Parenteau: The Hyperinflation Hyperventalists

By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute who writes at New Deal 2.0

After a slugfest on fiscal deficits, I find that the question of hyperinflation now demands an answer. And here it is: fiscal deficit spending may be a necessary condition of hyperinflation, but it is hardly a sufficient condition.

Think this is yet another rant against the “deficit errorists?” Think again. Paul Krugman treated this question in his March 18th New York Times column:

Hyperinflation is actually a quite well understood phenomenon, and its causes aren’t especially controversial among economists. It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press, trying to extract large amounts of seignorage – revenue from money creation. This leads to inflation, which leads people to hold down their cash holdings, which means that the printing presses have to run faster to buy the same amount of resources, and so on.

Krugman locates the source of hyperinflation in what is termed the “monetization” of fiscal deficit spending. He then attributes its perpetuation to shifts in the liquidity preferences of people — that is, the share of their portfolio that households and firms wish to hold in cash or cash like investment instruments (think Treasury bills, or money market mutual funds, for example). Krugman’s logic means that even the liberal wing, or the saltwater contingent, of the economics world has a touch of deficit errorism. We would invite Paul to take a closer look at the UBS research on public debt to GDP ratios and inflation first released last summer, reprinted in a FT Alphaville note, and discussed on Naked Capitalism. The story of inflation and fiscal deficits is more ambiguous, or at least more complex than the deficit errorists would have you believe.

Coincidentally, an investment manager friend forwarded me a letter that Ebullio Capital Management* allegedly sent to its clients after February’s investment results, which took them down nearly 96% for the year – virtually wiping out their stellar gains of the prior two years. The letter reveals that Ebullio was so ebullient about the possibility (inevitability?) of hyperinflation emerging from recent policy excesses that they bet the ranch on hyperinflation plays in the commodity corner of the investing world (metals), and lost big time. While we still have questions as to whether this is a spoof or not, there are undoubtedly people sitting around in gold wondering whether the old yellow dog is going to get up and bark again anytime soon. Although hyperinflation hyperventilation has been catching on in recent months, especially amongst the deficit errorists, gold has been dead money since late November 2009.

What gives? As a piece I wrote in the July issue of The Richebacher Letter explains, hyperinflation requires extreme conditions not just on the demand side, but on the supply side as well. A month after the Richebacher piece, Bill Mitchell published a similar conclusion. To summarize our findings: on the demand side, in order for household spending power to keep up with rising prices, household nominal incomes or credit access must be ratcheted up in synch with price hikes. Otherwise, the price hikes will not stick. Households will have to pull back less-essential spending areas to afford the same quantity of goods in essential items. So your gas, home heating oil, health care, or food bill goes up, and you cut back on your restaurant and entertainment spending, unless your paycheck also increases, or you can tap more credit. That is why hyperinflation episodes need more than just deficit spending. It is true, as Marshall Auerback and I explained in a recent New Deal 2.0 post, that fiscal deficits increase the net cash flow for the household sector as a whole. But we also usually observe some sort of escalator clauses or cost of living adjustment mechanisms built into wage contracts that allow this ratcheting up of household income pari passu with the inflation hikes. Take that element away — and it is a recurring theme in historical episodes of hyperinflation — and households cannot keep up with hyperinflation. The higher prices cannot get validated by higher consumer spending. The hyperinflation flares out.

Beyond this demand side component, which is scarcely to be found in the US wage contracts these days (although we must mention it is built into some government benefit programs like social security), there is the supply side issue. Productive capacity must be closed or abandoned in order for the hyperinflation to really rip. There is a built-in dynamic that encourages this. As the hyperinflation gets recognized, entrepreneurs eventually figure out that they would be much better off speculating in commodities (like Ebullio), buying farmland, chasing gold and other precious metals, or more generally, repositioning their portfolios and reinvesting their profits in tangible assets with relatively fixed supplies. That is, goods that are fairly nonreproducible become stores of value, as it is their prices that tend to rise most swiftly, since higher prices cannot, by definition, elicit any new supplies. Hence, those of you who lived through the ‘70s (and still remember what you were doing) will recall high net worth households were busy hoarding ancient Chinese ceramics while the middle class was chasing residential real estate, and the stock market basically went sideways.

In the case of the Weimar Republic following WWI, and Zimbabwe most recently, remember that war (civil or international), has an impeccable way of destroying productive capacity in a nation, or rerouting it to the production of war material. In the Weimar episode, the final back-breaking run up in hyperinflation accompanied the occupation by the French of the Ruhr Valley, which held a fair concentration of German production facilities. In solidarity with the workers who struck those plants in response, the Weimar Republic continued to pay the workers through fiscal measures. Cut production, but continue income flows, and you have the recipe for the kind of unresolved distributional conflict that often lies at the heart of the inflation process. Mainstream economics and popular lore refuse to see this.

Suffice it to say that hyperinflation takes a very special set of conditions. It is not, contra Paul Krugman, all about fiscal deficits, nor is it only about fiscal deficits. That is why we do not see hyperinflation breaking out all over the place on any given day, despite the fact the governments have to first create the money that you and I use to pay taxes or buy Treasury bonds (because even though we “make” money, we cannot create it, without risking a spell in jail for counterfeiting). Know your history. Try not to pass out with the hyperventilating hyperinflationistas: they are a particularly virulent wing of the deficit errorists, and they may simply leave you in a state similar to the one alleged to have been experienced by Ebullio Capital Management’s clients.

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  1. attempter

    Cut production, but continue income flows, and you have the recipe for the kind of unresolved distributional conflict that often lies at the heart of the inflation process.

    This economy is loaded with massive income flows based on no production. There’s the finance and weaponry sectors, and TPTB even want to add this insurance racket bailout in the form of this mandate to buy the toxic “asset” of a worthless piece of paper that says “health insurance”.

    Here’s how I look at inflation/deflation. The continuum goes from, on one side, the system maintaining control (managed inflation), to the different ways of losing control (deflation or hyperinflation).

    Speaking generally, America’s real economy has been gutted, and the wealth and power extracted by these rackets depends completely upon keeping the debt bubble propped up. But the vast debt bubble wants to deflate (reality wants to deflate). So it will take ever more extreme, artificial measures for them to stave off the reality-based debt deflation and keep phony “growth” and manangeable inflation going.

    They can’t fight reality forever, and therefore they’ll definitely lose control of the situation. They’ll have to surrender to deflation, or surrender to hyper-inflation. Given their pro-bubble premises and inertia, I think the latter is a serious possibility.

    1. Yves Smith Post author

      Inflation does not equal hyperinflation. That is the point of the post. It takes more particular circumstances than just “printing” to product hyperinflation. The Volcker experiment with trying to manage money supply in the early 1980s and a similar experiment under Thatcher gives some insight as to why: the relationship between money supply growth and economic metrics (including inflation) broke down. William Greider in his Secrets of the Temple gives a blow by blow account.

      1. Fu

        Inflation does not equal hyperinflation.

        Yes, but 5 years of 25% inflation will do plenty of damage to bond values.

        1. Polly Cleveland

          During the Zimbabwean hyperinflation, the government printed money to pay the military–effectively transferring goods to them from everyone else. This supports the argument that it’s more than just deficit spending that creates hyperinflation.

          1. s

            Supply and demand models do zero to address confidence in currency. Hate to say it but this blog is becoming harder and harder to read. Go back to basics yves much better content and analysis a while back. Starting to worry about erin callan syndrome

          2. MacroStrategy Edge

            Yes, Polly, you are getting it. Income flows that are not associated with production, especially consumer goods and services production, will tend to get you an inflationary bias, barring some impressive advances in labor productivity along the way.

            S (for some no reply button after your comment below, so this is the only way I can comment) lack of confidence in a currency is an example of a collapse in demand for a currency, so you are still working with supply and demand.

            So let’s run that film: what does a lack of confidence do to economic behavior? Households and firms try to pass the old maid of the currency they no longer believe in by 1) purchasing goods and services, especially storable ones, as soon as the get a money payment of any sort, 2) investing existing portfolios and new savings immediately in durable or real assets which are not easily produced or reproduced, so they have relatively fixed supplies, and 3) trying to exchange the suspect currency for one that is likely to be a better store of value and a more widely accepted means of settlement.

            Let’s also assume I am right and entrepreneurs and business managers cease being interested in using the capital stock to produce and instead get into commodity speculation, agricultural and residential real estate speculation, or the hoarding of precious metals.(This does tend to be a trademark of the later stages of a hyperinflation historically) So a lot of plants get shut down as this happens, and people lose their jobs.

            It then becomes hard to make the hyperinflation last. Step 1 won’t hold up very long if people are losing their jobs. Fiscal policy or credit availability would have to replace the household income lost from plant shutdowns. People might ask to get paid more frequently (another trademark of hyperinflations) but unless they have the bargaining power, fat chance they’ll get what they ask for.

            Step 2 leads to the bidding up of money prices for durable assets, so the existing owners experience a windfall, but of course they would prefer to reinvest it in other durable assets than hold cash…and these durable assets have already been bid up in price, so this is like selling a house and then buying it back at a higher price and thinking you are richer for it. Again, how do households keep up with this unless their incomes are also growing, or credit availability is loosening? Plus, these are durable assets which we stipulate cannot be produced easily – they have limited supplies or they are hard to reproduce – so there will be little or no jobs increased from this shift in portfolio preferences.

            Step 3 makes for a fall in the exchange rate and a sharp rise in a) imported goods prices and b) a sharp increase in the burden of servicing debt denominated in foreign currencies. Both of these represent a transfer of purchasing power away from domestic households to foreign households, again undermining the ability of domestic households to afford high and rising prices.

            So yes, confidence in a currency does matter, but it matters in ways we can anticipate using supply and demand analysis. And when we stop to trace these out, what do we find? Unless there is something buttressing household income flows, like escalating fiscal stimulus or automatic cost of living adjustments, it may be very hard to perpetuate a hyperinflation episode just on the back of a loss of confidence in a currency, as you put it.

            I should also note, there are a number of countries with working economies that have currency substitution – that is, foreign currencies are used in many if not most transactions. That is why half the US money stock, or something close to that, is held outside the US border.

