What About That Hyperinflation?

Regular readers know I am a big fan of getting called out on things. Not because I like to be wrong or making other people look silly, but because I sincerely enjoy the constructive criticism. Over the years I’ve been wrong about plenty of things. That’s totally normal in this business. When you write as much stuff as I do about things as hard to understand as the monetary system then you’re bound to get tripped up. It’s one incredibly long learning curve we’re all walking on here and I doubt anyone ever gets to the end of it. The world of money and finance is one big complex puzzle and I enjoy working with readers and other people trying to solve that puzzle. Anyone who tells you they’ve solved it is probably lying or misleading.

Anyhow, there’s a real power in being wrong. The quote “there are no mistakes, only lessons” is completely true if you actually live your life that way. I like to say “it’s in being wrong that we learn to be right”. So when I see people being called out for their mistakes (in a respectable and mature way) I think that should generally be applauded because it provides the platform for learning and improvement.

So I loved it tonight on RT when Lauren Lyster asked Peter Schiff “what about the hyperinflation…you’ve been predicting since 2008?” I’ve had a lot of fun over the years at the expense of the people who called for hyperinflation in 2008 (Schiff certainly wasn’t the only one), but I’ve only done that because it provides a great lesson for many others. Obviously, Schiff is sticking to his guns, but that’s not the point here. The point is to seriously consider why was Schiff wrong and why I have been right? Was I working from a superior understanding of the monetary system? Or have I just been lucky? You need to decide that for yourself, but you need to really explore those questions and truly consider both approaches and why one seems to have worked out far better than the other. There’s a lesson to be learned in these bad predictions. And those lessons are hugely important forms of risk management in that they help you avoid future mistakes.

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Addendum – See here for our page on Understanding Hyperinflation & here for our page on Understanding the Monetary System.  

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.

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  • Tyler

    I think the people calling for hyperinflation underestimated the government and Federal Reserve’s ability to “kick the can” further down the road, it is after all what officials do best. More specifically, the current velocity of money is serving as a huge headwind. However, just because it has not occurred yet, doesn’t mean it won’t/can’t happen. Has Schiff ever placed a date on hyperinflation? What helps me sleep easy at night…the U.S. still holds the largest amount of gold reserves in the world…should a catastrophic monetary event happen.

  • Frederick

    Schiff will never say he was wrong. He’ll say he’s just early.

  • Nils

    This is also the greatest cop out, instead of admitting you were wrong so far you can just say you haven’t been proven right yet.

    I’m saying we’re going to see the SPX over 1600. You just wait.

  • Orca

    Call me stupid, but I happen to think Schiff is right, and gold proves it. Inflation is a monetary phenomenon, however hyperinflation is a political phenomenon, ie losing trust in a currency. By that definition hyperinflation has occurred.
    2008: $900
    2012: $1700
    And by the way, in EUR the spike is even more pronounced (575 > 1350). And this for a commodity/money/whatever without any intrinsic return, it just is. So gloating about Schiff being wrong is not very clever IMHO.

  • Peter

    People calling for hyperinflation just do not seem to understand the depths of economic mismanagement that are required to achieve that status.

    Looking at a list of past (very few present) hyperinflationary economies should give you a clear understanding, typically it requires collapse of the previous legal order (see Soviet Union, Eastern Europe), aftermath of a big war (see Europe after WWII) or rampant cronyism mixed with flawed economic theories (perhaps Zimbabwe and Venezuela).

    If quantitative easing type policies really could easily result in hyperinflation then we would have seen much more of it in the past in well-run economies.

  • InvestorX

    Congratulations Cullen, you have called that based on you better understanding of the system’s working.

    I saw the other day that you prefer not to engage in qualitative assessment of the system (yet), but maybe it is time now for that next step.

    This system has led to two things:
    1. Steepening (and very wide) wealth discrepancy, corruption of the political system. No real median wage growth for 2-3 decades (so where is your GDP growth going – to the top 1-10%).
    2. To partially offset the latter problem above, the HH sector was led to debt slavery, which has caused your well-called BS recession.
    3. A further way to keep the middle class content was to provide “bread and circuses” – the share of Fed + State & Local Expenditures has risen from 26% in 1960 to 41% today:

    http://research.stlouisfed.org/fred2/graph/?s1id=W019RCQ027SBEA

    It would be nice if these spendings were invested in productive infrastructure or other enterprises, but hey are vastly not.

    The current kick the can policies will lead to a further rising share of government of GDP. This lowers the potnetial growth rate of the economy, there is no way to argue this (unless the US is China, which is building a lot of infrastructure). This is a slow-motion drift into socalism. The road to hell is paved with good (and in this case – pragmatic) intentions. The Fed’s QE to support the fiscal deficits and banking system only deepen the wealth disparity (and the US is now one of the countries with the lowest social mobility in the West, lower than a lot of EU countries) and encourages speculation and capital malinvestments.

    So yes, there is no steep falling off a cliff, no sudden hyperinflation, the frogs are only slowly boiled in the water.

    As Lenin (via Keynes) said: “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity (or fairness) of the existing distribution of wealth.

    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

  • Conscience of a Conservative

    Hyperfinflation=Hyperbole
    ————————
    That said we saw that Fed ZERO rate policy and Q.E. did have an effect on risk assets including commodities which did raise prices. And even if price level increase is moderating it is not going down. I’m one who argues that CPI understates inflation so 2% is really 4% etc.

