency or foreign denominated debt.

    The idea that loss of confidence is the CAUSE of hyperinflation is a total myth. Loss of confidence is the result of something else.

  • Suvy

    The only way government spending levels can get that high is because of the nonlinearity that forms between debt service costs and tax revenues. So very, very high government debts will eventually get you to those levels. Especially for developed countries, government debts need to be multiples of GDP for that to happen.

  • http://orcamgroup.com Cullen Roche

    Vincent, I haven’t just been close. I have been right. And you have been wrong. You are the one getting closer to realizing that your hyperinflation theory is just flat out wrong.

  • Dctodd27

    Interesting. Thanks.

  • Suvy

    Cullen, what’s your view on wage-price spirals? How do you think the mechanics of them work from an MR perspective?

  • Cesar

    The view is likely to shift when post-Keynesian’s become wealthy and promote their ideas as the reasons behind their wealth. I think Mosler is loaded – rightly or wrongly, this gives him “knowledge” from the perspective of your average Joe. If a couple of billionaires develop from the PK group then I think momentum might turn. As it is, every time I point out Kyle Bass’s ignorance, somebody points out that he made a fortune from the subprime crisis and I didn’t, so he’s right and I’m wrong. I counter by saying he was spot-on correct for nailing subprime and deserved his dues; but he then transferred his private debt-load thesis to a sovereign currency issuer, which is completely *wrong* and…. by then their eyes have glazed over and their ready to dollar cost average more GLD!

    In short: a) money talks; b) we’ll get there.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Cullen, the cycle that you describe is not just gone through once. It goes around and around many times for years. Because of this it is wrong to say “the printing press exacerbates and ends the cycle”. The cycle is a ongoing feedback loop. In a feedback loop you should not think of a start or end to the loop. The whole loop works as a unit.

    Yes, so far my predictions have been wrong and yours have been right on hyperinflation. You have said this many times and I have never argued that.

    The difference on mechanism of hyperinflation is that you are thinking of it as a single cycle with the money printing at the end and I think of it as an ongoing feedback loop. This is not that big a difference really, and on this mechanism, I am right and you are wrong. :-)

  • Auburn Parks

    The Fed controls the baseline interest rate, so there would never need to be a time where that happened.

  • http://orcamgroup.com Cullen Roche

    Vincent, the difference is that your model is simply wrong. Your understanding of the way the monetary system works is wrong. It’s the same with all of the hyperinflation people. You guys just don’t understand how the system works and how money is created and how the money supply influences prices. That’s why all the QE = “money printing” nonsense has been wrong. It’s all based on the same wrong understandings of how things work.

    This is about much more than understanding cycles. It’s about understanding the monetary system. And sorry, but you guys just don’t get it. And that’s why your predictions have been wrong and will continue to be wrong.

  • http://orcamgroup.com Cullen Roche

    Sorry. I had to delete a few comments. Something funky was going on with the formatting. I think that fixed it.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Maybe I understand the monetary system and maybe not. I can tell you this, hyperinflation is a positive feedback loop that includes money creation.

    Probably we have gone at it enough for awhile.

    Cheers.

  • Suvy

    Do you not understand basic math? Debt servicing costs are a function of the total debt stock and the interest rate and interest rates can’t go below zero. Remember that it still costs money to service your debt even when it’s basically free. So if you don’t deal with your debt problem at the ZLB and keep running deficits, you’re deficit will eventually reach 50% of GDP at some point. It has to.

    Granted, my model is extremely simple, but adding complexity to the model just really spring-loads the entire situation.

  • Suvy

    I’m assuming that the deficit is a larger share of GDP than the rate of nominal growth as well. There’s all sorts of nonlinearities that go into it, but no matter how you cut it, government debts do matter and when government debts get very high, governments/central banks run into major issues. The math is really, really clear to anyone who understands it.

  • http://orcamgroup.com Cullen Roche

    You could say that almost anything in the monetary system has the potential to be a positive feedback loop. But if you can’t actually explain the transmission mechanism and what leads to this loop then your model is useless. You think high debt levels lead to this loop, but that’s been thoroughly disproved.

  • Auburn Parks

    Oh, I understand the math perfectly well. The thing is that your assumptions are absurd. If the Tsy wanted to issue nothing but 3 month securities for .25%, they could and the amount of T-bonds outstanding would have to be impossibly high.

    $1000 GDP
    $200,000 T-bonds outstanding * .0025 = $500 in interest cost per year.
    Thats a 20,000% T-bond to GDP ratio to get to your really dumb example.

    That math is not that complicated, and your “insights” are not insightful.

  • Suvy

    Clearly you don’t. It’s dynamic, not static! Also, debt servicing cost isn’t interest expense!

  • Auburn Parks

    Suvy, you must be joking. Debt servicing costs are the interest costs for Govt T-bonds. How can you not know this basic fact?

    Furthermore, these are your words:
    “Granted, my model is extremely simple, but adding complexity to the model just really spring-loads the entire situation.”

    So all I did was provide you with a simple mathematical model that would achieve YOUR stated interest cost to be 50% of GDP.

    Talking to you is seriously painful. You can’t seem to grasp even the most simple concepts.

  • Endest

    Cullen you are a saint. Have no idea how you can deal so calmly with these goldbugs/inflationista/random nut jobs. Post after post. Every time they shown up and start spouting their “grand secrets” about why this time it is different and nobody realizes inflation is already running rampant you still try to educate them. I just like to point and laugh. I mean this stuff is not hard. Anyone with a little common sense and basic math skills can figure out Macro 101.

    Come on if it were that easy to crash the economy and generate hyperinflation wouldn’t it happen constantly? I mean short sighted no-nothing politicians have been around since cave man days. We are not special. But that is what these types really want. To be special. To know the “secrets” that no one else does. Goldbugs, UFO nuts, conspiracy freaks, etc they all want to be the star of the show and don’t realize it turns them into a laughing stock instead.

  • Auburn Parks

    LOL, I totally forgot that you wrote this very same principle YOURSELF:

    “Debt servicing costs are a function of the total debt stock and the interest rate and interest rates can’t go below zero.”

    Exactly! Debt servicing costs are T-bonds outstanding x the interest rate.
    $200,000 in debt stock x .0025 = $500 per year in debt servicing costs in YOUR simple model. That would be 50% of a GDP of $1000 per year.

    Yes, the numbers would change the next year as the economy is always changing, the definition of a dynamic adaptive environment. The point here is to show just how absurd you assertion is that debt servicing costs could ever get to be 50% of GDP. It would take a debt load of 20,000% debt to GDP at the lowest possible interest rate.