            Those economies are not all in hyperinflation, nor do they display an inevitable hyperinflationary tendency, although often currency substitution shows up after a currency collapse that may have at least a whiff of hyperinflation about it. I am not advocating currency substitution as a way to go – just pointing out it is possible, and need not lead straight to hyperinflation.

            Hope that helps.

          3. S

            That is basically a long windwed way of saying we can assume it away. I’d say when 50 plus percent of your “demand” (assumeing that direct bidder is someone real), is offshore with a growing appetite to find alternatives, as the old saying goes “mission control we have a problem.” Could you explain to me how in a decade we have had no job creation and an incrmeental $5T of GDP? You call it a gap, some may even call it hyperinflation.

            As for the cirular example you assume a closed system – why wouldn;t you. I would be willing to bet you love the idea of paperless money and negative rates..

            What if I were to merely suggest that people aren;t half as stupid as the bankers assume – and they themselves began the slow and steady process of forcing the transaction mechanism away from the store of value. They need not be the same thing.

          4. MacroStrategy Edge

            S – No, I am hardly assuming away anything. I am trying to examine the possibilities with you. But we don’t need to do that if all it appears to be to you is assuming things away.

            Any country at any time can demand that the US pay for the exports it sells to the US in a currency other than US dollars.

            Why do you suppose they have not thought of that yet, and executed such a requirement?

            Yes, people can find other currencies to settle economic and financial contracts. That was the whole point of the part I wrote on currency substitution.

            If you won’t take the time to read, why should you expect me to reply?

            But realize there can be a limit to currency substitution. At the end of the accounting period, when it comes time to pay taxes, if you don’t have the right currency in your bank account, you will be going to jail. Something about this not so idle threat tends to place limits on the ability of citizens to chose any old form of currency for settling their liabilities, exchanging their products, or storing potential and immediately available purchasing power, right?

            Doesn’t mean underground economies cannot form – just ask the Russian mafia. Just means there are limits to exploring cracks in the system. Don’t get caught in your crack.

    2. Martin

      Now, Rob was arguing that it takes even more than printing money to get hyperinflation.
      But so far the fed has not interacted in the primary treasury bond market. So effectively, there has been no money printing in without productivity. Zero.

      And when you talk about the military and health insurance. Have you ever tried to use a tank as collateral at the central bank, or your health insurance certificate? I guess no.

      1. MacroStrategy Edge

        Martin –

        Please take a look at the Fed’s balance sheet. It is swollen. When the Fed’s balance sheet expands, generally speaking, money is being created.

        At the same time, labor productivity growth has gone through the roof, as companies have cut to the bone (marrow) during the recession and are only just about to start net hiring again despite increase in top line revenue growth, profits, and production.

        But it is not the labor productivity so much that is suppressing inflation or hyperinflation. It is that the money the Fed created is sitting on bank balance sheets, and they have no desire to lend it out to people who might buy goods or services with it. For a number of reason, not the least of which is their recent near death experience and their uncertainty about future loan losses and future capital requirements, banks prefer to hoard reserves and cash right now, rather than make loans to people who want to buy produced goods and services.

        So the Austrian School story that the very creation of money is by definition inflation, or the Friedmaniac monetarist story is that inflation is just too much money chasing too few goods, are both at best incomplete.

        Money chases nothing. Money has no volition, no decision making power. People with money do, though. And unless people with money offer to use that money to buy goods and services, there is no magical way for the creation of money to produce higher prices. That is an abstraction that makes no sense. The money has to be used to bid for goods and services, or else it is difficult at best for inflation to result from money creation. If the money created by the Fed is just sitting on bank balance sheets, and the banks refuse for a variety of reasons to lend it out to people who are going to use that money to bid for goods and services, then that money is for all intents and purposes inert with respect to causing inflation.

        So much of this stuff has been mystified, yet when you stop and trace it all out, things can become a bit clearer beyond the slogans and nostrums and incomplete or twisted theories that get tossed around in fairly cavalier fashion.

  2. giulio

    God Yves,

    I enjoy your blog a lot but why such an arrogant, unjustified and obtuse attack on the economics profession and Krugman. Hyperinflation is mechanically about LARGE deficits AND the government trying to finance them by money printing rather that either eventually raising taxes/cutting expenditure or defaulting. Large deficits are a necessary but not sufficient condition in the sense that without them there is no need to run the printing presses like crazy. But notice the AND. Governments do not have to and historically most governments did not monetize the debt. Krugman and most economists understand this perfectly.

    What is your point about ‘know your history’? Notice that the datapoints in the UBS paper you quote do not contain any hyperinflation observation (the largest inflation rate being 30% YEARLY). The commonly accepted definition of hyperinflation is a rate of inflation exceeding 50% A MONTH! This is exactly the point that Krugman was making in his column.

    Take it easy.

    1. Skippy

      Ummm…maybe because they sold the planet down the road (economics experts) aka Krugman the wind vane. 3/5 of the agreed upon bench for hyperinflation sure is a comfort to most people that inhabit the earth.

      Come on now, the agreed upon norms are just a door mat these days. Hence the panic aka truthism found to be a lie.

      Skippy….Yet we toil over this dung heap of faux academia?

    2. Dan Duncan

      Parenteau does a good job getting in front of hyper-inflation freight train. In light of the strong opinions held on either side of the debate, The Timid need not apply. Seems like his “attitude” is a function of the same.

      As for the underlying debate, however…

      How meaningful is this debate when there seems to be no real consensus as to what constitutes “Money”? The players on either side of the Inflation v. Deflation fight appear to hold different definitions.

      And this fact alone justifies any attack against the economics profession. Until the “professionals” agree on the most fundamental of concepts, then these same “professionals” will simply idle their time away in academic centers arguing past one another in an Abstract Semantic Wonderland where the Heroes are always right and the Villains are always wrong.

      Where were the economists when Fiat went from being a shitty Italian automobile…to a shitty concept of money?

      “Fiat.” Latin for “let it be done”.

      Fiat Money. WTF?

      Thy Kingdom come,
      Thy Will be done

      now reads:

      Thy Kingdom come,
      Fiat Money, Bitch!

      Under the cover of light, the politicians and economists have shoved an imaginary pile of excrement down our throats…and because of our great faith/stupidity we believe in it…so we are choking on it.

      A couple of years ago, Jay Z caused a stir about the plight of the Dollar when he featured Euros in his video, rather than Dollars.

      “All about the Benjamins” became “All about the Euros”, when, really, it’s been:

      “All about the Abstraction…Bitch!”

      Inflation v. Deflation? Who the hell knows? Certainly not the dismal scientists at Lake Wobegone U, where all the economists are above average.

      1. MacroStrategy Edge

        It is true, Dan, that I am guilty of practicing economics with an attitude. Sorry, I listened to one too many Sex Pistols and Dead Kennedy’s songs in college. One day, I will get over it.

        Mostly, though, I am interested in provoking people to think about some of the bs they are being fed in matters economic and financial before they get duped and manipulated even further to serve and defend the powers that be, whether those powers be people in the government, business, or financial worlds. I apologize if you find my tone abrasive, but frankly, we’ve run out time to screw around, and everybody knows it.

        As for the definition, let me suggest the following spare but fully functional one that I shamelessly lifted from Paul Davidson, who’s recent book on Keynes y’all need to go out and buy as soon as your eyeballs lift from this screen.

        Money is the means of final settlement. Full stop. Now pass me Occam’s Razor so I can slice open some of the angels dancing on the head of the monetary definition pin.

        If you are wondering whether the thing you are looking at is money, ask yourself, can I settle a contractual obligation or pay my taxes or extinguish a debt or pay for something with this thing, without incurring and further obligations? If the answer is yes, Dan, then you’ve got money!

        Now, if you then want to spin off into the different types of money – fiat, commodity, credit, etc. – you’ll have to read my March Richebacher Letter if you want to see how I make sense of it all.

        But you are quite correct about WTF fiat money. The governing body politic decides what it is willing to receive that will settle a tax liability, and voila, you’ve got money!

        May not be the best monetary arrangement, but as I wrote above, it appears we are not smart enough yet to do come up with something that endures through the ages, besides clay tablets and tally sticks, since even the gold standard has crashed and burned on more than one occassion (and economists like Barry Eichengreen observe the countries on gold standards were the last out of the Great Depression – probably not a prize you want to win).

        But don’t let that stop you from searching for a better monetary arrangement. Think for yourself. Discuss with others. And when you find it, please do share.



    3. MacroStrategy Edge


      Sorry this is not an attack on Krugman. I respect much of Krugman’s work, even if I do not always agree with it (nor does he – see the New Yorker interview earlier this month with him where he concludes his earlier work on managed exchange rates was theoretically elegant but, um, empirically wrong). And even if it was an attack on Krugman, I can assure you, between the NYT hate mail he’s generated, and the enmity of his academic colleagues who do not appreciate either his politics or his occassional forays into more maverick forms of economic analysis, the words I wrote above are unlikely to be more than a bug bite to him – if he ever sees them at all, anyway.

      Rather, this piece is an attack on the many fearmongers who have deep pockets or excellent media soapboxes and who are repeatedly concluding the road to hyperinflationary hell is paved with monetized fiscal deficits, that is all it is paved with, and we are already on that road. Some of these people are also in positions of policy making authority.

      I am saying even a cursory examination of the history of hyperinflationary episodes suggests the foul stew requires more than monetized fiscal deficits for it to really boil over, and we need to check to see if those ingredients are really present now, or likely to show up in the near future.

      I am also saying if you are willing to stop and think about it, you cannot create the money you use to pay taxes or buy government bonds. You can earn it or make it, but you cannot produce the money – that is counterfeiting. Now start asking yourself how money is created under current arrangements (and you may find some of the essays on billy blog very instrumental in this exploration), and you will eventually come to recognize that the money the household sector uses as a whole to pay taxes and settle Treasury bond purchases comes from none other than…the government itself, as the Fed credits private bank accounts with deficit spending, or the Fed credits banks accounts of private agents selling the assets they hold to the Fed.