    The saving graces so far in those fearing higher and higher prices has been 1)bank balance sheets which are so impaired banks cannot increase lending, 2) Europe dealing with what looks like the ending of monetary union and 3) A China that is seeing lower consumer wealth from all the stimulus and Mal-investment going on in that country

    It cannot be ignored that negative real rates which the Fed is responsible for represent theft from the saving class and price controls on money. The parties most benefiting from Fed policies are those that have primary access to money(e.g. banks, large corporations, the very rich)

  • Bond Vigilante

    “Hyper-Inflation requires Hyper-Deflation”
    “Hyper-Inflation is a political chocie”

    Source: Hugh Hendry

  • http://griderbay@comcast.net boatman

    looking at inflation with the contrived-changed-8-times-in-18-years-to-keep-social-security-COLA-down, rose-colored-glasses CPI………yes, its mild.

    but who cares when the CPI is 47% housing[equivalent rents]

    who cares about a bunch of INFLATED then deflated houses?

    or the fact that a LCD TV has gone down 10% a year for 8 years on technology improvements.

    food and fuel are not included cause their ‘volatile and erratic’.

    look at the housing chart and repeat that last sentence back to me.

    95% of the things i buy have gone up 10%/year……..FACT….i have kept track.

  • LRM

    This is an important issue and what has kept me reading Cullen.
    I needed to find out why the rising interest rate predictions were not becoming reality.
    I just read today a FT article that said GMO is more or less abandoning the bond market and they manage $100B+ of assets. That is a big statement and gets one to ponder on its significance to the DIY investor thinking about risk management using fixed income products.
    Link to article was from Abnormal Returns site.
    What do readers here think of this move by GMO? Montier seems to understand the system but they seem to be acting on rising rates belief No?

  • whatisgoingon

    Cullen – can you deal with Pimco’s call that the stock market is a Ponzi.
    http://articles.marketwatch.com/2012-11-27/commentary/35368213_1_el-erian-new-bull-money-managers/2

    5. The stock market is a Ponzi scheme … get out now
    In fact “Gross recently stunned the markets by calling equities a Ponzi scheme,” says Foroohar, “warning investors they will never see 6% real returns again and would be lucky to get 3%.” Worse, investors are going to pay a stiff price for the Fed’s cheap money today: Inflation, stagnating growth, skyrocketing costs of borrowing, real estate and stock prices, consumer spending … all dropping. Foroohar says two of “the world’s best surfers are saying, ‘Get out of the water.’” Now.

  • Dan

    Schiff’s Euro Pacific Capital newsletter featured an article written by James Turk entitled “On the Cusp of Hyperinflation.” In this 2009 article, Turk predicted that “hyperinflation of the US dollar is imminent.”

    Fear operates and motivates people at such a basic level–and I guess that’s why it’s so annoying to see Schiff and others use that fact to get attention and sell books. They can’t be making that much on the books, so I guess these folks really just want the attention. That desire too is something basic in human nature I suppose.

    I don’t understand why news programs will give a guy like that 20 minutes of talk time like they do when there are others that could be much more informative. The whole business is screwy.

  • Dave L

    Sorry, but you don’t get to move the goalposts. Inflation is a sustained rise in the general price level, not a run-up in the price of one commodity.

    Oh, and a question for you and the many others peddling this line: Do you also believe that the world went through a steep deflationary episode in the early 1980s, followed by 25 years of stability?

  • Dunce Cap Aficionado

    Even by that definition, plenty of people would disagree that people have lost trust in the $ as we still use it as curerncy.

    The value of a currency is what we can get with it. I don’t make a whole lot of money (<$50K a year in the NYC area) and I would love any and all US $ anyone has 'lost trust in' sent right over to me. I find it hard to believe I'm alone.

  • Dunce Cap Aficionado

    Follow up- please note the accounting unit you used to note the values of gold in both 2008 and 2012….

  • El Viejo
  • El Viejo
  • Lucas

    Shiff’s bread and butter is rooted in guns and gold conclusions, regardless of facts. He is making a killing from those who buy his mutual funds with their low performance, high loads, and high expense ratios. He may be the proverbial stopped clock.

  • Cowpoke

    Great points Cullen, I think you are interested in finding the truth instead of clinging to old financial dogma.
    The truth shall set you free as the saying goes. Folks like Schiff have a vested interest in playing the same old song over and over.

  • LVG

    I’ve never seen Schiff squirm like that! He’s not just saying he’s early. He’s changing his story to include any sort of high inflation.

  • Geoff

    It is very difficult for Schiffty to directly admit he was wrong at this point. But perhaps his watered down version of inflation is a subtle admission.

  • http://thundereyez.blogspot.com Bosscauser

    Fear sells. Just run for political office and tell the voters he’s going to raise your taxes and cut granny’s check so let’s beat him.

    Works year in year out. Really need proof? Wait until we get into the “fiscal cliff” nonsense next month. Every body will have favorite media guru terrifying the old ladies to death.

  • Jerry

    I need to correct you. Energy and food are included in the CPI. When talking about the Core CPI they are excluded.