  • Suvy

    What about the principal that’s coming due? You’ve made the most elementary mistake in the book.

  • Suvy

    You want proof? Here’s Japan’s budget. Look at how the interest expense is a part of the debt servicing costs.
    http://www.mof.go.jp/english/budget/budget/fy2013/01.pdf

    Again, you really need to learn basic math.

  • Suvy

    I’m sorry dude, but you really need to back to basic math. I’m not kidding. You’ve made the most basic mistakes possible.

  • Auburn Parks

    Man you are really clueless. In a continuing deficit environment, net T-bond principle repayment NEVER happens. One person’s T-bond matures, and the Tsy issues T-bonds worth the same nominal value that someone else buys. Thats why as long as we are running a continual deficit, no tax dollars EVER go towards paying back principle in the aggregate.

    Cullen would know better than I, but last time I heard, there was something like $40 trillion worth of T-bonds that were rolled over last year, and tens of trillions every year.

  • Auburn Parks

    I have no idea what that one circle chart is supposed to prove.

    “Definition of ‘Debt Service’
    The cash that is required for a particular time period to cover the repayment of interest and principal on a debt. Debt service is often calculated on a yearly basis.”

    http://www.investopedia.com/terms/d/debtservice.asp

    Thats right, the difference is there is no net T-bond redemption for Govt T-bonds. Thats why the T-bond number never goes down.

    http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

    Care to try again Suvy?

  • Suvy

    Let me put it this way.

    Say you have a $10,000 loan with a 10% interest rate and let’s suppose it’s on an annualized basis. Your yearly servicing costs aren’t $1000 dude.

    Your yearly servicing costs are $2,593. THAT’S WHAT NONLINEARITY MEANS!

  • Auburn Parks

    T-bonds are not like your mortgage. We are not paying back part of the principle of the T-bond each year. The interest gets paid and the face value of the T-bond gets redeemed in full upon maturity Why can’t you get beyond the fact that what applies to private and personal budgets does not apply to the Dollar sovereign?

    “The federal government—like other borrowers—pays interest on its debt. The federal debt affects the federal budget through the level of interest spending. Interest spending—a function of both the amount of debt and the interest rate on that debt—”
    http://www.gao.gov/special.pubs/longterm/debt/budgetdebt.html

    http://www.aei-ideas.org/2013/05/is-the-cost-of-servicing-us-debt-really-ready-to-explode/

    How many more examples do you need?

  • Suvy

    When someone(whether an individual, company, or government) is rolling over debt, they have more expenses than just the interest payments. They have to issue new debt to cover the old debt in addition to the interest costs of the debt that isn’t maturing.

    This is actually why the time maturity of the debt is so critical. If you’re rolling over debt very often, it actually adds to your debt servicing costs even though interest expense may be small. Geoff actually asked the exact same question to me not too long ago(let me see if I can find it). Think about it as if you’ve got an old credit card and you’re using your new credit card to pay off your old one.

    You need more new cash flow than just your “regular deficit”(by that, I mean one that doesn’t include servicing costs) plus the interest expense. Remember the survival constraint: cash inflows>=cash outflows at all times–it applies to governments too.

  • Suvy

    No shit dude. You’re still not understanding it. Think about it as cash flows coming in and cash flows coming out.

  • SS

    How is the servicing cost 26% if the interest rate is 10?

  • Suvy

    SS,

    You have to remember to compound it. So $10,000 compounded by 10% annually for 10 years is $25937. Your yearly payment is that same value divided by the number of years, so it’d be $2,594. That’s how much you have to pay every year on that bond.

    The main confusion is because the math isn’t linear.

  • Suvy

    “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”–Albert Einstein

    “Compound interest is the most powerful force in the universe.”–Albert Einstein

    “Compound interest is more complicated than relativity theory.”–Albert Einstein

  • Auburn Parks

    Even your example of a mortgage is wrong.
    A $10000, 10 year loan at 10% annually breaks down like this:

    Year 1: $1000 principle and interest is ($10K x 10%) $1000

    Year 2: $1000 principle and interest is ($9K x 10%) $900

    Year 3: $1000 principle and interest is ($8K x 10%) $800.

    And so on. So at the end of 10 years you would have paid $10,000 in principle and $5,500 in interest.

    Thats not how T-bonds work.

  • Suvy

    No, it’s not. THE MATH ISN’T LINEAR!!! YOU’RE NOT COMPOUNDING IT!!!!

  • Auburn Parks

    Again, Federal Govt financing is nothing like a credit card. It doesn’t matter how much the interest cost is, the deficit always gets covered by T-bond issuance. And all T-bonds that are being redeemed are being done so with newly issued T-bonds.

  • Suvy

    I also wasn’t talking about a mortgage. I was talking about a bond.

  • JK

    Either Suvy is waaaay smarter than all of us here, or he (she) is extremely confused. So far my vote is the latter.

  • Suvy

    I know the federal government doesn’t run like a credit card. I was just using an example.

    You may want to take a look at this.
    http://www.basic-mathematics.com/simple-vs-compound-interest.html

  • Suvy

    JK,

    This is, I believe, the mistake Auburn is making:
    http://www.basic-mathematics.com/simple-vs-compound-interest.html

    He’s confusing simple interest with compound interest.

  • JK

    Suvy,

    We all understand compound interest. (ok, I can’t speak for everyone).

    But your nonlinearity fear still doesn’t make sense.

    Let me ask you a question…

    Why haven’t we run into any of these nonlinearity problems in the past 100 years (1913-2013)? According to you, interest has been compounding all this time. Why hasn’t there been a problem?

  • SS

    Interest on a government bond does not compound. You get a fixed interest rate based on the face value of the bond. If you buy a $100 bond at 10% coupon then you get $5 every six months for 10 years.

    You don’t compound the interest rate.

  • Android

    Cullen, Vincent,

    I think you are both right but from differnet contexts or perspectives. A feedback loop contains cause and effect mechanisms. A printing press can be both a cause and an effect.

  • Suvy

    SS,

    I didn’t know that. I just assumed that it compounded like most other loans.

    Does the principal get paid back at the end or during the periodic payments?

  • Suvy

    JK,

    Other countries have. In fact, almost 50%(I think 48%) of the world restructured their debts before World War II.

  • JK

    So….

    SS finally puts the dagger into Suvy’s nonlinearity nonsense?

    Sheesh!

    It’s about time.