      Let this one in, and realize it has been going on for years, both here and abroad, without an immediate or an inevitable hyperinflationary spiral taking root, and you can drop the ativan prescription tomorrow.

    1. MacroStrategy Edge

      Cathryn – No, I did not say that. Read it again. I did say hyperinflation appears, at least on my review of the facts and history, to require a unique set of conditions – as in more than just “monetized” fiscal deficits.

      That is why we don’t see hyperinflation breaking out everytime a country runs a large fiscal deficit, “monetized” or not.

      In fact, the UBS results discussed in my article on NC early this week reveals there is no hard an fast relationship between increases in the public debt to GDP ratio and inflation rates, never mind hyperinflation rates.

      So I am suggesting some things that I conclude might give us a better chance of knowing when we are heading into a hyperinflationary outcome. And it appears the list is longer than just “monetized” fiscal deficits, that’s all.

      If you don’t care to recognize the checklist I offer, of course that is entirely up to you. Some people say ignorance is bliss. My experience is that ignorance just makes it easier for you to be manipulated and econned, and neither of these appear to be reliable routes to bliss.



  3. CrisisMaven

    I wonder, who’s the errorist: “your gas, home heating oil, health care, or food bill goes up, and you cut back on your restaurant and entertainment spending” – so, you’re saying, the restaurant bills go down (restaurants give rebates like car dealers in a downturn) ALTHOUGH food prices, the very stuff they serve, are going up? NO – inflation, once it begins, tends to be across the board, no market-segementing anymore. Still, restaurant bills and other unnecessary spending items may go down in REAL terms – no inflationist denies that, but in NOMIMAL terms they still go up until in hyperinflation everything goes up and still he who sells has less to spend in real terms. Inflation is NOT about rising prices in REAL terms! This “fear of deflation” is just a ruse by central banks to keep inflating the money supply. Deflation does not keep people from spending – they always spend what’s necessary. And money NOT “spent” is then saved which means it is credit to someone who invests it for capital goods etc. thus it is again being spent, only not for consumption. Money never lies completely idle to any extent whether there’s inflation, deflation, stability or a solar eclipse. For deflation to seriously happen, not only the current extreme credit expansion by the central banks and states (through “quantitative easing”, stimulus packages, monetising and then spending national debt etc.) but also the money that was released into the economy PRIOR to the collapse would have to be “mopped up” again. This is nowhere to be seen nor would it be technically possible (confiscation aside) so we will rather see inflation than deflation.

    1. Greg

      SOOOO Crisis Maven

      Are you now reduced to simply coming up with one original thought and mindlessly re posting it at various blog comment sections. This is your exact response to a billy blog post a couple days ago.

      Your other error in this line of reasoning is to equate “saving” to “investment’ and to then say they are equal forms of spending supporting aggregate demand.
      Yes the accounting identities of savings and investment do in fact appear to be equal in value but simply looking at that relationship can lead one to the wrong conclusion that investment follows savings, which is categorically wrong. Investment (in NEW capital assets) leads to savings, not the other way around. Getting the direction of flow right is crucial to encouraging growth.

      People mistakenly think when they are “investing” in the stock market and buying other peoples stocks they are letting their savings work for growth and eventually job creation. They are not. Buying an IPO has that affect but purchases in the secondary market are simply plays at the Wall St casino and are not investment in the sense that most economists speak of investment.
      Growing the FIRE sector is no way to build a national economy as our post Reagan American growth strategy has shown.

    2. MacroStrategy Edge


      Looks like your CapsLock key keeps getting STUCK. Might want to have your KEYBOARD checked out.

      Deflation can be demand side driven, as in falling wage and profit income in money terms, or supply side driven, as in rising labor productivity from let’s say innovation that lowers unit costs of production. This first type tends, by definition to reduce the money available to spend. The second tends to reduce the amount of time you have to work to produce and consume the same quantity of goods. Let’s agree about this distinction.

      And let’s also agree there are both historical episodes related to the first type that lead to debt deflation spirals that can CRUSH SOCIETIES (damn, looks like my keyboard has the same technical difficulty as yours) that start with large loads of private debt relative to private nominal income flows.

      And historical episodes related to the second type that may lead to gently falling product prices and higher material standards of living (think falling computer prices as innovation accelerates, for example, or the late 1800s, as Jim Grant of Grant’s Interest Rate Observer likes to cite frequenty, but to be clear, also sported some patches of bad deflation as well, I recognize).

      These are distinctions with more than a few differences, and I find it helps clear the mind when discussing deflation and its potential repercussions.

      Regarding your repeated assertion that savings creates investment, or to put it more specifically, savings out of income flows insure reinvestment in tangible capital goods, this is unmitigated horsesh*t in the economy which we actually inhabit. Keynes clobbered Hayek over the head with this a lifetime ago.

      Think of it this way. Household sector gets paid wages to produce for firms. Wages are a cost to firms. In order to recover the cost of production that includes wages, firms must sell goods and services to households equal to the total wage bill. Otherwise they don’t recover all their costs.

      So when a household saves money out of wage income flows note that a) it does not (and generally cannot) place an order WITH ANY PRODUCER for a certain quantity of a specified goods or service to be delivered at a specified time in the future

      1. MacroStrategy Edge

        ..sorry, freaking key board, hit submit button somehow…

        and b) there is no price signal that insures desired household saving out of income flows is exactly equal to desired investment by firms.

        And let me be absolutely clear about this – gather round, dear pure blooded Austrian Schoolers and mainstream econogurus – the interest rate is NOT the price that equilibrates saving with investment.

        The interest rate cannot ever be the reward to saving. Saving money without investing it in a fixed income instrument like a Treasury bond, or in a bank CD, will get you precisely ZERO interest income. Interest is the reward to the saver for parting with the liquidity of the money saved – that is, for tying the money up in a less liquid investment instrument. Keynes demonstrated this a lifetime ago with his liquidity prefernce theory of interest rates which the mainstream of the profession either decided to suppressed, or could never accept, depending upon which story you want to believe.

        So CrisisMaven, looks like YOU’VE BEEN ECONNED, but hey, so have most people, especially in the economics profession. Time for a major rethink, I’d say, which might be a good thing, as Greg mentioned, since you do have this Johnny One Note proclivity, at least on NC.



  4. middyfeek

    The dollar used to be worth something. Now, it’s well on its way to being crap. The cause of this is the government creating money out of thin air. .

    No matter what the government says or promises they will continue to create money out of thin air. Sooner or later the dollar will crash. All the rest is talk.

    Pari passu indeed.

    1. Greg

      How do you determine what the dollar is worth?

      Is Gold worth something?

      Can you describe golds worth without using the term dollar or any other circulating fiat currency? I didnt think so.

    2. MacroStrategy Edge

      I think you meant pari pissu, middyfeek.

      Look, the government has to create the money you use to pay taxes and buy Treasury bonds under current arrangements. You just have to run on the Habit Trail gerbil wheel in order to get the money in your pocket.

      This has been the game for years, across many nations. It has not, and need not, end in hyperinflationary tears. And to be honest, we have yet to see, nor are we likely to ever see, a monetary arrangement that lasts for perpetuity. Even gold standards end in tears.

      Not arguing we shouldn’t try to find something better, but you appear to have fallen prey to the hyperinflation hyperventalists already. Pick yourself up, dust yourself off, get over it, and stop letting them yank your string. You’ve been econned.



  5. Brick

    So the harbingers of hyperinflation are.

    1) entrepreneurs eventually figure out that they would be much better off speculating in commodities , buying farmland, chasing gold and other precious metals.

    2) the “monetization” of fiscal deficit spending.

    3) household spending power cannot keep up with rising prices as household nominal incomes or credit access does not ratchet up in synch with price hikes.

    4) Productive capacity must be closed or abandoned.

    I suspect monetization might be in play to some extent and to a minor degree money is chasing commodities rather than going into the economy. To a lesser degree household income is not keeping up with commodity based price rises, yet this is somewhat mitigated by deflationary forces. The good news is I don’t see productive capacity being abandoned at the moment, although last year you could argue that it was.

    Although I would agree that we are not likely to see hyperinflation soon, I think it could be readily triggered by a lack of confidence in a particular currency. Here I would not be looking at the US initially but Japan and the UK.Once it starts then there is a possibility of contagion which would eventually hit the US as well.

    What does anoy me slightly is the assumption that hyperinflation is solely the consequence of internal policy while I believe it has more to do with external confidence. While governments conceal, fudge, monetize and prevaricate on issues then the risks of a high inflationary period increase.
    Personally I am not in the hyperinflation camp, but see a prolonged period for developed nations going in and out of stagflation as developing nations currency and wages adjust.Globalisation has to run its course and US economic policy can try to fight the flow or go with it.

    1. MacroStrategy Edge

      Brick –

      Regarding external confidence issue, please see my 7:05 pm response to s on 3/20/10 above. If that does not satisfy you, come back with more detail on your concerns.

      Also, if I am correct that household income flows and access to credit will not support hyperinflationary price gains, the very same argument applies to your closing comments on developed nations fading in and out of stagflation, which strictly speaking is falling ouput with rising prices. If output is falling, odds are employment is falling, and with falling employment, household incomes are likely to be falling. So tell me again how they will be able to pay higher prices?



  6. Bates

    The goal of the Fed is to allow asset prices to slowly inflate to regain and maintain some level of ‘stability’ in the system. Asset prices are rising only due to the decline in purchasing power of various currencies. The Fed is attempting to walk a thin line that seperates too much inflation too soon and deflation. Hyperinflation will be the Fed’s last resort, to be used only if they lose control or are forced off their thin line by external events. The Fed is actively fighting deflation with every legal and some not so legal means at their disposal and with as much coordination with foreign CBs as possible. Currently, cracks are beginning to appear with foreign CBs along the lines of debtor and creditor nations and their associated CBs. If their were no pesky foreign (including in the US) governments then the CBs, including the Fed, would have free reign to cooperate as they deemed necessary. BTW, that is the long term goal of CBs; do away with government (soverign) interference. The citizens of countries with longer historys than the US have seen this game (or a variation of it) many times in the past and are not as easy to fool as the US population.