  • krb

    Schiff and his staff were extremely silly to make an “imminent” hyperinflation call and I wrote it off at the time as talking-his-book when they said it……he is in the business of managing money and selling gold after all. However, I think it is only a little less silly for the no-hyperinflation crowd to claim they’ve won the argument. And by their very nature the no-hyperinflation crowd will be right more often because of the relative rarity of hyperinflation….like arguing there will not be a .400 hitter in baseball this year…eventually you’ll be wrong but you’ll be right many times in the meantime……which reinforces the silliness of the call by Schiff and staff. In my view this quarrel is little different from those between people arguing the market is gonna go up or down…….they never include specific time-frames and so eventually will both be correct…..and of course when THEIR favorable time-frame takes place is when they go public proclaiming the wisdom of their call.

    I’ve benefited from Cullen’s teaching and now better understand that hyperinflation is more a political than monetary phenomena. But after witnessing the pathetic performance of our short-term thinking leaders in govt and the Fed, I would never claim that Schiff’s hyperinflation call won’t eventually be right. We are already seeing a loss of confidence in the dollar around the world…..not in meaningless words but in actual actions being taken to replace it…..for the first time in my adult life. I personally don’t have much confidence that our leaders will know when to step back from the abyss and avoid doing the additional damage taking us from the no-hyper to hyperinflation world. I think we all dismiss the dollar-negative moves around the world and Schiff’s warnings at our peril……I’m just not predicting the time-frame! ;) krb

  • http://www.nowandfutures.com bart
  • http://www.nowandfutures.com bart

    Is there even an accepted definition of hyperinflation here, as in x% per year?

  • troll

    So, has anybody yet constructed a graph of the yearly ratio(s) between the FED rate and the inflation rate? I’m not an inflationista, but something seems to be happening that has never happened in the history of economics. Could this graph reveal a “hidden” type of inflation that is relative to the FED rate? Is it possible there is something more to inflation than just the base number?

  • JJTV

    There is no precise numerical definition of hyperinflation. I think it more has to do with the inability to control rapidly rising price levels as opposed to set yearly increases. I also think you have to include that the inflation is government related (loss of war, overthrow of government, fixed exchange rate, etc.)

    IMO, 100% a year or greater is where a country starts to get there. Some may say 50% or more. Either way it’s historically abnormal.

  • http://www.nowandfutures.com bart

    True, I was just wondering if there was a level that was accepted by the majority here.

    The International Accounting Standards Board uses “a cumulative inflation rate over three years approaching 100% (26% per annum compounded for three years in a row)”, for what its worth. Much lower than most other definitions.

  • JJTV

    Boatman,

    It’s important to consider that higher prices are simply the result of the market allocating resources and not inflation. Prices reflect the indifference levels where buyers and sellers meet. Inflation is the process whereby government causes higher prices either directly through excess deficit spending (after full employment is met), indirectly through lowering interest rates (housing bubble), or indexing. Oil can be in a shortage one decade and in a surplus the next. There could be years or even decades when CPI grows at 5% without any real inflation

    A good case in point would be food, gas, healthcare, and education. People complain about food prices at the same the US has a growing obesity epidemic (35.7% of Americans are obese). People complain about gas prices while continuing to drive oversized SUV’s and F-350 trucks for suburban and city living. Healthcare and education are even worse. These are prime examples where people’s growing demand is forcing prices to rise.

    We need to make a separation between the market allocating scarce goods and the government inducing inflation. Both have very different solutions.

  • El Viejo

    +1 Thanx

  • Orca

    Actually, the goalposts got moved, by central bankers. Gold merely reflects that fact. Comparing with the eighties, or any other timeframe, is useless, this time IS different. That is, unless you think zirp/nirp is normal, suspension of GAAP/IFRS rules are normal, on/offbalance sheets are a reflection of true numbers etc.
    So yes, Schiff is right. I concede the fact that hyperinflation has not occured yet in “normal” prices, by which I mean fiat money, but it most definitely has occured with regard to longterm purchasing power, as evidenced by gold.

  • voreason

    There’s a fundamental problem with your argument. The monetary actions of the Federal Reserve and the (rather limited) fiscal actions of the Federal government are PRECISELY the actions that Schiff and people in his camp have argued would CAUSE hyperinflation. You are arguing exactly the opposite, that they have forestalled hyperinflation. Setting aside the question of what YOU think then would be causing hyperinflation, you simply can’t have it both ways. What the performance of the economy shows is really nothing new. It shows simply that monetary expansion is pro-growth. Monetary expansion when interest rates are at the zero-lower bound can only be accomplished by QE, and to some extent it seems to work. Not very well, but at least we are seeing some growth in the US while an austerity-crazed Europe has dropped back into recession. We would really be doing much better if we had a larger fiscal stimulus. Were growth and unemployment to get back to respectable levels, that would be the time to reverse the expansion, to work on the federal deficit and so on. The time to ‘pay down the debt’ is when the economy is running well, not when it is on life-support.

    You know, it just happens that the Keynesians have been right about the causes of the fiscal crisis of 2007-2008 and right about what should be done about it. Politics and poor reasoning skills have limited the application of tools that would really have helped more and have prolonged the misery. And now we are looking at a bipartisan solution to our so-called ‘debt crisis’ that threatens to plunge us back into recession. Wow. I guess it’s time to party like it’s 1937.

  • Chris

    Learn some basic macroeconomics. You don’t get inflation in an economy with high unemployment and lots of unused capacity. Wages aren’t going up. Inflation comes from an economy that is booming, not an economy still in semi recession.

  • Cowpoke

    Chris, what about Stagflation?

  • krb

    Wow!

    QE handouts to banks going on four years now…. unemployment steady at 12%, food stamp use up 50%, gap between rich and poor growing by the day……leads to your conclusion that “and to some extent it seems to work.”