  • SS

    You didn’t know what government bond interest doesn’t compound? Bro, if it compounded the US government would be sinking in debt right now. C’mon!

  • Suvy

    The math still works out. It just doesn’t get there as quick. You still have feedbacks.

    Let me put it this way.

    Call the total debt stock at time t D_t
    Call the deficit at time t d_t

    D_t+1=D_t+d_t

    So if your debt is really big and your deficit is relatively large, your debt at the next time step has to be greater. That means that your deficit has to be greater at the next time step because you’re paying more in debt servicing costs since your debt is greater, assuming you can’t push interest rates any lower.

    The real limit is when your debt servicing costs are greater than tax revenues. When government debts are really, really high, debt service costs still move exponentially to shifts in interest rates. If you have debt of $2000 and you’re taking in $200 in taxes while you spend $200 on debt service and your interest rates move by 5%(from say, 15% inflation), then your debt service costs go up to $300. Say the 15% inflation increases tax revenues by 30%, you now have $260 in taxes. So your debt service costs/tax revenue is higher at the next time step. Same for the next time step.

    There are all other kinds of nonlinearities too. The one I was using as an example was the most basic one, but just because it isn’t there doesn’t mean the scenario isn’t spring loaded.

  • Suvy

    JK,

    In the simple model above, I’m not including the maturity of the debt. If you have a shorter maturity, the debt has to be rolled over more often. So if you do want to keep your debt service costs extremely low, you have to borrow on a very short time frame, which means you can’t increase short term interest rates. If you have to borrow on a longer time frame, you have to pay higher interest rates. That adds another layer of complexity.

  • http://orcamgroup.com Cullen Roche

    Right. Govt debt shouldn’t be compounded as Suvy is doing.

  • http://orcamgroup.com Cullen Roche

    Suvy, your example is totally unrealistic and way overstated. For instance, the US govt presently pays about 350B a year in interest expenses. It brings in 4250B in taxes. You’d have to somehow multiply interest expenses by 12X to get to your point. To get an idea of just how far fetched this is, here’s the annual interest expenses.

    2012 $359,796,008,919.49
    2011 $454,393,280,417.03
    2010 $413,954,825,362.17
    2009 $383,071,060,815.42
    2008 $451,154,049,950.63
    2007 $429,977,998,108.20
    2006 $405,872,109,315.83
    2005 $352,350,252,507.90
    2004 $321,566,323,971.29
    2003 $318,148,529,151.51
    2002 $332,536,958,599.42
    2001 $359,507,635,242.41
    2000 $361,997,734,302.36
    1999 $353,511,471,722.87
    1998 $363,823,722,920.26
    1997 $355,795,834,214.66
    1996 $343,955,076,695.15
    1995 $332,413,555,030.62
    1994 $296,277,764,246.26
    1993 $292,502,219,484.25
    1992 $292,361,073,070.74
    1991 $286,021,921,181.04
    1990 $264,852,544,615.90
    1989 $240,863,231,535.71
    1988 $214,145,028,847.73

    Why do people keep trying to make up sane sounding arguments for hyperinflation? How far do we need to stretch reality and the truth before these people just stop with the nonsense??????

    Suvy, you’re smarter than this. Don’t make up plausible sounding scenarios justifying their viwes.

  • Suvy

    Cullen, the example is overstated for the US, but not for Japan. Japan’s total debt is 20-25 times its tax revenues.

  • Suvy

    Cullen, take a look at this. It’s Japan’s budget.

    http://www.mof.go.jp/english/budget/budget/fy2013/01.pdf

    They took in 43.1 trillion of tax revenues while spending 22.241 trillion in debt service and spent 29.1 trillion in social security expenses. The MOF collected 43.1 trillion in taxes while issuing 45.5 trillion yen in bonds(if you count both government bond issues and “pension related special deficit-financing issues”). They’re issuing more in bonds than they collect in taxes, they spend twice what they take in while 70% of what they take in goes to social security and over 50% goes to debt service. All of this is happening at 0% rates where the yield curves are flat.

  • http://orcamgroup.com Cullen Roche

    Japan’s interest payment costs have been flat for 30 years. See chart 6:

    http://www.mof.go.jp/english/budget/budget/fy2013/02.pdf

  • http://orcamgroup.com Cullen Roche

    Debt service includes redemptions there. You should only use actual interest payments.

    You could have looked at that data and made the exact same argument in 1994 or any year afterwards. In fact, some people have been saying that. So why are you right now?

  • Suvy

    Japan’s interest expenses have stayed relatively flat, but their debt service costs haven’t. The MOF expects debt service costs to rise 14% for next year. If you assume a 14% growth rate, it’d mean that their debt service costs would almost double in 5 years.
    http://www.reuters.com/article/2013/08/27/us-japan-economy-debt-idUSBRE97Q05H20130827

    “Japan’s Ministry of Finance (MOF), charged with drafting the state budget and issuing government bonds, will request 25.3 trillion yen ($257 billion) in debt-servicing costs under the budget, the document showed on Tuesday.”

  • Suvy

    Cullen,

    Japan’s interest expense went from 8.4 trillion yen to 9.9 trillion yen from 2012-2013 even though interest rates dropped. That’s a 17% increase.

    Remember that as interest rates kept falling in Japan, they were refinancing their debt at lower and lower rates, so interest expense was staying still as the debt stock was rising.

  • http://orcamgroup.com Cullen Roche

    25T. That’s up from about 21.5T in FY2000. So, over 13 years we’ve seen a whopping 16% increase. That’s your sign of impending hyperinflation????

    I don’t often get frustrated, but you hyperinflationists have a knack for just stretching the truth to the point of absurdity.

  • http://orcamgroup.com Cullen Roche

    These same arguments have all been made for decades. I won’t give it the time of day until we start to even see inflation over JUST 5% in Japan. Wake me up when that happens. Until then, these sorts of predictions are totally without merit. Everything you’d said here has been said by someone before you over the course of the last 30 years….

  • Suvy

    Cullen, the numbers for the US in 1994 are completely different than the numbers for Japan today. In 1994, the US debt/tax revenues ratio was 2-3. In Japan, it’s 20-25. That’s a huge difference. The total debt/GDP in the US in 1994 was less than 50% in an economy with private sector credit demand. The total debt/GDP in Japan is around 240% in an economy that’s been stuck at the ZLB for decades. It’s a completely different situation.

  • Suvy

    In 1994, the nonlinearity didn’t exist.