    The intention of the Fed is to drag the current dollar devaluation out over a long period of time. Although the Fed has announced the end of QE in some form, it will not abandon QE altogether, but shift it to other forms and perhaps give it a differnt name. After all, a decline of living standards of any society is easier to accomplish over a multi generational time period than an immediate change that would cause shock followed perhaps by civil unrest.

    The present price of so called (by the author) ‘yellow dog’ gold is an entirely different matter. The current range bound trading of gold, and other PMs, is due to massive short positions by some large players in PM markets, primarily very large banks. The real ‘tell’ for gold is that for the first time in many years CBs have become net buyers of gold. As long as the Fed and other CBs can create currency from thin air, loan it to the banks holding large short positions in gold and other PMs, the PM prices will continue to be range bound. If for any reason the large shorts are forced out of their positions the PMs will continue to increase relative to the amount of new currency being created. If gold were truly a ‘yellow dog’ why would CBs be buying and holding it? Gold will play a part in the new world reserve currency once the dollar is replaced in that role.

    1. MacroStrategy Edge


      Just keep one eye on your rear view mirror Bates.

      You do go further off the reservation than I would, but that’s what makes markets.

      I would only point out, as I have discussed in the past week’s blogs by George Washington on the money multiplier, under current monetary arrangements, banks can create money out of thin air, they don’t need central banks to do so first. Central banks that target fixed policy rates, like the fed funds rate in the US, have to provide all the reserves banks demand at that price (interest rate, really) level or else they cannot hold the target. End of debate.

      Bank loans create deposits. Bank purchases of securities from the private sector create deposits. Neither of these actions require a prior central bank creation of money. Deposits are convertible into currency on demand, and checks written on bank deposits are accepted as a means of settlement. Bank deposits are therefore money. Banks can create money without the Fed first having to create reserves, contrary to the party line of bs fed to you in economics textbooks, but apparently not all central banks or central bankers these days.



  7. Gonzalo Lira

    This post reminds me of those commentators in the early Aughts, who explained how housing and commercial real estate prices would forever rise, up and up and away. They used fairly sophisticated sounding arguments, too—just like this piece. But I think we all saw that movie, and it didn’t have a Hollywood ending.

    There are only four ways to get out from under massive sovereign debt (which is what the US has, after the private losses of the banks were socialized). Raise taxes, cut spending, default, or inflate.

    The first two are politically anathema. Default on Treasuries is a practical impossibility—a default would cause panic

    So Geitner, Summer, et al., will try to inflate away the debt. From their point of view, it’s the most expedient way to get out from under the debt with a minimum political price.

    The problem is, these guys are like the Sorcerer’s Apprentice—they control power they don’t really understand. Plus they’re arrogant enough to believe they can put the hyperinflation genie back in the bottle at their whim—let out “just enough” inflation to “do good”.

    I suppose what I’m saying is, it’s not on *economic* grounds that we’ll get hyperinflation—it’ll be on *political* grounds. The bad choices that will be made is what I (and apparently a lot of other people) believe.

    Hope I’m wrong.

    1. MacroStrategy Edge

      Gonzalo: Do go back and look at the government debt to GDP ratios that built up in the US (and UK for that matter) with WWII. Then ask yourself, which of your four iron clad exit strategies got the public debt to GDP ratio down over the subsequent 2-3 decades?

      Maybe there is a fifth? What could it be? Economic growth that improves government tax receipts and reduces cyclically related expenditures like unemployment compensation?



      1. X

        It was precisely inflation that reduced the size of US debt after WWII.

        In 1946, the debt-to-GDP ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade.
        ‘Using Inflation to Erode the U.S. Public Debt’
        Joshua Aizenman and Nancy Marion
        NBER Working Paper No. 15562
        December 2009

  8. Bill

    I’m not economically educated, but read a lot on these blogs these days.

    Mr. Parenteau explained the Weimar Republic hyperinflation with his model that indicates consumer/private funding rose with govt money printing………just like in current Zimbabwe ?

    Oh but wait…he didn’t get around to Zimbabwe…why is that ? Is it different ? and if so, how ? Could be instructive to know…

    1. MacroStrategy Edge

      Bill – If you have not been economically educated, consider yourself three steps ahead of the rest of us who suffered through the indoctrination process. Seriously.

      But I see you have a touch of hyperinflation hyperventilation showing. Go grab a paper bag from your kitchen, sit down, breathe calmly into the bag, and go back to the original article above and click on the blue text that say “similar conclusion”.

      Here you will find, in my estimation, a darn good depiction of what the hell happened in Zimbabwe from Bill Mitchell, and Australian economist at billy blog, who reveals a few things the hyperventalists forgot to tell you about this situation.

      Then, if you still have questions and doubts, research Zimbabwe’s hyperinflation episode on your own and come to your own conclusions. You don’t need an economic indocrination to do that – all you need is common sense and a good bs detector.



  9. Alexandra Hamilton

    in order for household spending power to keep up with rising prices, household nominal incomes or credit access must be ratcheted up in synch with price hikes. Otherwise, the price hikes will not stick.
    In other words, as soon as people can no longer keep up with rising prices, prices will stop to rise, provided their wages and pensions are not inflation adjusted.
    Isn’t that a bit simplistic?

    The majority of government debt is rather short term nowadays. It will need to be rolled-over in a few years, and will then most likely be inflation adjusted.
    This raises interest payments and debt servicing costs for governments. This can be met by governments by a) raising taxes; b) borrowing even more; c) printing money; d) saving; e) a combination of the four.
    b) and c) are out as option – they are likely to drive inflation up even further.
    You end up with a) and d).
    Where could you possible save? Why pension obligations, of course. However, you cannot just scrap them or reduce them, that would not get much support.
    Pension obligations, for example, are sometimes not or not fully inflation adjusted (social security is for now, but the UK just scrapped that).
    When there is no inflation adjustment, pensions will just be wiped out at some point.
    Even if they are inflation adjusted, you have a problem with higher health insurance costs (will be up) and taxes (will go up as well).

    So, while government cannot inflate their way out of its debt to private banks, it can inflate its way out of obligations towards citizens (e.g. pensions).
    Looks like a sure way to wipe out the low income people and the middle-class, IMHO.

    Deficits DO matter if the debt servicing costs go over a certain threshold.

    1. MacroStrategy Edge


      I can make the description of the inflation process as complex as you want. Problem is, I’ve already got people complaining I am being too obtuse and wonky with this stuff I am dishing out for y’all, so simple works sometimes.

      Regarding your checklist, tell me how and why you can just cross c) off the list? The government creates the money we then use to pay taxes and buy government debt. Under current monetary arrangements, it can be no other way. The sooner we all grow up and face that reality, the faster we can move forward. I know, it is a mind blower, but it is, as they say, what it is, at least until one of us can come up with a better monetary arrangement.

      So tell me again, why the government cannot create the money it uses to pay interest expense? And if the answer is hyperinflation, then go back and read the article again, along with the deficit errorist piece earlier this week at NC which I think you already read as I recognize your handle.

      Now there is a problem I have openly acknowledged in my response to Bruce Kasting earlier in the week with regard to government interest payments to foreign debt holders, but I don’t have time to go hunting through the 100+ responses I have offered to find this for you. You’ll have to do that yourself, or maybe some other kind and skillful reader will post the link here.



  10. NS

    None of the potential (or likely) scenarios are pretty for anyone in either camp..both will produce profound pain beyond what we already see.

    As bad as US deficits are (and they are obscene) other developed nations are far worse. We cannot forget this is a GLOBAL crisis that includes currencies, deficits and massive debt of nations that intermingle. Global trade of sole source base goods present the potential for hostage taking of nations through trade wars, tariffs, etc..this would be inflationary. It will be a mercenary world of Mercantilists. In many ways, it already is.

    History is fine teacher, but we also must recognize there are elements which were not present in former crises in this global world of nanosecond trades which includes access by every Tom, Dick and Hariette. Basal II Accord, The Euro, commodities trading enabled by the CFMA and trade agreements all center around the 11 year mark. Deregulation, global trading in SIVs with pet toothless tigers as watchdog gatekeepers created the perfect economic storm.

    There is ‘disinflation’ in sectors: the primary is RRE and CRE and consumer discretionary. The deficit spending and trillions of liquidity provided by treasury/fed never actually got into the money supply, its held on account (earning interest) and being hoarded by those they lent to, favoring shareholder over taxpayers. For hyperinflation to take hold, the money being hoarded would require those trillions to take the form of lending (or horrors-paying interest on capital sans Glass-Steagall) at the Main Street level. The other way hyperinflation can and does take hold is by short supply of base goods as in the 70s with oil. (yup I survived it….BARELY).

    Policy wonks only have a few tricks up their sleeves. Anything beyond that means they must give up their academic foundations of one theory. It is unimaginable to them that economic paradigms can be false, so the course will continue until it utterly collapses and fails; until every market sector is totally exhausted (and squeezed for every last cent to the top 1%). Its getting close to end game, the race to the bottom is accelerating. My guess is a massive global currency crisis which will challenge every fiat.

    I hope I’m wrong too.

    1. MacroStrategy Edge

      NS –

      Well put.

      But we also have another choice, which requires;

      1. De-duping ourselves through forums like the one Yves has graciously provided us all here, and through books like the one she has bravely produced and is now busy marketing to a wider audience than the one gathered here.

      2. Figuring out plausible ways forward on our own, without waiting for the policy wonks to get it right, through forum like this and conversations with the people in our lives, including random strangers on the train.

      3. Then taking our power back from the sociopathic wing on Wall Street and their predatory sock puppets in government, piece by precious piece, in small d democratic fashion…cuz that’s part of what your ancestors died for…and it won’t happen if you just sit there watching your laptop screen of your flat screen TV.

      It’s high time. I’ve got 3 kids. I’ll be damned if I am going to leave them a world this f*cked up and twisted. Enough is, indeed, enough.

  11. Ryan

    “Although hyperinflation hyperventilation has been catching on in recent months, especially amongst the deficit errorists, gold has been dead money since late November 2009.”