    Tell me what your criteria would need to be then to conclude that it hasn’t worked? My observations about Keynesians such as yourself, Krugman, Fed leaders, govt leaders, etc is that you NEVER reach those conditions……you then claim the unprovable……”well, it WOULD have worked if we had just done more of it.”

    I repeat, under what specific conditions would you be willing to conclude that this theory of bank-handouts-will-lead-to-economic-revival has failed? krb

  • tew

    Re: “Has Schiff ever placed a date on hyperinflation?”

    The implication of that question is that no matter how much time has passed without the predicted result, we cannot declare the prediction to have failed. In other words it is not falsifiable. Thus, it is not a useful prediction.

  • Bob

    Thanks for calling out the hypocrite Schiff. He prides himself in his ability to communicate to younger people when in reality he is merely leading them off a cliff. He told callers to his older radio show NOT TO WORRY about their student debt and that it would be erased by run-away inflation. Opps!

  • http://www.deltafinancials.com Delta Financials

    So, I think there’s a general flaw to the way the Austrians think of the world. They analyze the world as if we were living under a gold standard. The reality that under FIAT government spends money into existence is something they don’t grasp and so, their model appears flawed. However, I think there is a delayed reality factor to the Austrian view. I mean, Schiff and Ron Paul started talking about the housing bubble in 2002. They were wrong for 5 years before they were right. So, a temporal flaw or just a false view of the world? Ultimately, a large number of factors will interact – but, I think there’s a lot to learn about malinvestment and the business cycle from the Austrian school. FIAT as a system runs differently from how the Austrians view it, but that doesn’t speak to the virtue of a fiat system. Particularly if we all end up with lost decades, mounting credit pressure (think of the pressure created by well intentioned federal loans on a college grad today v 20 years ago) and so on. There’s a lot to be said about government creating inflation where it gets involved. There is still a lot to be said about the limited government message. But yea – they’re wrong about the world we live in.

  • http://www.orcamgroup.com Cullen Roche

    I think their model has a pretty standard flaw in it and that starts with misunderstanding the key differences between inside money and outside money and how they influence one another. Most Austrians build their theory around the money multiplier. Most neoclassicals don’t understand banking and some don’t even include a banking system in their models. That’s like becoming a surgeon without understanding how the human body works. It’s kind of ridiculous. Although Austrians are heterodox like MR, they don’t fully understand banking (or most don’t). So they start and finish in the wrong spots and come to the wrong conclusions. Personally, I don’t see how anyone can really understand the economy without understanding banking. It’s the key component. Like understanding the heart and the circulatory system in the human body. It’s a central component.

    In an interesting way, they build a govt centric view of the world that says when the Fed creates reserves the money supply explodes. If you go back and read Austrian work from 2008 you’ll find countless pictures of M1 going vertical accompanied by hyperinflation predictions. At the time, I was explaining how there’s no connection there because in our reality, inside money (the money that really matters for economic purposes) is created entirely independent of outside money.

    So, like most of neoclassical econ they got the banking system wrong. From there, it was all downhill. They were guaranteed to get it all wrong.

  • http://www.deltafinancials.com Delta Financials

    I agree with all of that, wholeheartedly. And the ridiculousness of the “we’re the next Greece” BS that a lot of them spout is ignorant beyond belief. But, that in itself, doesn’t make Krugman right. Too often he picks on a bizarre argument to create an illusion about his own rightness! The notion that we need inflation is certainly open to a lot of debate. As off as the Austrians are, there’s a profound lack of addressing the long-term about the Krugman view.

  • http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html Vincent Cate

    I have a FAQ For Hyperinflation Skeptics that you guys might like.

    http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html

  • Ackadamius

    It seems as though many Austrians don’t seem to understand that inflation/deflation are direct results in shifts in the supply and demand for money. They don’t seem to understand that there is supply and demand for money just like anything else. And right now there is a large supply of money with little demand which causes prices (ie: inflation) to be low. And demand isn’t “well I want more money so there is demand”. For money there is a vehicle that impacts demand: Lending, Jobs, Real Investment primarily. You get money by working or borrowing. With few jobs and banks not lending the “demand” for money is low. All of this can be seen in lending/production/capacity reports put out each month. Once demand picks up and begins to exceed supply then you get inflation. So yes, a lot of money has been put into holdings but its not in the economy really, its not in the market place. For the most part it’s purely a paper swap.

    Just run regressions on lending/production/capacity against inflation and you will see a STRONG R2. Run it against increases in the monetary supply, very little. It’s not hard to test these theories with empirical evidence.

    Given the slow rate of recovery it is likely we will slowly grow into the increased supply with very little growth in inflation. If we had a “V” shaped recovery then Schiff may well have been right with higher inflation but that’s not what happened. Of course then we wouldn’t have had multiple rounds of QE, etc. It’s hard to model hypothetical retroactive reactions. So who knows.

  • Widgetmaker

    I see Schiff primarily as a salesman, pure and simple. He is charismatic and his comments are made to excite the viewers mind and get them agitated. One must emotionally engage their target in order to get them to act on your proposal.

    So much of what he has to say comes down to fearmongering – the oldest trick in the book. And he has a way of communicating that is very compelling. Sure, many of the people on this discussion board see right through him, but what about those that don’t? And these folks are so much more sophisticated than the general public, which basically doesnt’ have a clue.