  • http://orcamgroup.com Cullen Roche

    1. Interest expenses are a budget item. If the Japanese govt is worried that interest payments are too high and contributing too much to expenditures then they’ll just have to cut other spending.

    2. Avg interest rates are 1.2% at present. If they want to pin that at 0.1% for the rest of eternity then they’ll just do it.

    Non-linearity is not something that they can’t control so the fact that you keep falling back on that just proves that you don’t understand how these expenditure items are all in the control of the Japanese govt if they want to control them. It’s that simple. Non-linearity does not determine the Japanese govt’s expenditures. The Japanese govt does!

    Someone make the madness end! I can’t take this hyperinflation nonsense any longer….

  • Suvy

    What are the consequences of keeping yields so low? Inflation won’t stay low forever either. Population will start declining like crazy. What about the impact that Fukushima had? Supply side factors are usually necessary. Why can’t those supply side factors be a secular demographic shift combined with a major energy crisis? It’s all there.

  • Benjamin Cole

    Fear and Loathing For QE

    1. QE is inflationary and, soon (as in any minute), hyperinflationary (Meltzer Round One, many others).
    2. Worse, QE is inert and thus a waste of time. The Fed swaps reserves for bonds, and banks sit on the reserves. Or, we are in liquidity trap, so QE does little or nothing (Roche, Krugman, Meltzer Round Two, others)
    3. QE may be inert or hyperinflationary, but in the meantime will do nothing to stimulate the general economy, but will cause bubbles in specific sectors (efficient market theory notwithstanding, too many authors to mention)
    4. The Fed ends up “saddled” with a big balance sheet (Martin Feldstein). You might say, “So what?” But have you thought about it? The world might be ravenous for safe assets, but you think the Fed can sell safe assets? And in the meantime, will the Fed collapse under the weight of all those bonds?
    5. QE causes “unquantifiable financial risks.” This one is an ace, carte blanche to stop QE. I just keep hoping someone somewhere says QE causes “unforeseeable but potentially catastrophic financial imbalances and dangers.”
    6. QE is actually contractionary, locking up cash in bank reserves, where the banks sit on it when it could be out there working in the economy. (Cochrane Blog). By this measure, QE fights inflation. (But wait—I am supposed to be against inflation…also does this mean we can pay off national debt and reduce inflation at the same time? Is this why inflation has drifted down while the Fed has deployed QE? Yippee, we have a new inflation-fighting tool!)
    7. QE causes jobless recoveries, because labor does not lower its price, but capital costs go down, and this leads to business buying labor-saving equipment and throwing workers out on to the street (Cochrane Blog)
    8. Once you start QE, you can never stop. The markets will become dependent on QE, like a crackhead on coke (Richard Koo).

  • http://howfiatdies.blogspot.com Vince Cate

    “Suvy, your example is totally unrealistic and way overstated. For instance, the US govt presently pays about 350B a year in interest expenses. It brings in 4250B in taxes. You’d have to somehow multiply interest expenses by 12X to get to your point. ”

    Cullen, looks to me like the US Federal taxes were 2449B in 2012. Also looks like interest was 223B. Where do your numbers come from?

    http://en.wikipedia.org/wiki/United_States_federal_budget

  • Greg

    Suvy

    Just a couple observations

    1) You seem to have gotten the whole interest thing badly wrong on govt debt. It doesnt compound in the manner you think.

    2) You seem to also have a little bit of the “library book” view of govt debt when you descrbe paying principle back. You seem to suggest that when the principle is repaid this involves getting the money from somewhere to repay it. This is just flat out wrong. The money doesnt go anywhere get used by the govt and then need to be re-retrieved when the principle comes due. Its money that is in a savings account accruing interest for, say, 10-30 years and then it gets moved back to a checking account. Once back in checking it gets no interest and what the owner of that money does is determined by his savings preference at that time. He might look to spend it now, which of course if happening en masse across the economy would certainly be inflationary, but it would by no means HAVE TO be inflationary. That person may just buy a new treasury or leave it in cash to spend later. What his actions would be are not certain.

    Hyperinflationists seem to assume that getting out of treasuries automatically translates into mass consumption as folks run to the malls in a panic of sorts.

    QE has shown that when a lot of people voluntarily liquidate their bonds, they search for returns elsewhere like stocks or gold but they dont run and drive up prices of our everyday stuff to an appreciable amount. We actually could use for them to go out and buy some real stuff, or invest in the production of new real stuff and stop playing in the “inflation fighting” casino.

  • http://pragcap Michael Schofield

    I don’t know if these inflationistas and other assorted trolls are eating what they cook but if they are the their accounts are surely suffering. Allow me to pass this along: Early is wrong, late is stupid. You guys are at best early in your calls and you ignored the thing that was running. Had you not made that basic mistake it is likely that you would not be so hardheaded now. The gift that keeps on giving. To add insult if the Big Blowup happens I expect the more level-headed readers to recognize it before you. Now THAT’S funny!

  • InvestorX

    Cullen, the system is a scam and you have hinted before that you know it. Only because it is a scam, it does not mean that it will crash tomorrow, although it almost crashed in 2008.

    It is a scam, but it is a managed scam and it is a long-term scam.

    Here the indicators for a scam:

    - wealth transfer to the top 1-10%
    - median wage has not moved for 30 years, median wealth is similar
    - unsustainable growth of debt / GDP is required for the system just to operate smoothly
    - a huge increase in the govt sector as a % of GDP, also on the rising trend
    - govt corruption

    These are the system problems, you also recognize, but decide to ignore and keep acting as a system apologist. It is saddening and hypocritical. You already had your dogmatic phase with MMT. now it’s time to end the system apologism phase. Only because the system has not fallen apart after 5 years of excessive management, does not mean that the system is stable, not a wealth transfer mechanism, and not crashable at some point (e.g. 2008 the “managers” underestimated the danger, now they err on the side of overestimating it, while telling everybody how fine everything is). I understand that being pragmatic requires one to do business as if the system is unsinkable, but it is not true, if you are intellectually honest.

    Your logic is of the goose at Thanksgiving, seeing the human entering its cubicle, thinking “so far this meant only good for me”. The dangers of induction and sheeple thinking.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    When JGBs are paying 0.2% per year you can be 5 years early and only pay 1%. In hyperinflation bonds can crash in a weekend. It is better to be 5 years early than a day late. Time will tell.

  • JGF

    Could one of you hyperinflationists explain the mechanism by which people’s wages increase to pay these inflated prices? How will inflation be sustained without the wage increases?

  • Adam P.