    This whole article seems like a ridiculous bash on gold. If we own gold we will lose 98% like an overleveraged hedge fund.

    Thanks for nothing Yves.

    1. MacroStrategy Edge

      Ryan –

      If it helps you at all, in full disclosure, I happen to have a long position in silver. I consider it an insurance policy in case systems start to break down, because frankly, Sept. 08 was a closer call than any of us knows. Not kidding. Read Sorkin. Read Paulson – he was puking in the wastebasket for a reason, and it wasn’t too many diet cokes.

      But, as you can see, that does not make me susceptible to the fearmongering of the hyperinflation hyperventilators. I choose to think for myself and share what I can find that makes some sense. Maybe that is something you want to do too.

      This is not a gold bashing article – I would be undermining my own portfolio position in another precious metal if that was the objective of the article, and while I am capable of doing stupid things, I assure you, I am not that stupid, at least not yet.

      Hope that helps,


  12. Psittakos

    But why pick a fight with Krugman on this? In his blog post he certainly doesn’t argue that our large fiscal deficits will lead to hyperinflation. His point is that they won’t.

    1. MacroStrategy Edge

      Psittakos –

      As I said above, I have no wish to pick a fight with Paul Krugman (quite the opposite it would appear, if you made it all the way to the PS on my article above), nor is this an article meant to pick a fight with Krugman’s article.

      Read the Krugman quote I pulled from his article again. K says this about hyperinflation, verbatim:

      “It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press”.

      What’s up with that…government creates money how come…oh year, he says they canor raise taxes or borrow to pay for their spending…as in they’ve got a huge budget deficit and no way to close it except creating money.

      No disrespect, Psittakos, but I think you are missing something that is staring you right in the face, at least in that quote.

      Now it is true, K then goes on with this additional monetarist slant, which is a falling liquidity preference in household portfolios story, but that appears as an amplifying mechanism (and one he needs to unpack probably), not as the source of the problem, which starts with governments creating money to close a budget defiict.

      Now, if I really wanted to bust Paul’s chops, I could snidely point out that government alway has to create the money that households use to pay taxes and buy bonds, but I’ve done that schtick a half dozen or so times here, so I’ll let Greg do that rant, especially because I am not really interested in p*ssing of Paul here: quite the opposite.

      now pass the ouzo,


  13. N DePlume

    Actually, I thought this was helpful … though still incomplete. That households need to be able to ratchet up their earnings to keep up with price increases is putting the cart before the horse. Seems it should be the other way around. Second, someone, someday needs to study economics at the household level in this F’ing country. Since the 1970’s households have been able to increase earnings in one of two main ways … rely on two adult earners (single-adult headed households, mostly headed by women, really struggle) — or take on ever increasing amounts of debt as a means of maintaining income and expenditure flows. The first earner’s wages, usually men, have been mostly flat in inflation adjusted terms since that decade. As as households have come to rely on second earners, their expenditure costs increased in service of their new income earning arrangements (largely childcare, healthcare, and additional transportation). So, debt has been an essential income-flow management strategy for households to hold on to non-poverty standards of living.

    With the preceding as a backdrop, their are 4 ways for households to increase their available income to increase their spending on a now limited set of goods (thereby supporting inflation) (1) increase individual wages and hours worked for current workers (2) send additional workers out to bring in income (3) take on even more debt (4) cut their taxes substantially.

    In the current economic and political milieu, which of these 4 are possible for American households? — I see 0, none, zippo. Indeed, #4 is going negative as government at all levels (local, stat, federal) are working feverishly and stealthily to raise taxes, even if B-Obama prefers to call it “health care reform”.

    Ergo, no hyperinflation, indeed no real inflation at all in the sense of flows of money. Deflation, in terms of flows of money and credit, continues apace.

    1. NS

      Bingo. Nicely said. Just one problem, jobs. Can’t pay wages if there are no jobs. The massive ‘stimulus’ produced exceptionally anemic results in job creation. The reason why is self-evident. While the ranks of under-employed rise to historic levels, even those with full-time work find their benefits reduced (no matching on 401ks as an example-reduced contributions to health care insurance, etc.). Average workweeks now stand at ~33 hours.

      For decades, Americans lived in fear of job loss and for good reason. The longer one is unemployed, the more difficult it becomes to find employment. The technological advances that allow business to become more productive with fewer workers added another whammy in a workforce seeking a living wage.

      FDR like programs won’t be adequate as a large portion of the workforce are women and men whose fingernails have never been dirty, do not have the skills to operate heavy machinery for infrastructure projects. This is the gigantic conundrum facing government. Without increases in wages, tax revenues will continue to decline, sales receipts will continue to decline. Those with income will continue to repair hh balance sheets by retiring debt.

      Just where will the jobs be created that provide more than a temporary quarter two bounce from temporary projects? I have a gut feeling that the last game is played as the fed retires its purchases of RMBS, all up in hopes of a natural recovery. Instead its become an insipid unrelenting decline for all but those fair-haired institutions of bank holding companies, insurers and businesses supported by the very employees tax revenues they have devalued out of existence. The middle class is dead. The very last store of value and true wealth for the middle class destroyed, homes that were more than short-term investment avenues for the majority. Time to find some other schmucks to rob.

      This time it is different UE won’t be a ‘lagging’ indicator as in previous jobless recessions. Measurable increases in full time, living wage work will be leading over more than one or two quarters.

      1. MacroStrategy Edge

        Where is it carved in stone, NS, that all government job creation must require ditch digging and the like?

        I am living in state where 23,000 teachers just got pink slipped.

        Why do you believe we must we first hand them a pick and shovel in order to create jobs for them? Their old jobs might just do fine. And seems to me an education has something to do with public investment in human capital of its citizens. Not that there aren’t things that need to be improved in the education system mind you, but just saying, who said anything about hard hats and jackhammers only?



  14. nowhereman

    I read these discussions, some times I get it, sometimes not, but overall, deflation or inflation (hyper or otherwise), my understanding is either way I’m screwed.

    1. MacroStrategy Edge

      Keep trying to get it. Ask questions. Do your own research. Then maybe you don’t have to resign yourself to being screwed. Then maybe you can take your future in your hands, preferably in concert with others, since the Daniel Boone option is pretty much a non-starter these days. Eventually the starving horde will find you and eat your cattle alive while pulling up all your carrots. You may have more choices than you are currently allowing yourself, that is all I am saying here.



  15. Dave

    Has anyone actually checked to find out if any of the past hyperinflation episodes happened in a society with high personal debt? My observation is that Latin American countries that experienced this had very little personal debt relative to North America. The same appears to be the case with 20th century Europe. If you accept the premise that the banks control this country, (I do) why would they allow folks to pay off their mortgages with a month’s pay? Instead, it looks to me that they would just repeat what Paul Volker did in the early 80s. Conspiratives will of course say that “they” will just redenominate. Then, how do you say Revolution?

    Hyperinflation may be just wishful thinking on the part of gold bugs and the highly indebted.

    1. Jim

      That’s an interesting point. Wouldn’t it depend on who the money was borrowed from? In the case of America, the money is borrowed from China, etc, so the banks just take a cut before passing it on, don’t they? In which case hyper inflation might work, as they could take their cut, then pass on a much reduced in value interest payment.

      It would be interesting to look at Iceland, after their currency collapsed, prices doubled over the course of a few days. I don’t know if prices then stabilised, or if they have have high inflation. But it seems that hyper inflation is a policy choice that is taken after productive capacity collapses and the state isn’t willing to sack public servants.

  16. Kevin de Bruxelles

    I thought Mr. Parentheau’s newsletter did a great job explaining hyperinflation in a balanced way. It is true that the two best arguments against hyperinflation in the US are seemingly the lack of any obvious supply shock and the improbability of a wage-price spiral due to the weakness in US labour. But while reading this I kept thinking about in reality the US long ago lost control to foreigners of the supply side and most “US” labour is actually located overseas working in a foreign currency. It seems clear to me that if China were to be convinced that their unfair access to US markets might be withdrawn, that they could potentially hold the power in their hands to launch a cycle that would indeed lead to hyperinflation in the US by cutting supply and contributing to a wage-cost spiral.

    The first step would be for China to kill the dollar by selling hard its reserves and T-bills, driving the US currency down and interest rates up and in the process breaking the pegs other countries have set around the world to the dollar. One might object to this idea by reasoning that China would just be cutting their own throats to devalue the dollar. But to maintain this idea one must conceive of the Chinese accumulation of dollar reserves as a massing of assets. But what if one were to reframe this activity and instead viewed this process as a race to gather weapons – that is economic arms? Viewed this way, people would find it a strange argument if I claimed my enemy would just be cutting their own throats if this enemy were to drop their bombs on me because afterwards their bombs would be worthless. No, instead it is clear that the value of a weapon is in how much damage it can do.

    This killing of the dollar would do quite a bit of damage, among other things it would drive interests rates higher, explode the deficit, and make imports (especially oil, remember the Chinese were able to break the Gulf Arab dollar peg) that much more expensive.

    After this the next step would be to drastically RAISE the value of the yuan to somewhere near say 4 yuan to the dollar. This would serve to drastically increase labour costs in the US since the geniuses of globalization decided that by outsourcing labour it was a good idea to have de facto US workers being paid in a foreign currency. At this point the spiral would be started. Would US wealth quickly move to start investing in manufacturing in the States or would they sit on the sidelines speculating in commodities? Would other cheap labour countries move to undercut the Chinese only to receive now worthless dollars in return?

    It is true that due to labour weakness, US wages would hardly budge as prices sky-rocketed but since US workers hardly produce anything any more, this would not stop the spiral. In fact the result would be many more Americans would just become dependants of the state (or left to starve) and thus their maintenance would just add more pressure on the government to monetize more debt. This would lead to further wage increases by offshore workers in the form of currency revaluations, which in turn would lead to higher prices back home in the US, which again would lead to more debt, and the race to hyperinflation is on.