    Schiff knows that as long as he sticks to his guns with strong convictions he will attract followers. Marking his theories to market will only make him look weaker – no need for honest accountability. His is an emotional pitch, which influences people far more than logic.

  • http://www.orcamgroup.com Cullen Roche

    I think it’s incredibly admirable for an economist of his stature to admit that he’s changed his model as he’s learned over the years. Love him or hate him, that’s worthy of big time praise.

  • Widgetmaker

    Furthermore, this whole idea of hyperinflation occurring in the USA is ABSOLUTELY LUDICROUS. Does anyone think that if inlation actually reaches 10% (let alone 4% or 6%) that the Fed will sit idly by and let it continue to 20%, 30%, 40% and so on? I though Volcker did a pretty good job of showing us how to tame inflation.We have an independent central bank and none of these bankers would let something like that happen on their watch. What is in it for them?

    Once again, Schiff is playing to the public’s deepest fears, and he does it in such a compelling way that he attracts his share of followers. Nice trick.

  • http://www.orcamgroup.com Cullen Roche

    Considering your long time hyperinflation predictions, it’s probably better to use the “understanding hyperinflation” links here at this site. :-)

  • Johnny Anon

    How about if the U.S. economy performed worse during the period when the U.S. pursued expansionary measures while Europe engaged in austerity? Except the opposite happened, providing evidence that you are wrong.

  • http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html Vincent Cate

    You need to understand why all the other central banks did keep buying government debt when interest rates got higher and higher before you can say that the US central bank would not.

  • http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html Vincent Cate

    Some of my FAQ questions are from your points. :-)

  • http://www.orcamgroup.com Cullen Roche

    Yeah, just glancing there….we’re still ocean’s apart on this stuff….Oh well.

  • Patrick

    Do you do you even take the time to look up economic statistics before you shoehorn them into bombastic comments?

    Unemployment is 7.9%. Takes 30 seconds to look this up.

    Credibility: Blown.

  • Patrick

    Unfortunately for your theory, gold now has substantial industrial uses.(most importantly in electronics) Demand for electronics is outstripping supply of gold and the price is going up. (Are you really going to dispute that electronics is a massive growth industry?)

    This is why it is bad to use gold as a metric of inflation(or any single price) and this is also why it is a terrible idea to use gold as a currency. (Ask the Spaniards, whose empire collapsed when they used gold as a currency and supply outstripped demand.)

  • krb

    Ha….keep drinking the kool aid Patrick! You, and the BLS, believe that when you’ve been unemployed so long your benefits run out, or you’re so frustrated you quit looking, that you don’t count anymore. To steal a phrase from Lincoln and a recent blog poster….”better to keep quiet and be thought a fool than to speak out and remove all doubt”.

    By your and BLS, and Bernanke and Geithner and Krugman et al, standards, if we can just have people unemployed long enough where EVERYBODY’s benefits run out we’ll be back to full employment!! krb

  • krb

    And you conveniently ignore the examples of Sweden, Iceland or even our own 1921 depression where just the opposite occurred. Or Japan, who has yet to recover after 25 years of QE.

    “Performed worse”?….worse than what? measured how? 50% increase in food stamp use would have to be what, 100%? 12% unemployment should be what, 18%

    Compared to which country in Europe? Which region of Europe? Should the US fed reserve handouts to European banks be factored in or out?

    Your “experiment” looks like it was designed by a liberal arts major….with as much scientific validity. krb

  • krb

    I understand your point, and it does seem ridiculous that the “Fed will sit idly by and let it continue to 20%, 30%, 40% and so on?”

    However, the context of our current mess never seems to get much air time. Wall street banks were allowed to begin gambling, gambled to the point of insolvency, taking both the US and global economies into depression….all on the watch of Greenspan, Bernanke and Geithner! And they made very public pronouncements every step of the way that there was no danger, things were well contained, banks were in good shape….right up to the point of global collapse…..with all the info at their disposal they didn’t see this coming when many others did.

    They are HIGHLY motivated to do whatever is necessary to conduct their extraordinary, bank-centric, experimental policies to divert attention away from who was watching the fort when all this took place.

    In my view, their behavior isn’t that surprising……..do they want to be held responsible for the calamity that already happened or the one that might or might not happen later. The BIGGEST mistake was putting them in positions where they could do whatever was necessary to cover up their past incompetence……all under the guise of a “middle class jobs recovery program”….what a joke! We’re all fools and idiots for going along with it! krb

  • Rick

    Thats right, China, India, Saudi Arabia, were all buying boat loads of GOLD in large orders for IPADs, meanwhile Germany is asking for their gold back which the US is making it awfully difficult to do (wonder why?)

    All for industrial purposes huh?

    If you understand Austrian Economics you’d realize the predictive nature of the study is about as reliable as human behavior. It is why (if you pay close enough attention) Austrians rarely make predictions on “WHEN”.

    I will admit Peter will accurately predict the action but he too often underestimates the ability of humans (in this case Fed/GOVT/International Bankers) action being able to prolong the inevitable.

    BTW – it is unconscionable that a Keynesian is even arguing for a practice (money printing) that has failed in creating prosperity 100% of the time through ALL OF HISTORY.

    To be a Keynesian is to ignore time before Keynes.

  • Rick

    1. There is too much disagreement here about the definition of Hyperinflation.

    2. Does it really matter if Inflation is hyper or not? Isn’t Moderate inflation a crime on humanity (especially the poor) in itself?