    Really boring. The most likely final result is not hyperinflation, this is not how an exponentially growing process generally ends. A collapse is much more likey: total credit is growing, stocks are growing but wages and purchasing power is shrinking. One day when just a little amount of the money trapped in the la la land of the financialized world will try to exit to buy some real stuff like a shrinking pool of natural resources… bang ! collapse not hyperinflation dudes ! Look at the oil price… when it will be repriced higher than you have reasons to be really worried.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    People need to eat. If they can’t earn enough to eat they will explain to their boss that they need a raise or they have to leave and go take up farming or something else. When these talks with their boss get to be every week or so they both agree to index the salary to something like the CPI or gold or a foreign currency. From then on their wages go up with other prices.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Hyperinflation is a currency collapse. When people try to get out of bonds and buy a shrinking pool of natural resources the bang is the reduced value of the dollar.

  • Suvy

    1. Government interest still doesn’t need to compound in that way, I made a mistake by thinking it did, but all it does is change the threshold level. Hyperinflation starts in FX. Here’s a little piece by Keynes who talks about it.
    http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html

    2. When government debts are getting large and you’re at the ZLB, you can’t move off the ZLB. So if any inflation takes off, you’re completely screwed. Can you give me a period for any country that hasn’t had inflation 40 years? Where is FX in your model? All that needs to happen is that people need to start moving their money out. Over the course of an extended period of time, an inflation will break out at some point. Your sensitivity to the shock worsens the longer you stay at the ZLB.

    Hyperinflation doesn’t automatically translate into mass consumption and almost always drives consumption down. It’s a cost-push inflation where the middle class gets wiped out(consumption goes down). Hyperinflation does require supply side factors, which are all there for Japan. History is littered with examples of wage-price spirals. The last time debts in Japan were this high, inflation started to take off at right around the same numbers, but it was also wartime.

  • Suvy

    What if it starts with rising costs that causes workers to demand more wages?

  • JGF

    They can “demand” all they want. It doesn’t seem to me that the demands will be agreed to.

  • JGF

    My main point is that if we start to see rising prices (say 10%-15% per year), they must necessarily be accompanied by rising wages. If they aren’t, the price increases won’t stick.

    In the 1970′s, the high inflation that everyone talks about was triggered by a rise in energy prices. However, a much higher percentage of the labor force had automatic COLA increases, and this is where the spiral took hold. Most people don’t have such terms today.

  • But What Do I Know?

    And here I thought you were going to review Alan Greenspan’s new book :>)

  • Suvy

    Abe is pushing corporations to increase wages. I think he’ll probably succeed considering Japanese culture.

  • Suvy

    I agree with everything you just said.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Japan has shut down their nuclear reactors and is importing oil to make electricity, as well as for transportation. If their currency keeps dropping then the price of transportation and electricity will shoot up and trigger high inflation just like the US in the 1970s.

  • Steve W

    Vincent,

    I assume you’ve read Cullen’s abstract titled “Hyperinflation — It’s More Than Just a Monetary Phenomenon”.

    What’s your take on his finding that in each case of hyperinflation in the last 100 years, there have been exogenous forces/events — not just high deficits?

  • Suvy

    What about demographic shifts and supply side shocks? They have occurred in Japan.

  • GreenAB

    another (well deserved) victory lab, Cullen.

    ok, but what are your visions of the future?

    How will the grand QE experiment by the FED and BOJ play out in your opinion?

    Will they ever trim their programs, stop it, reverse it? Or will they continue growing CB´s balance sheets to incredible sizes, owning huge parts of the bond market? what could force them to reverse course and will a reactionary policy work?

    I´d love to read your thoughts on how either scenario (stop QE, infinite QE) will play out, because i think thats the most important question for the next years.

    you could make yourself a big name when you hit this one too.

    thanks a lot!

  • Greg

    “Hyperinflation doesn’t automatically translate into mass consumption and almost always drives consumption down”

    Might it not be more accurate to state that production crashes start the hyperinflation and since production is crashed consumption must crash too? I think the causation is more in the direction I said, at least in regards to Weimar and Zimbabwe.

    And I still dont get the moving money out idea. As long as there is a working scoreboard (Fed and banks)then anyone “getting rid” of their currency is finding someone accumulating. Im not saying that at some point everyone might not walk away form a currency, including banks, like the Confederate dollar or Greenback, which would be like Greece returning to the Drachma, Im just saying that THAT scenario is extremely unlikely under current conditions.

  • Detroit Dan

    Suvy– The central bank can buy up the debts (as in QE). Poof. They’re gone.

    Thus, for example, in the U.S. interest payments by Treasury go to the central bank and are remitted back to the Treasury. The Treasury is paying interest to itself. The net effect on the private sector is zero. And of course the central bank could just forgive the debts entirely if doing so is needed for some reason…

  • Detroit Dan

    Suvy– I couldn’t reply to your earlier post (due to forum technology limitation) about debts begin restructured before WWII, but those were gold standard days. With fiat currencies, governments can buy up and liquidate “debt” any time, and that has in fact been happening in the U.S. and Japan. And it’s not even inflationary, much less inflationary. The debt can be liquidated at will.

    So compounding interest has nothing to do with it when liquidation of debt is an option. Central banks routinely by government debt to achieve desired interest rates, so we’re not talking about anything exotic here…

  • Jim

    Cullen: A quick glance at the article you mentioned reveals that over 200 comments have now been posted. I and many of your other regular readers are still engaged. By now, you know where I stand, but the more I read, the more I think I understand the other side too.

    Firstly, consider the barrage of information coming from everyone who has an agenda of some sort … from the political to the religious to the economic. We seem to be able to manufacture a crisis every day, and the mass media thrives on it. Extremism? Man, it’s like doubling the thickness of the buttercream atop the cake.

    Secondly, our nation is engaged in a massive social experiment that necessarily will play out over a span of years, regardless of how many people would like it to prove or disprove itself overnight. The Affordable Care Act cannot operate in a vacuum. I happen to subscribe to the idea that our health care problem HAS BEEN our deficit problem, but I know plenty of folks would debate that point. They’re positively gushing over the computer glitches currently plaguing the roll-out, and all I know is my ability to keep our college grad kids who are under 27-years-old on our employer’s insurance programs saved our butts.

    Finally, many folks were badly burned in the economic circumstances of the past several years at exactly the wrong time. Middle-aged people getting their retirement savings clipped by 50% or more, getting wiped out by massive medical bills while trying to get out from underwater mortgages amid layoffs in a changing employment landscape, sudden homelessness when you have 5 mouths to feed. It’s hard to trust, after jolts like that.