    One could argue that the US produces much food and has decent oil reserves. But the question is whether the corporate owners of these commodities would sell them cheaply to the local US population or export them for “hard” currencies on the global markets? Those of us of Irish decent might be forgiven for taking a cynical view on this subject in light of the fact that during the Great Famine in the 19th century more than enough potatoes were exported from Ireland to feed the local population. On the other hand there certainly would be a high demand for Americans to serve as security personnel to guard these suddenly very valuable crops from starving looters!

    1. MacroStrategy Edge

      You raise some important points Kevin.

      I would only suggest that the Chinese taking out the US in this fashion would require that they be prepared to refoot their economy on a domestic demand led, i.e. Chinese consumer demand led growth path.

      They would have to, in other words, start paying their workers more money, and opening up consumer credit channels, because this would be no small feat your are proposing.

      Problem is Chinese private sector firms run on razor thin margins as it is, so they are not exactly on board with any proposals to raise domestic wage rates.

      Now it is possible, since this is an avowedly socialist market economy, that the Chinese state could just use the banking systeme to effectively subsidize domestic consumer demand, but as a general rule, it is not a good idea to blow up the economy of your key customer, namely the US. Maybe if China had more geographically diversified exports, it would be willing to play the financial equivalent of the nuclear option, but they are not there yet, and as my analysis on the eurozone shows, they are about to see another one of their customers derail as it is if this fiscal retrenchment does what I think it will do to the private sector debt of the eurozone.



      1. Kevin de Bruxelles

        Thanks for your response Rob.

        The premise of any such move by the Chinese would be the fact that they were likely to lose their access to US markets at the current very favourable conditions. In other words those factories with razor thin margins were likely going to be closed anyway if the Chinese leaders kept to their current export-oriented model due to both American desires to have jobs and European economic retrenchment.

        Under these very probable conditions, the Chinese leadership would face a difficult choice. Keep kow-towing to as their Western betters close markets and in the process look weak to their domestic populations, or take aggressive action by killing the dollar. The first path of keeping to the export model would mean wage cuts and more austerity. The dollar killing path would mean rising wages and optimism for the future. Either way there will be a period of adjustment for the local population. But if the Chinese people saw real pain being inflicted on the US, they will respect their leadership that much more and stay patient during the adjustment period.

        So while it is foolish for a parasite to kill its host; it is also foolish for that parasite to stick around and continue sucking once access to the host’s blood has been cut off. The obvious Chinese alternative to the export market is the huge domestic market the Chinese leadership are sitting on. So yes, any move to kill the dollar would also mean killing the current export oriented model and to push domestic consumption in China.

        What is interesting is that if the dollar were really killed then the US would have to turn to an export model while China with its presumably hard currency would attract imports. The current roles would be reversed and historians would have to scramble to rewrite the ending of the Cold War.

        The key for China would be to keep this conflict on the economic plane and not the military.


        1. MacroStrategy Edge

          Yes, Kevin, your opening premise of a Western protectionist response for this type of a positioning by China is probably the right context. I would think of this as the credible threat scenario the Chinese trot out for their Western counterparts behind closed doors whenever protectionist pressures heat up, which if my analysis of the eurozone is even half right, we are about due to see over there. Think of it as the macrofinancial equivalent of the Mutually Assured Destruction policy in nuclear warfare, and you’ve got the essence of the situation.

          However, I wonder if long before that show down, the Chinese would play the card of demanding to be paid for their exports in another currency (possibly even their own, although they do not wish to open their capital accounts so practically, this would be a stretch).

          Surely we have seen OPEC make such overtures in the recent past, and it could have a similar effect of knocking the US dollar lower and signaling who’s boss, which appears to be important to the Chinese as they strive to regain their empire and their status of global hegemon. It would avoid the nuclear option, but hint at its effectiveness nonetheless.

          And yes, if they did play the nuclear option card along with removing their currency peg to the US dollar, the resulting dollar decline would tend to improve prospects for US exports and speed China’s transition away from export dependence, which for a country that large an internal market is probably overdue (and is happening to some extent organically anyway – look at car sales in China overtaking US levels).

  17. eric anderson

    If it suits the powers that be to have inflation, they will inflate. And when I say the powers that be, I mean the people Obama and our Congress are working for. Who got the lion’s share of the guarantees and bailouts? From this we know whose interests are being served.

    It all depends on whether TPTB have the bulk of their wealth in assets that will suffer from high inflation or in assets that will suffer from deflation.

    I really don’t think it is any more complicated than that. Since TPTB seemed to own a lot of mortgages and other debts that were under threat of default, they want a scenario in which they will get paid back in dollars that are actually worth something, not dollars which must be stacked into wheelbarrows to buy a loaf of bread.

    Therefore hyperinflation seems a remote possibility. They will opt for mild inflation or even deflation.

    This is not an economics theory. I am not qualified to present an economics theory. Human nature is not difficult to interpret. Who is really in charge? What do they want? That’s what they’ll get, barring some sort of revolution.

    1. MacroStrategy Edge

      Largely agree, although I would not completely discount your last clause, because I find more and more people who have concluded the status is no longer quo.

      I should also add I was in a room 8 days ago with 30 CIOs and hedge fund managers from some of the largest investment management firms in the US. They honestly can’t tell which way it is going to go either (which to my twitchy contrarian mind means it will go neither way, hyperinflation or deflation, and instead we’ll just muddle through with low inflation – how very boring is that?) although in the flavor of the investment recommendations they brought to the table, I detected more than a hint of a hyperinflationary bias to their actual positioning, rather than their pontificating. And, as you have no doubt heard, some very large hedge fund managers who have a penchant for getting things right (Soros, Paulson, Einhorn) are very long gold.

      So if your theory is correct, maybe I’ve just got it all wrong on this hyperinflation thing.



      1. Greg

        So does being VERY long on gold mean you have the ability to wait out the current currency crash and cash in way down the road?

        My question when thinking about gold and futures is what is it priced in. Is that the right question? It seems to me if you are paying $US for gold now and are holding for a long time (or simply have a long futures contract) you must be looking to redeem it later back to a currency…..right? Are these guys playing the game of “I’ll redeem it in the strongest currency at the time” kind of game.

        I dont play commodities markets so help me with my thinking if its flawed Rob. I really dont understand these flights to gold or Chinese Vases because eventually what the holder will seek is currency.

        If “civilization” collapses, like many are betting on (hoping for), will any one trade food for a VASE or pieces of shiny yellow metal?

        I guess I’m thinking that they better be hoping for a currency to exchange into or they havent preserved very much wealth.

        1. MacroStrategy Edge

          Most of them presume gold will be the next money, if fiat and credit money systems fail, so they will be able to walk down to the mint and turn in their bars for gold coins. They will remind you that gold is the only form of money that is an asset with no liability attached to it, and they will cite the history of gold standards in the past, all of which by the way have failed or fallen…as have most monetary systems of human design.

          Some of them realize you cannot eat gold so they buy farmland in Argentina or some other remote place where they believe they could wait out the fall of civilization as we know it, if they only have enoough ammo to keep the starving, marauding refugees at bay.

          Some of them had relatives a generation or two back that fled various political regimes and discovered that precious metals were the only way they could get their net worth moved out of the country, and this has left an indelible mark.

          But yes, you are correct, when they landed in their new territory, eventually they had to negotiate and exchange of some sort with their gold in order to get a means of final settlement.

          Behind all of this is lurking, as I think Keynes tended to point out, a deep human psychological need to preserve the illusion there is some immutable point of ultimate stability we can grab on to and will carry us through life’s inevitable chaos. This is what happens on planets spinning swiftly around suns in galaxies that are also rotating very quickly. We all want an anchor. Hence the quasi-religious fervor of the gold bugs, and their hyperventilating about hyperinflation. They’ve been econned.

    1. PJM

      Mr. Peter Bernholz gave us some insitghs about the pre-conditions do generate hyperinflation. We have now, in global economy, at least two gigantics monetary systems in that state. Japan and USA. Japan exported inflation to USA. If we exclude the changes made in last twenty years to calculate inflation in USA, you see where that japanese inflation affected. USA is exporting now.

      Now we got a lot of countries in a process to inflate their econmic systems to tackle the debt. The velocity of the growth of production in world one day will be not available to stop rising prices. Depending the countries and his level of international trade in his output, the prices tend to rise.

      This time is different? Mr. Rogoff show us that isnt true. When you choose deliberate to inflate because you dont have nerve to implement economic reforms you are gambling with the future.

      Jaak Valge show us that the majority of countries who lived hiperinflation lost the freedom when lived in Democracy before. The students of Zimbabwe School of Economics are gambling, not also with futures prices but with your freedom. Whem somebody choose gambling his freedom insted doing economic reforms, you must to be alert.

      When the students of Zimbabwe School of economics calls for proteccionism and blame the other, like in the thirties, youre gambling with all citizens of the world.

      We know when trade wars and “cheat your neighbour” starts but we dont know how it will stop. In the past stopped with wars and a lot of blood.

      Its time do listening others and have open mind.

      1. PJM

        We are having some signals that something is wrong in the debate about inflation. Lets look the case of UK.

        In february the aplications for mortgages lending fell again via-a-vis with 2009. However, according the Halifaxs index the prices are going up at high velocity. About 9% y/y.

        According BoE the inflation is running well above 3%, last numbers released. And the unemployment start to fall.

        Mr. Mervin believes that Boe will stop inflation before explodes. However he told to british: expect a fall in yours standard of life because we will have inflation above your rise in income.

        But the gouvernment dont stop to spend and BoE dont stop monetazion. The prices are starting rising fast with high unemployment.

        Were seeing the first signs of high inflation in UK. Especially in land and houses even the mortgage aplications are falling. The money created is searching for high returns and real estate is the best indicator of inflation and the best hedge agaisnt futures high prices.

        Soon we will see the same in USA.

        The money created around the world is now in motion. Commodities are rising in prices. According FAO, the basket of basic food for poor countries rose about 19% in 2009. In the poor countries food represents about 35% of basket inflation.

        We are not seeing the inflation yet in our lifes because we live in rich coutntries and only about 10% is basic food. But we are seeing the prices rising in food and energy. Are the first signs of the inflation imported. We export inflation through money and we import inflation through high energy prices and food.

        Of course this time could be different. Why not? But the money is in the system. And the prices of stockmarket are showing us that money is there.