    For every dollar created every dollar is devalued. Basic supply and demand proves that out, but what many of you forget is the newly printed digits/paper are still sitting on the sidelines, thus you won’t see anything drastic (yet)

    Regardless, where’s the honor in driving the value of money over the cliff at a rate of 5 or 15% a year vs. 100%? It’s still theft, and it still leads to impoverishment.

    If you’re not for Free Markets or a Strong dollar then you’re a confused fool fit for GOVT employment.

  • anon

    Dean Baker, a Keynesian, wrote about the housing bubble in 2002, saying that when the bubble ends the problem would be the lost demand. And he did all this using data and arithmetic.

    It’s worth keeping in mind that the Austrian solution to the housing bubble, even in 2002, has always been higher unemployment. (Not explicitly, as they just say the want to return to the gold standard or free banking, but they also claim interest rates were “artificially” low, so their solution would be higher interest rates, less government spending, and higher unemployment.)

    So when the 2001 recession came what would they propose? Cutting spending, gold standard, higher interest rates, and unemployment “savings” (idle resources to them aren’t waste but people “saving up” for more “productive” investments).

  • Ted

    Don’t agree, but I’m willing to have an open mind on the subject. Just curious – where do you get your “80% debt + 40% deficit” as the cause? Is there a set of historical examples or some kind of study you’ve taken this from?

  • Cheeto Dust

    “…an economist of his stature.” ??? Spare us the adolescent fawning – it’s embarrasing. Toomas Hendrik Ilves speaks for many of us when it comes to Krugman. Estonia has become a shining star in Europe by doing exactly the opposite of what Krugman advocates.

  • zackf

    tell that to Zimbabwe and Weimar Germany. History fail.

  • Ted

    +1

  • Cheeto Dust

    Welcome to the Weimar Republic of America. Ben Bernanke is the second coming of Rudolf von Havenstein. I totally agree that hyperinflation is a POLITICAL phenomenon. Politicians’ will always choose what they perceive is the easiest, most politically expedient solution. When national debts cannot be repaid, they will print money. Our national debt is $17 trillion, but the net present value of all future liabilities (big entitlements) – revenues (The U.S. Fiscal Gap using CBO numbers) is $200 trillion and cannot be repaid.
    Inflating our debts away is a temporary solution that delays the day of reckoning, but the music will stop eventually and the U.S. will find itself without a chair. Bernanke is buying some time so the problem will land on some other sap’s watch.
    Like the ants and the grasshoppers, one part of America sees a long winter ahead and does its best to prepare while the other parties on indulging its Keynesian fantasies. “The U.S. will never default – it can just print money!” “The dollar is the world’s reserve currency, that will never happen here!” “This time it’s different” That’s what ordinary Germans after WWI thought and their inheritance for monetary collapse was Hitler. Wake up America!

  • Ted

    Maybe it’s theft from those in savings accounts, but’s it’s been a great gift to those who have their savings in houses, bonds, or equities. Let’s say the Fed raises to 4-5%, wouldn’t that hurt most assets and lead to higher unemployment? I don’t disagree that it lets the banks off the hook, but you can only punish them so much without hurting Joe taxpayer too.

  • Ted

    Stagflation was a result of the oil shock, while Germany had foreign-denominated debts. Zimbabwe, well that’s just Zimbabwe. I fail to see how any of those 3 cases have any bearing on our situation…

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

    Yes, the 80% debt and 40% deficit numbers come from a study by Bernholz.

    Monetary Regimes and Inflation: History, Economic and Political Relationships

    http://www.amazon.com/Monetary-Regimes-Inflation-Political-Relationships/dp/1845427785

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

    Would you be willing to argue against my FAQ?

  • Ted

    Thanks, looks interesting. There could be some useful information there. Wouldn’t you say though that the current deficit is only 8% of GDP and likely to decrease as we emerge from the slump, keep govt spending in check, and create more energy from oil & natural gas?

  • http://www.orcamgroup.com Cullen Roche

    I’ve been arguing against your points for years now, haven’t I?

  • http://www.deltafinancials.com Delta Financials

    Seriously Cullen, time to get over this man crush on Krugman who is about the most dogmatic economist on the planet. His selective use of information and constant demagoguery of the other side is an insult to any serious science. I have no idea why him changing his view in 1990 something deserves any praise. Objectivity is a wonderful thing. Krugman has none.

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

    It is deficit as a percentage of government spending that has to be over 40%, not GDP. Note that at 50% it means they are spending twice what they get in taxes. It seems that with a huge debt, a deficit out of control, and a central bank monetizing debt that eventually you get inflation and people not wanting to buy the bonds. At some point the central bank monetization gets necessary for the operation of the government and unstoppable. Then as everyone gets out of bonds they have to monetize the whole debt and you get a huge increase in the monetary base.

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

    So why stop now? They are more organized and in one tidy place now.

  • anon

    Objectivity is a wonderful thing. Krugman has none.

    “None.” Yes, clearly you’re the objective one.

    If you could point to some links where Krugman “selectively” uses information, I’d appreciate it.

    “Constant demagoguery.” Constant? More objectivity? But I’m curious to know what your talking about specifically.

  • InvestorX

    Look, what Austrians are calling for is that recessions are i) necessary (you need to reorganize resources); ii) temporary – free market will reorganize resources and start growing again. What Keynsians are calling is central planning and prolongation of mal-adjusted economic (and now also financial) structures.

    Austrians are for ST pain and LT gain. Keynsian are for no ST pain, but prolonging the sickness over decades.