    Snake-oil salesmen, whether they’re selling guns or gold, are all over these times. The best we can do is educate ourselves and try to derail faulty logic. The rest is up to the markets, as usual.

  • Suvy

    Most of the world already went off the gold standard in the early 30s and the restructurings that followed weren’t all due to fixed exchange rate regimes. In The Economic Consequences of the Peace, Keynes specifically points out what happens to the currency abroad when governments use “printed notes for the balance” to finance deficits. Clearly, Keynes documented the effect of freely floating exchange rates and he really disliked them for the very same reason. This is why his proposal at Bretton Woods had a fixed but adjustable peg system. This is not the first time in the world we’ve seen floating exchange rates. Germany, Austria-Hungary, Russia(many times), along with other countries in Europe have had floating exchange rates before.

    Historically, countries usually flipped back and forth between fixed exchange rates and floating exchange rates.

    http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Don’t be too frustrated Cullen. I just went and tried to give it a thumbs down but I’m not sure it registered. Maybe there’s more like me. :D

    I think most of the people that go to see that video do so because they received a link and they LIKE to watch stuff like that. They want to be convinced that the world is coming apart. People who don’t believe that ignore the link in the first place and don’t waste their time.

    Very few people that are skeptics actually watch the thing all the way to the end and vote on it.

  • http://orcamgroup.com Cullen Roche

    I’m not taking a victory lap. Seriously. I am trying to dance on the (empty) graves of the hyperinflationists. Problem is, the graves are empty because they’re still out there selling their gold and fear to people. So I actually lose.

  • Johnny Evers

    Maybe the snake oil is that we can pay for the Affordable Health Care act with deficit spending forever.

  • GLG34

    Cullen, I see some people saying that deficit spending just pulls demand into the future. Is that really true?

  • http://brown-blog-5.blogspot.com Tom Brown

    But Vincent, you’ve never “bunked” hyperinflation. Hmm… well maybe you have, I’m not sure. :D

    but seriously, your arguments always assume we’re in the middle of the positive feedback loops you like to bring up. If someone brings up a counter argument, say X, you often reply something like this “But with hyperinflation X doesn’t happen due to the positive feedback.” So you jump right from where we are now (not hyperinflation) straight to the positive feedback hyperinflation case. You never demonstrate how we move from the local minimum of where we are now to this new regime. Maybe that’s a LOT more difficult than you think.

    Assuming for the moment that one or more of your positive feedback loops is real, perhaps there’s plenty of negative feedback to keep a productive country well away from the positive feedback regime, but you always ignore that part, or don’t model it, or don’t grant that it might exist. Rather than being balanced precariously on the cliff edge or “slippery slope” of hyperinflation, perhaps it would take a gigantic “shock” of some kind to force us out of orbit into the hyperinflation zone.

    So sure, if the Earth didn’t have enough velocity to maintain it’s orbit, it would start falling into the sun, gaining speed the whole way, and it would eventually be consumed. But perhaps you’re ignoring the fact that there would have to be a big shock to the system (something to slow the Earth’s velocity) before that can happen.

  • http://brown-blog-5.blogspot.com Tom Brown

    Vincent, you’re a Milton Friedman fan, right? Milton argued that the high energy cost explanation for 1970s inflation was false. He also specifically brought up Japan in this regard: inflation and energy. It’s somewhere in here:

    https://www.youtube.com/watch?v=L6N_wYOEUSY

  • http://pragcap Michael Schofield

    SPY? QQQ? IWM? No crash there. Good times are rolling, Vincent. There’s no way anyone who has had money in the markets is going to lose all that profit in a crash. Getting out money ahead in that scenario is more certain than your hyperinflation prediction, and hard assets might do well in an inflationary environment anyway. My advice is don’t waste your time worrying about what might happen, the market always gives you plenty of time. How many chances were there after Oct 2007? Or after Mar 2009? There will be plenty of chances in the future. Crashes just aren’t as likely as you think and you’re too scared of them. Our whole history is problem after problem, problems have a way of going away. Repeat after me: Early is wrong, late is stupid. There you go, can you say bull market? Sure.

  • Johnny Evers

    Lots of people today own pieces of paper saying somebody else owes them money.

  • http://pragcap Michael Schofield

    It’s not a done deal that QE has to go on forever. Typically when the fed tightens, it is in response to improving conditions and typically markets go up. The fed will exit when conditions improve. I don’t think poverty is our destiny.

  • Greg

    We can Johnny, so long as the people who provide the care and the people who supply the equipment to the care givers will all continue to accept the payment.

  • InvestorX

    Another manifestation of the scam character is:

    - the endless series of bubbles with a rising magnitude and frequence. This is wasting scarce capital in gambling and speculative activities and reduces the long-term GDP growth rate

  • Johnny Evers

    Great comment.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    I am a fan of being able to see different points of view. If someone thinks oil going up was what caused inflation in the 1970s then that may be the easiest way for them to understand the coming inflation in Japan.

  • http://highgreely.com John Daschbach

    I often wonder how all of these hyperinflation believers come upon their views. The danger we face today is deflation. We are different from Japan in many ways, but one problem we are now facing has been at the core of the Japanese situation for decades. The Japanese have not increased domestic consumption even with low interest rates which is deflationary in an economy that is not resource constrained (Japan’s is more than ours which makes their propensity suffer deflation even more significant).

    The rate of debt increase for consumers fell off after the 2008 credit crisis and has never recovered. Business debt has been growing slowly since mid 2009. Absent significant reflux of foreign dollar holdings, or higher government spending (the first unlikely, the second very unlikely) the options are for the economy to grow slowly with near zero inflation, grow faster with deflation, or contract with deflation. Since it is very hard to grow with deflation we can only hope for the first option.

    Since government debt (absent real money printing) simply transfers money from Peter to Paul it doesn’t create money. It has no direct effect on inflation or deflation.

  • http://orcamgroup.com Cullen Roche

    Sure, all credit spending technically pulls demand from the future. You’re spending more than your current income. So yes, anyone who points that out is just stating the most obvious fact of a credit based monetary system.

  • http://brown-blog-5.blogspot.com Tom Brown

    Yes different points of view is fine. However, I’m interested to know if you dispute Friedman’s point: which was that energy costs had nothing to do with either Japanese inflation in the early 1970s (and late 1960s?) or US inflation throughout the 1970s. It’s an hour long video, so I don’t know precisely where he says that.