        One these days we will discovery the prices in our everyday life. Politicians tend to use money creation to stay in power. Thats the problem.

        But, hey, when we gamble with others money and life and we dont loose nothing, why not? If we have some sucess were heroes, if not, we only loose prestige. Others pay for own errors.

        1. PJM

          Some opinion makers dont see the inflation created by central banks. They say: look, in USA, prices are only 2% above last year.

          But the problem is that inflation is exported before shows his face in USA. Nobody is looking what is happening outside USA?

          According FT, the inflation is out of the bottle. Índia, for example, rose the lending rates becuase the inflation is 9,89% y7y. Vietname with 8,5%. Or even Philipines with 4,2%.

          But the problem isnt just that numbers. The problem is the velocity of increase in the inflation, in some places doubling in months.

          Hey! USA dont have high inflation rates but the dollares, pounds and yenes created are putting prices pressures all over the world. Of course dont expect to see low inflation in USA. Soon or later we will see the money created in our prices, even in rich countries.

          Well. We cand deny the reality but or we can live in a virtual world but the seeds of high prices are all over the world. Low interests rates, high fiscal deficits and imbalances created in our rich countries are starting affecting others. Like poor countries.

          Of course for Wall Street this is good. Especially for banks. Are better policy than inflate the prices to erase bad assets? Or stopping foreclosures? Put the prices rising of real estate and you will see better balance sheets.

          However this has a price to everybody. The middle classe are screwed. Will pay the mortgage debt with high interest rates, will have a fall in their standard living and, of course. Middle classe will loose aniway: in future inflation or in high taxes. Or both.

          Perhaps is a deliberated strategy. Use proteccionists calls (nationalism with another face) against others, especially chinese or german and squeeze your middle class with inflation or high taxes.

          Of course this is dangeroues. Inside the USA maybe isnt bad but outside the USA, this is very dangerous. In Asia they are starting to pay higher prices. Higher interest rates and low levels of standard of life.

          But one day we will see that crazy economic policies afecting USA. Soon or later that errors are paid. Infortunatelly by the poor.

          Hey. At leats the american upper classe will be more rich than ever. Inflation is good for rich, inst true?

          But someone is gambling with our future. And with our freedom.

          But! Hey! You can blame the chinese. Or the german or even the PIGS. They are a good scapegoats, right?

    2. MacroStrategy Edge


      Yes, as stated above, nothing seems to function well as money in the long run, except maybe clay tablets and tally sticks, if we are talking the long run already behind us.

      Even gold based commodity currency systems derail. Face it, they do. Or if we want to go pure blooded Austrian on this, how many 100% reserve/100% commodity systems do you observe in operation today?

      Were there in fact any that operated at any time in human history?

      Why aren’t they here anymore – what went wrong? Why did the market select against them over time (if they ever existed to begin with)?

      Inquiring minds would like to know.

      As Jim Grant put it at the Levy Economics Institute/Ford Foundation Minsky conference last April, it would appear that humanity is just not quite ready for money yet…in any form…including gold. And Grant is considered an Austrian sympathizing gold bug. But he also knows history.



    3. Greg

      How is fiat money not a “store” of value?

      You can buy whatever hard asset you want with it, for the right price.

      How is gold a store of value? How do you denote that value? What is its inherent worth?

  18. PJM

    The first signal that USA production has a gap to expenditures is the trade balance deficit. Is basic to understand this. Now USA is exporting inflation trough fiscal deficit and cheap money. You dont see inflation in USA until that inflation exported comes back in prices imported.

    Others economies are seeing inflation like chinese. Onde day will export that inflation to USA. if you impose sanctions to chinese products you will see that inflation.

    USA is exporting inflation and the commodities are showing that inflation. Look to oil prices at 80 dolares per barril. One day it will disturbe internal prices in USA.

    Isnt only the money in circulation but the velocity as well versus production. USA dont have production capacity to stop prices when velocity of huge liquidy created start running at higest velocity. When that velocity takes momentum even if USA want to produce more it will cant because dont have skills and know how to produce.

    World Growth Output will rise 4% in 2010, according to World Bank. One these days inflation will knock to the dor of USA. Its about time.

    You must to come to basics to understand this.

    If USA dont want that trade deficit USA need to cut spending, private consummation and public consummation. USA is wrong not others.

    Even China will appreciate his currency if wants stop that imbalances created in USA and UK. The liquidity created in USA is disturbirng China. China knows that but the blidness of USA leaders dont see where is the problem. The problem is in USA not in China. China is starting to prepare his currency to be freely traded in international markets. Yhuan must do be free converted in international markets because China trade is to big.

    But the USA, as his problem needs hard steps and choices, choosed the easy way, at first glance: proteccionism and using his militar power to impose his view and trade coices to others. A rogue state.

    Maybe is time to mainstream media in USA to ask others his opinions. Maybe will discovery some things that are basics but its hard do swallow.

    Do USA wants cut the trade deficit? Cut the fiscal imbalances, cut the liquidity and improve his hability to produce. Its hard? Of course it is. As portuguese or greeks. Its difficult. But is the only way.

    Mr. Krugman is calling for the same old policies in thirties: export the crisis!

    What USA is exporting is inflation and disturbances. Its the crude truth.

    1. MacroStrategy Edge

      Germany and China need to go for domestic demand led growth, US and rest of world needs to do the hard work of product innovation and productivity growth to deliver goods and services the rest China and Germany can buy.

      Fiscal retrenchment won’t get you there: all you’ll get is private debt deflations then, as we are likely to see in the eurozone soon enough.

      Trick is to find ways to converge up rather than race to the bottom.

      1. PJM

        Germany has a fiscal deficit, has governement stimilus and low interests rates. Cant to more unless will blow up his financial position. Like others. Like Portugal and others.

        But even if germany put more money in their demand what will happen is the same problem: others dont have competitivity to sell in Germany. What products do you think USA could sell in Germany to give more balanced trade balance?

        The same is happening in China. Have you cheched the figures? China is importing a lot. Has strong programs stimulus. They deliberate are keynesians. But USA cant export to China because China is importing from others countries. The problem of USA is that has lack fo compettivity. And cant export to China and others because dont have skills and know how to export enouph to China to balance the trade deficit.

        What youre asking is: we spend more that we can, please do the same. Perhaps we could be in the same boat.

        As Chirstian Stofaes teached us: USA cant export because lost his passion to produce and has a deliberated passion to sepnd and shopping. His final stage for the economic colapse. The problem is: USA dont listening and read others. Too much nobel laureates inside home gave an false idea about good economic policies.

        Strange or not, USA start having imbalances in his trade balance when the government made changes in his calculation of inflation to cheat the citizens and economic agents. And the interest rates where deliberated low to stimulus the private consumation. The authorities deliberated create bubbles and didndt have guts to have small crisis to clean some imbalances. The crisis are normal in capitalist system so when governement uses the easy choice, spending, to avoid to take some hard steps and policies. When you deliberated uses spending to avoid minir recessions youre delaying the health correction in your own imbalances.

        Thats what USA did in last 150/20 years. Ask Mr. Greenspan and he confesses that he was wrong.

        Whem germany had high uneployment, high fiscal deficits and low economic growth, americans and british, credit adidcted and with economies supported by shopping way of life, told them: youre doomed. Youre lazy, socialist and fat. Do reforms and you will have a strong economy like ours. yeh!

        Germany in those days where reestruturing his economy. Germany was absorving the impact of reunification and open borders. They rose the taxes and put pressure on his economi agents to be better at producing goods at low cost.

        In economics the hard way is the best way. Americans dont understand that. They think that can compete in a open world in the easy way: spending and credit to all. That dont work.

        What USA can sell to the world even if the dollar is half of actual value? TVs? Cars? Furniture? What?

        Today USA doesnt have know how to compete in the world markets, dont have competitivty and his wages are too high for his production. Maybe its time to read others and learn with others. Ask german what they did to improve their competitvity and, at same time, having a health care system much cheaper and having a education e formation system that produces good workers. Thats is that in Portugal we look: how they did? Can we do the same?

        1. PJM

          My dear MacroStrategy Edge, dont are you confunsing the causes with consequences?

          What was the main driver of economic colaps of Latvia? The same mistake of USA, Portugal, Greece and others. Credit without a real improveent in productivity. And credit in others currency thna yours because external rates are lowest that yours. Lack of sound financial policy, especulation with cheap money and a true belief that you can manage your debt in crises times. They discovered late that economic miracles financied with cheap money and especulation are sand castles. The same in Iceland.

          At least in Portugal we discovered before we collapsed and our private debt was made in €uros because we entered in the euro zone. We discovered that we could take debt in yenes but was to risky to do that. Thanks to common sense and not bo greedy.

          But the causes of Latvia collapse are the same of hiperinflation. Too much debt, lack of savings and especulation in risky assets. Or risky debts. If the debt was in their own currency perhaps they lived in high rates of inflation and not the colapse of his internal demand.

          But youre seeing the consequences of bad economic policies. As I said before, the best way in economics is the hard way. When someone thinks in shortcuts to be rich quickly certainly is taking high risks. Or ignores the risks that are taking.

          Sometimes we got to go to the basics. What is money? Money is actual consummation. Money has three states: savings, consummation and credit. Savings is consummation in the future, cash present consummation and credit is advanced consummation. In order to advance consummation you must to bet the risk that in future you will be able to generate income to pay that credit/advance conssummation. Governements all over the world believe that can create advanced conssumation, in credit way, believing that futures incomes will be there to pay the credit and interests on that credit. Worst is, governemnets are depending in high levels of private consummation to pay they own bills. Everything looks easy. You create money via credit, families got adnced consummation, believing that are rich, and governements collects money. But we got a problem. Are you sure that levering the internal demand could sustain high levels of debt?

          When a country believes that advance consummation, via credit, is enouph to warrant future incomes is gambling with uncertainty and a collapse. Because nobody can warrant a certain level of income in the future and nobody can avoid future crisis. When some black swan event happens (could be a war, a technological disruption or an external economic shock) that leverage explodes in our face.