    There are Austrians who very well understnad inside / outside money, myth of multiplier, FRL etc. Ignore the ones like Schiff – they are misguided.

  • krb

    Well put and I agree. Both schools have their flawed and conflicted advocates…..Schiff is selling a service and “imminent” hyperinflation is talking his book. But Keynesianism feeds the desire of the political class to give out candy to voters and donors as well as being seen to be “doing something” when cyclical tough times come…..the Krugman’s of the world telling them there is no cost for doing so, or even better, that we need to do much more of it, is exactly what they want to hear. We all rely on spokespeople for the different schools of thought who ALL have other agendas than how best to actually solve our problems.

    There is a role to play for the Cullens of the world whose passion is just the mechanics and science of how the system actually works…..IF those objective, apolitical people also step into the prescriptive area of that science. I respect Cullen’s desire to limit his PG scope for the time being, but I’m looking forward to the day when prescriptive policies and ethical, fair use of the “machine” become more of the mainstream debate. Heaven knows we have no chance to get that from our conflicted govt “leaders” and ideologue “economists”. krb

  • krb

    …”his PC scope…” Sorry!

  • http://www.deltafinancials.com Delta Financials

    There’s a few every week. Take using “potential GDP” to benchmark deficits and spending on. Or his great depression narrative which simply ignores the fact that the ’44-’50 period saw some of the largest tax cuts in history (taxes as a percentage of GDP went from 21% in ’44 to 14.4% in ’50). Or how he ignores Iceland because it doesn’t fit his narrative. The list is endless. The name of his blog says it all “the conscience of a liberal”. That’s not science – that’s finding a way to fit the facts to a view you’ve committed to. I don’t claim to be the smartest cookie in the jar, but I’m not looking to pick a side on any issue purely because of some ideological consideration. Facts in their entirety matter.

  • Cheeto Dust

    We will all be Billionaires and equally penniless.

  • Greg

    Except you know, everything you have said is absolutely false. First off, you make an assertion that is decidedly untrue, that increasing the money supply hasn’t ever created prosperity. Look at France and Britain in the 1920s and 30s. When France increased the money supply in the 20s its economy boomed to being at roughly 140% of 1913 levels, while the UK economy sagged. Then in the 1930s the two countries reversed themselves and France saw zero growth meanwhile the UK grew at quite a rapid pace.

    Austrians have a completely inexplicable and entirely unwarranted fetish with gold. Gold is just a metal with no intrinsic value. Indeed gold as a currency is just as much a “fiat” currency as paper as currency, all of it is only useful as currency because a government chooses to accept it as payment for taxes.

  • anon

    Delta, I don’t what you mean about Iceland as Krugman has written about it several times.

    I also don’t know what your point is about taxes as a percent of GDP. (Debt to GDP was also decreasing at the time, so what?)

    Do you have a link to a misleading use of “potential GDP”? You’re saying the recession is structural?

    I don’t what the name of the blog has to do with anything. He writes about both economics issues and political issues. (In any case his motivation for finding a fact doesn’t change the facts. It’s the difference between discovery and justification. If he were changing the facts on the other hand.)

  • Greg

    Rick: Your #2 is absolutely false. Indeed inflation is generally beneficial to the poor and middle classes and only harmful to the creditor class. Inflation causes debts denominated in that currency (as basically all private and public US debts are) to essentially be “erased.” Deflation kills the poor and benefits the rich and inflation does the reverse.

  • Greg

    I’m sorry but your anecdotal evidence isn’t worth the time you spent writing it down. To illustrate: my food costs have stayed rather stable or even declined somewhat. Computers are cheaper, TVs are cheaper, my cable/internet/phone bill is less today than it was a few years back. All in all the only things which I buy regularly which are more expensive today than they were a few years ago are cigarettes and that is entirely due to taxation. So my anecdotal purchasing experience is precisely opposed to yours. Which is why we have statistics, to analyze all of our purchases and tell us the truth about them. Inflation has been painfully low the past few years, and that is a problem. Higher inflation would be a massive benefit to the US economy right now, given how badly so many americans are indebted. An inflation rate of 5% would massively improve the housing market and would open up a huge amount of purchasing power which is currently spent on paying overvalued mortgages and student loans.

  • Greg

    Except of course that growth isn’t stagnating but is improving, albeit slowly (due to poor fiscal policy, namely the general austerity pursued by state and local governments and the failure of the federal government to raise is expenditures to match) and that we really aren’t seeing any inflation. The Fed’s cheap money today is the only thing keeping our economy from tumbling into an abyss by depressing long term interest rates and therefore increasing investment in industrial plant and housing stock. That is why we saw a huge boom in housing starts and permitting almost immediately following the announcement of QE3.

  • anon

    I don’t agree that Austrians are for long term gain. They claim to be value neutral or that all value is subjective. To them it doesn’t matter if people are worse off in the long run because their ethics are based on radical individualism.

    Basically malinvestments are not “bad investments” because they are worthless but because they’re a transfer from one type of investor to another.

    To them a “free market” interest rate can never be too low, even though you can still have bubbles and recessions in anarcho-topia, because each person can be blamed for their decisions.

    It’s true that many Austrians claim we will in fact be better off in long run, but Keynesians also claim this.

    Keynesians argue that short term pain will turn into long term pain.

    By long term gain Aurstrians actually mean long term economic “efficiency.” Specifically they mean the economy itself will be more efficient, not that welfare will necessarily be improved. (Again many do claim welfare will be improved, just that they don’t care if it’s not because any individual is on their own.)