    If you think Friedman was wrong about that, why was he wrong? I don’t have a strong opinion either way.

  • http://pragcap Michael Schofield

    Since govt debt is never paid off, would it pull less from the future than private debt?

  • http://orcamgroup.com Cullen Roche

    Private debt is never really paid off either, in the aggregate. One thing that govt debt does is it helps support the overall credit structure by adding net financial assets. So govt debt issuance actually enhances the credit structures making it possible for more people to pull more from the future.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    It is an hour long video so I am not going to look for it. I watched some of those some time back but not sure I remember.

    Nixon “closed the gold window”. This made the dollar unbacked and so not as valuable. The price of a number of commodities and oil went up. The Arabs were paying more dollars for American food products and charging more dollars for oil Really the core problem was the dollar was worth less, and oil was not the core reason.

    But I can see the other point of view too. The idea is that oil costs contribute to shipping, fertilizer, energy, etc. Higher costs in these things result in higher costs for food and all kinds of other things. So the higher costs propagate through the whole economy. This is not exactly wrong, it just ignores why oil costs more.

  • http://pragcap Michael Schofield

    Thanks Cullen. Just watched the BS video. I feel your disgust. People actually watch that garbage and come away thinking they’ve learned something. More gold bars for the bunkers.

  • Odie

    Yes, but the problem will not be that there was too much money to begin with but that output collapsed. As it did during pretty much all previous hyperinflations. What you do not seem to understand is that the size of the money stock does not matter in that scenario. The numbers will be larger but the effect is the same. To illustrate that point:

    Image your income is $1000 and a lunch costs $10 or 1/100 of your income. Now the output drops and a lunch costs $20 or 1/50 of your income. That will be tough. Now say your income is $100,000 and a lunch costs $1000 or still 1/100 of your income. The effect of 100% inflation will be the same. Now you can play the same game with the US. GDP is 16 trillion which is also the income of the US society.

    The point is: The absolute value of the prices does not matter but the ratio of price to income. If incomes keep growing prices will automatically follow. And that income growth has also meant in the last centuries that output increased, too, which is the part we really care about. Thus, if the supply of goods and services is there people can still buy what they need. That is the only part that matters.

  • Odie

    Japan is the world’s largest creditor nation and has almost $3 trillion in net foreign assets.
    http://blogs.wsj.com/japanrealtime/2013/05/28/japan-worlds-largest-creditor-nation-for-22nd-straight-year/
    They can sustain a trade deficit for quite a while before the lower exchange rate will impact them. In the meantime, they may just begin to get the exports going again due to the lower Yen. We should not forget that Japan was in trade surplus for decades before the tsunami hit.

  • Odie

    Cullen,

    I know how you feel. I am not running a blog but I am also trying to enlighten people about our monetary system. It is a tough battle and I often feel disheartened myself. Nevertheless, the alternative is even worse: We would leave the field to all those fearmongerers who will find new victims. It is for those ordinary people who do not know better that I keep going and I hope you do, too.

    Thanks for all your hard work.

    Best, Odie

  • Gary- UK

    Did you mean are predicting?

    You’re so short term in your thinking. This cycle will complete in 2017-19, as it does the dollar will collapse.

    Even Buffet watches the cycles.

    Just be patient.

  • Gary- UK

    How about loss of confidence because the rest of the world sees that your government will never stop its budget deficit, or trade deficit, from rising.
    In fact it will get worse.
    And then the rest if the world walks away from Treasuries (already started) .

    Leaving the fed to print and buy it all.

    Yeah, that’ll collapse confidence easily enough.

  • watermelonpunch

    I’ve come to believe that the hyperinflation threat is something people believe in, no matter what, not because they’re worried it will happen, but because they actually want it to happen.
    Maybe I’m wrong… about some people.
    But how many people who push hyperinflation as a threat don’t have some kind of John Titor fantasy where they “move up” in a post-apocalyptic world, where after the disaster, they imagine things are more to their liking or advantage?

  • http://brown-blog-5.blogspot.com Tom Brown

    watermelon: I absolutely agree. There’s a whole group of people like that. I have a co-worker who was disappointed that the US didn’t default (though he was at least realistic enough not to get his hopes up too high). Plus he thought shutting down the government was great! He too “blamed” the Republicans, but felt the word “credited” would have been a more appropriate description. I pointed out that his entire career has involved getting money through Federal government contracts. He had to acknowledge that… but it didn’t change his mind. The other most radical libertarian I know is my own half brother who spent his entire life working for the Post Office, eventually retiring from it. It’s a bizarre world.

  • http://brown-blog-5.blogspot.com Tom Brown

    Cato contemplating a return to the Gold Standard?

    http://www.slate.com/blogs/moneybox/2013/10/22/monetary_derp_at_cato_institution.html

    Sumner writes that on monetary issues the GOP is the party of bad ideas and the Dems are the party of no ideas. He claims this is the reverse for everything else.

  • watermelonpunch

    Yeah, I’m glad I’m not the only one who’s noticed a lot of people who make their living, one way or another, from the government, can hold some of the most adamant anti-government views. It’s not really surprising since actually, a lot of government work is quite thankless and difficult. But I chalk it up to the general “I hate my boss” phenomenon, with a healthy serving of “I get to see any possible corruption, injustice, or imperfection up close, regarding our tax money” mixed in. Especially in cases where the people feeling that way have never worked in the purely private sector enough to know that crap doesn’t have to happen anywhere, but can and does sometimes happen everywhere.

    Not to defend libertarian postal workers… But it is true that the US Postal Service is an independent government service without tax money success story. It’s easy to see how a postal worker could come to get those kinds of libertarian notions about government services.

    I also understand why people might find appealing the idea of “starting from scratch” or turning the tables, changing the playing field, etc., because they sense that things are not really fair, and don’t know how to deal with it, and just hope some major shake up will solve the problem for them.

    As to why anyone would want to look like such a monster by actually admitting openly they want some kind of catastrophe that would greatly harm a lot of people… I have no explanation.

    But someone who doesn’t care if they look like a hateful despicable person, certainly isn’t going to be worried about being proved wrong, over & over & over again.
    Maybe there’s some link there. ;o)

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Free-banking advocate and Cato institute economist George Selgin reviews the “Scam” video:

    “Yes, the video is mostly tin foil stuff–albeit very slick tin foil stuff. The nonsense in it is made all the more dangerous because some truth is blended in as well.

    And I made it through the whole thing, though it pained me to do so.”

    http://marketmonetarist.com/2013/10/19/more-silliness-from-the-tin-foil-hat-austrians/#comment-28467

  • http://brown-blog-5.blogspot.com/ Tom Brown

    “Being wrong again and again just doesn’t matter”

    That sounds like the age of the derp. Derpishness. Derp-a-palooza. I’d never read this before, but I think it fits perfectly:

    http://noahpinionblog.blogspot.com/2013/06/what-is-derp-answer-is-technical.html

    Basically he boils it down to insanely strong commitments to your “priors” (in a Bayesian sense).

    My favorite parts:

    “What does it mean for a prior to be “strong”? It means you really, really believe something to be true. If your start off with a very strong prior, even solid evidence to the contrary won’t change your mind. In other words, your posterior will come directly from your prior. (And where do priors come from? On this, Bayesian theory is silent. Let’s assume they come directly from your…um…posterior.)”

    “That twerp just herped a flerp of derp!”

  • Johnny Evers

    Being wrong about hyperinflation for the past five years is too short a time to be statistically significant. It’s not relevant to the argument.
    An analogy would be somebody who warned that the Versailles Treaty would lead to another world war. He would have been wrong for almost 20 years, but ultimately, you might say that he was right. Or, you might say that the second war would have occured even without the Versailles Treaty.

    My own view is that hyperinflation would be such a traumatic event that you have to err on the side of caution. For example, if escalating debt levels have a 20 percent chance of creating hyperinflation, then that’s too big a risk.
    I believe the MR argument is that escalating debt levels do not lead in any way to the risk of hyperinflation. I think that’s your best argument against the hyperinflation case. Not saying I believe it, but that’s where the discussion should be.
    On the other side, we could have hyperinflation that has nothing at all to do with the present hyperinflation argument made by Vince, etc. Let’s say Martians land and start printing like crazy. Maybe they put a Martian in charge of the Fed. Might lead to hyperinflation, but Vince couldn’t say, ‘I told you so.’

  • Tom Brown

    What if “erring on the side of caution” wrt to hyperinflation puts you in even more danger of something else undesirable, such as deflation, deepening recession, or depression?

    Regarding the Versailles Treaty analogy, you didn’t have to wait 20 years to see bad consequences: there were a whole continuum of them starting almost immediately: hyperinflation, rise of the “stab-in-the-back” theory, rising levels of antisemitism, communist takeover of Bavaria and the right-wing Freikorps crushing of it, para-militarism, rise of communist and fascist parties in general, Beer Hall Putsch, Night of the Long Knives, Nazi takeover of government, Krystallnacht, racial purity laws, Spanish Civil War, Anschluss, Czechoslovakia, etc.

    So how come we’re not even seeing high inflation… or even moderate inflation on our way to a hyperinflation meltdown? The evidence is actually in the other direction: continued undershooting of the Fed’s inflation target.

  • Tom Brown

    A quasi-related post from Beckworth:

    http://macromarketmusings.blogspot.com/2013/10/why-counterfactual-thinking-is-important.html

    I don’t necessarily agree… but it’s in the spirit of “but what are the dangers of playing it too ‘safe’?”

  • Tom Brown

    Also another good one from JP Koning asking “is debasement always bad?”

    http://jpkoning.blogspot.com/2013/10/was-coin-debasement-always-bad.html

  • Greg

    Selgin is a University of Ga professor. I wonder if he considers himself a Cato economist or a UGA economist. I’ll bet it is who pays him the most!
    Or maybe who provides his health insurance

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I don’t know really know much about George, but I’ve seen him interviewed a number of times and thought he didn’t sound crazy. In fact I had an overall favorable impression. Once in a while he’ll leave a comment at Sumner’s or David Glasners… or Lars Christensen’s apparently. I read some of the articles that Lars did on him and his run ins with some other Austrians. My impression is that George’s free banking philosophy is an off shoot of the Austrians, but at the same time he’s one of the biggest Austrian school critics. And the bits and pieces I’ve seen him critical of… I have to agree. I’m a little more familiar with Mike Sproul who’s also a free banking advocate. Mike does not seem crazy to me either. Actually I like some aspects of his “backing theory.”

    Free banking is something that Glasner has looked into as well I believe.

    I’m not advocating free banking or Cato or George’s overall beliefs, but I’m willing to bet that he might have a little more nuanced and realistic view of things than the typical “tin-foil-hat internet Austrian” (as Lars puts it).

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Output collapses is part of the feedback loops but not the main problem or even trigger in most cases. You always find high debt and deficit.

  • Odie

    Again, show me the countries with stable governments (no recent wars), no foreign debt and no supply-side shocks that experienced hyperinflation. I doubt you will find even one case.

  • Odie

    I am really wondering why hyperinflation is really considered to be such a traumatic event. Most countries performed a currency reform and soon they were “back in business” so to speak. Germany 1925 did not look too bad, Argentina in the late 90ies was doing ok (although they keep repeating the same mistakes). In the end, a currency reform is good when you are a net debtor and bad if you are a net creditor. At the moment, I would even come out ahead due to our mortgage. ;-)

    You also need to look at the other side like the Great Depression. How is that any better than hyperinflation? In fact, I would argue that the human suffering e. g. in Germany was way worse during the depression than during the 1923 hyperinflation.

    Don’t get me wrong I do not wish either but those cries for austerity are like calls to commit suicide to avoid death.

  • Johnny Evers

    Good points raised.
    Counterfactual thinking is certainly important. Countering Beckworth’s post, couldn’t you just draw a chart showing the economy would be even better without QE? I mean, that chart is offered without any explanation for why QE would stimulate the economy — especially since I don’t think you believe it stimulates the economy.
    But on the other, other hand, if QE works, then the Fed could buy up all kinds of private debt and get the economy booming again.
    Odie is right in that hyperinflation could be a good thing if it bailed out debtors.

  • Waitingtoretire

    This post has worried me since I first read it. Cullen states he doesn’t understand it. That is, the people who think the world is coming to an end. He doesn’t understand them.

    I find it difficult when hyperinflation, economic collapse, dollar collapse, bond market collapse and stock market collapse are all bundled together as one entity.

    As for collapse, I thought things collapsed in 2007/2008 or am I wrong on this. Things for a lot of people have not been restored.

    What is missing from a short article like this is any prediction of where the future might lie. It is a totally open ended statement but it is statement that infers another collapse cannot happen because it didn’t happen in the last 5 years. But what could happen if the present Fed action and government action continues for another 5 years or another 10 years? That is what I do not understand.