    Efficiency is a relative term. You could have a perfectly efficient subsistence economy.

  • Cowpoke

    Greg, when talking about Inflation VS Deflation, isn’t it prudent to discern which side of the coin your on?

    For example would a poor person who is a renter, be better served in a deflationary housing collapse than a poor person who owns one?

  • anon

    To put it another way: Austrians view the government as bad first and foremost because it takes liberty away from individuals not because of the economic outcome.

    This is why they think they think we “need” unemployment because any attempt to lower unemployment would take liberty away from individuals.

    To them if you’re poor or unemployed it’s because you value poverty and unemployment more than wealth and work.

    But even if you didn’t it is of no concern to them because taxes and money inflation are theft at the point of a gun.

    (I’m not wholly unsympathetic to Austrian/anarchist views. Perhaps we really will be better off.)

  • Tyler

    “We would be doing better if we had a larger fiscal stimulus…Keynesians have been right.” Wow, I didn’t know Krugman would take the time to comment on my statement.

  • Tyler

    Ok, true. How about we call it a huge fail on Schiff’s part if there is no hyperinflation by 2020. I could live with that. lol

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

    The reason the central banks keep buying government debt with new money (monetizing debt) is that nobody else is buying and the government needs money to operate. The Fed will do the same even if interest rates are 50%.

  • http://www.orcamgroup.com Cullen Roche

    This is verifiably wrong. This is precisely what most people said when QE2 was about to end. They said yields would rise because there’s not enough demand for govt bonds. But the Fed is buying on the secondary market which is just about the most liquid market on earth. The PD’s are required to bid at tsy auctions and then on-sell in the secondary market as they always do. There’s really nothing that unusual going on here at all. Which is why yield FELL when QE2 ended. All you need to do is study recent history to prove your own theories and understanding of the system wrong.

  • http://www.deltafinancials.com Delta Financials

    Right. So let’s start with the great depression, anon. How on earth is a version of the depression that leaves out the ’44-’50 tax cuts an objective assessment of the depression. Sins of omission in academics are a tell tale sign of a lack of objectivity.

    As for Iceland – he cherry picks the odd issue within – but really, Iceland is a case of – let’s liquidate the bad debt, let the banks go bust and build all over again. And it hasn’t been a disaster. Big picture implications? Lost on PK.

    Lastly, yes – this recession is structural. If high unemployment over a 5 year period doesn’t tell an economist that there’s a significant structural component, I’m not sure what the economist is doing. In fact, the very fact that the pace of the recovery was sluggish is confirmation that using potential GDP as a barometer is intellectually dishonest.

    Now, if you pre commit to a liberal ideology, few facts are going to change your views on it. I’m really not sure why economists should have any big picture political leanings – each issue deserves its own independent, objective analysis. Surely.

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

    We were talking about why central banks keep monetizing debt even after inflation goes higher, not the current situation.

  • Johnny Evers

    Wages flat, prices up.
    Unemployment up. Food stamps up.
    Boomers retiring and going on the dole.
    Young people groaning under the weight of higher taxes and student loan debt.
    Infrastructure crumbling.
    Families breaking down.
    Maybe the solution is printing money (and yes, when you borrow money that you will never pay back you are adding financial assets (money) to the system. I wish we could be honest about that. We’re getting closer — the B of J is talking about buying debt and the Europeans are extending the maturity on our debt to forever … and the Treasury wants to eliminate our debt ceiling.
    Let’s hear the printers defend their strategy and the results.

  • Johnny Evers

    The Fed can keep interest rates at zero forever. We could be headed for a bizarre situation in which inflation is running at double digits, Treasuries are yielding zero and the government steps in to lend money directly to businesses and individuals.

  • anon

    Delta, if you want to argue against the necessity of the bank bailouts, I have no problem with that. Dean Baker has made the same point although he uses Argentina, not Iceland as a comparison.

    Baker has repeatedly stressed that it’s the collapse of the housing bubble, not the “financial crisis” that’s dragging down the economy. And not just because of underwater homeowners, but because of the lost demand. If you have the time read one of his many posts on the topic.

    You’re right that taxes were lower after the war, but taxes were so high during the war because the government was spending so much on the war. The budget had moved to surplus by 1947 so there was plenty of room to cut taxes.

    I suppose you’re making a purely supply side case, but cutting taxes fits a demand side story.

  • hangemhi

    krb – if you pick examples where private debt deflation is greater than public deficit spending you “prove” keynes wrong. And if you pick examples where private debt is exploding and greater than the decline in gov debt, you also “prove” keynes wrong. But what you haven’t proven wrong is anyone who actually understands the ENTIRE money system. So what you have only actually proven is that all one needs to do to refute any theory is take their own version of the theory, rather than the theory itself, and go out and find examples where your wrong theory…. is…. ahh…. wrong!!!! So congrats on that…. your comments have been a smashing success.

  • hangemhi

    Rick – bidding up ANY asset class proves only that “investors” value it – sometimes for sane reasons, sometimes for insane ones, and sometimes because they are like Schiff and don’t actually understand how the monetary system really works. And sometimes those assets keep going up beyond any rational level – see tulips, or housing, or dot com stocks… or gold (and before you bash me as a gold hater – tulips may have been idiotic, but housing and dot com are real and valuable – they just got out of control because people bought into rhetoric rather than reality).