          Latvia believed that his bettings in euro debt could be safe. They discovered that his currency was weak because was based in leverage. They blew up because they betted in high leles of especulation and risky assets and debts. They believed that could generate high levels of income to pay the credit. That collapse was generated outside Latvia show them that his economic policies were to weak to support external shocks.

          The applies to USA, Japan, Portugal or even in the moon. The money has three states. You could advance consummation via credit but youre betting in the futue. Youre betting that your future income will be enouph to pay the amortization and interests of that credit. But its a bet. Are you sure that you can generate that income in the future? No. Youre betting. And as any bet youre taking risk. If you take a lot of risk, you will blow up in the first crisis that affects you.

          Of course the past show us that high degree of leverage is dangerous. And were paying now that bet in leverage.

          What caused the subprime crisis? High leverage or the high oil prices? prof. hamilton show us that was oil prices the main driver to blow up the subprime crisis. It was the lack of income by householders that blew up the crisis. The lack on income caused by a fall in capacity to pay the debt was the trigger of subprime crisis. Too much debt, too much leverage and betting in future incomes that didnt come because oil prices rose and cut the purchasing power.

          The governemts are leveraging in the same way. They expect colect revenues from citizens who are in high level of debt. The government is leveraging in two ways. Spend more that can collect and, worst, that revenues collecte are generated by citizens with high level of debt. Believing that in the future the economy will generate income enouph to citizens who will pay the debt and taxes.

          That actual crisis is more complex than we think. But at same time, to much complexity by economic models cant understand some basic math. Thas why nobel laureates arent good advisers. They lack of basic skills to understand basic simple mechanisms, even the least literate understands if we ask the good questions.

          Today a lot of countries are in the basic trap. States depends of income generated by citizens, who are in debt and without enouph income to pay the bills, the debt and taxes. Governeement, in that trap, inject more money in the system, believing that income gap in houseolders will be filled, but sometims they cant. Jobs dont come in one day, jobs arent enouph to pay some level of debt and we have a lot of uncertaintis that high level of debt and credit could be worse.

          We must to go the basics. What is savings? Money? Credit? In the three states they have risks. That risks are uncertainetis. Governements and private agents must deal with that risk careful. High levels of risk more chances to explode in your hands.

          1. PJM

            Another example why high level of complerxity in the thinkings makes worse the solutions.

            When it was cristal clear that the subprime crisis was exploding in USA, the authorities made more mistakes, because sometime is better to be basic in action. Whem mr. Paulson swa the hole what he did? Deeply dig more the whole. The scandinavian financial crisis show us that isnt easy to safe the banks without a fall in the state revenues. They fixed the problem but the unemployment skyrocketed and the fiscal decidits explodes too.

            Perhaps the american authorities should be more simplistic. Banks took a lot of leverage and they must fail. Could worst? Maybe not. If the governement had the nerve to buy all or a part of mortgages and give an moratorium to the householders. And let the bad banks to fail, to teach a lesson to the risky gamblers. Or nationalize all the banks and give some pain to investors.

            I remeber discuss that solution with a group and onlye one american said that as non sense that solution. It was anti-capitalist, told me. Others understood that solution could be better for american people even if youre doing some external hazard.

            The way choosed by USA created the same moral hazard but in thw worst way. Save the rich and risk takers, and put the debt on the shuulders of the middle class. Now the american middle class has two debt to pay. Their own mortgage and the governmenet debt. The banks are now in the same game, taking high risks and their shareholders and investors are happy to see their investment coming back to black numbers. hey! is good to be rich in USA! The government in the name of people, screw that people and saves the oligarchs! hey, dont tell that to mr. Puttin. He will be jeallows. Is good to be rich in USA!

            Maybe if americans are more open to others opinions and solutions could be better for them.

            What sems today is the basic: deny your own mistakes and try to see them in others. Thats why some authorities in Germany thinks that exists a plan to destroy the €uro. because, with mistakes from USA, the dollar is doomed and the euro is the only competitor. Do you see, if Mr. Juncker wins in his solution to €uro zone, the dollar will loose his status as world reserve currency. Thats why the germans puted his spies working in the field. And in one week the shorters of euro close they positions. Its coincidence? Maybe, maybe not. Thats why, everyday, USA looks a rogue state. But hey! In Europe we are paying attention to Obama Administration. And what is doing and who is the real powers in the shadows. Who runs Obama Admnistration? The banksters or the represenatives of the american people?

          2. Greg

            You have some very interesting analysis, ask some good questions and offer some unique insights pjm. I do have one quibble with one statement at the end of your post though. You said;

            “States depends of income generated by citizens, who are in debt and without enouph income to pay the bills, the debt and taxes”

            This has it backwards. Citizens depend on the STATE to provide the “tokens” it needs to pay its taxes. They will need more tokens than they are required to pay taxes with so they can participate with the other tokens users in the private economy, otherwise they go into debt (within the private sector)

            “Governement, in that trap, inject more money in the system, believing that income gap in houseolders will be filled, but sometims they cant. Jobs dont come in one day, jobs arent enouph to pay some level of debt and we have a lot of uncertainties that high level of debt and credit could be worse.”

            You DO seem to hint that you understand the above dynamics but then you talk as if the government can never really fill that gap, only that they BELIEVE they can. The truth is that ONLY they can. ONLY can the currency issuer fill the gap otherwise its a simple zero sum redistribution of existing private sector financial assets. Its that reluctance to redistribute that leads to the indebtedness of high percentages of the private sector. The 5% lenders want interest from the other 95% (and increased productivity and slowly rising wages). Your point about the jobs not being there is well taken and simply illustates the need for a comprehensive ELR/Job guarantee program. We cant get out of this without jobs, we cant ask the private sector to be the drivers of the jobs because they want profit (rightfully so) So the only entity that can create a job out of whole cloth is the currency issuer.

          3. PJM

            Do you see, Gregg, we tried in Portugal and didnt worked.

            Do you see, the State can help us a lot, but not much than you think. In Portugal, between 1995 and 2000, we had a government who spend a lot in infraestrutures, schools, hospitals, computers, education for all, and son. Do you know, Paul Romer or ideas from others neo-keynesians economists arent new. As I said once, we portuguese tend do be early trend adopters. Do you see, the leader of that government was one of best students in his generation in Portugal. He believed in the “hand of state”, to leverage the standards of life. Do you see, after 6 years in power he resigned because he was not economist and found he followed the wrong advices. He was an engineer and was in love with some economic theories. Like neokeynesians.

            Do you see, the State is important but not enouph. In realitty the State can be dangerous or can be a great tool of society. But no answer is universal and for us, Portuguese, the state isnt good enouph. Creates a lot of problems and isnt so good that we believed.

            Do you see, neo keynesians believe that politicians and bureaucrat are better at put your money than the market. Isnt true. The investement in Portugal made by the state isnt good enouph to pay the interest. Do you see, after some amount of investment in infraestrures the benefits fall under the price that you pay.

            Do you see, others believe that the market gives the answer but isnt true. A lot of investment made by privates are wrong and with low returns for the risk. Do you see, Misnky wanst wrong after all.

            Do you see, the answer isnt easy. In some countries the state can be big without corruption, for example. Like in Scandinavia. In Portugal, big State, more corruption, less returns and more value destruction.

            Do you know, we in Portugal did a lot of mistakes. And still do. However, after 10 years in estrutural crisis, and after a lot of economic experiences, we dont believe too much in shortcuts, economic Gurus, snakeoil economic seller, and so on. We learned in the hard way. And were still paying for some mistakes.

            So, maybe in some countries and cultures the State can leverage standard of life, but not in the manner that you think.

            So, when I see some theories and economic gurus, trying to teach shortcuts to improve our standard of life or fix own problems, we listening but dont believe. Show us how did you do in your cowntry, later we will see if it works in ours.

            Maybe the state is good for somethings, maybe isnt good for others. What we learned is that without a lot of work, a lot of mistakes but avoiding big mistakes cuting the error as soon is find, we cant improve our standard of life.

            The State can help us but isnt good to manage others money. Is good to help us improving the fight against absolute poverty but isnt good to create wealth.

            We learned in hard way. In almost forty years living in Democracy we made a lot of experiences. we learned doing the errors. Thats why the economic theory is in crisis in Portugal. For me, Krugman and his snakeoil selling is the same as the guy who sells gold in their economic advice. Like some economic gurus who are in love with mr. Ron Paul. To me doesnt work. I still believe in the same things after a lot of study: hard work and doing better than others without blaming the sucess of my competitor. Thats the way it is.

  19. gordon

    Like many have commented, the Fed buying over $1 Trillion in bad MBS and giving the banks and Primary Dealers Treasuries, or as Lewis(author) said last night, they are buying agency paper and scalping the spread(+/- 3%), instead of lending. So, once the Fed is forced to (politically) unleash lending again, inflation takes off. Maybe they offload all their toxic waste on Fannie-Freddie-Fha nationalized. Whatever, they seek to bury this stuff, right? Surely, it’s close to PROVABLE, the Primary Dealers Credit Facility has been exploited in concert to buy stock indices since March 2009, largely in after hrs cash futures. So now there’s only 3% of MBS left to buy, we will find out soon if the Fed is giving us BS on this, and they continue to fuel $$$ to the Goldman-JPM HFT trading scheme until all this liquidity runs crude oil to $100+ and
    SPY p/es to 30?

    Deflation case -in point>
    As for homeowners & DELEVERAGING, please read this
    I am curious the one chart shows refi activity LOWERING mortgage debt, as many are ADDING CASH (selling equities, cashing in 401Ks?) into their refis, a recent phenomena.

    Inflation case- in point>
    Taylor (Taylor Rule) shows the Fed Funds should be about 4%
    right now, and I can’t argue with his chart, maybe others can, here>

    1. MacroStrategy Edge

      Gordon, by what mechanism do you propose the Fed can or will unleash bank lending? Loan decisions are the responsibilty and right of each bank. The Fed can try to influence bank portfolio preferences, but that’s it.

      If you have the proof you declare, you need to go find a lawyer or an investigative reporter (try Gretchen Morgenson at NYT) at once. Alternatively, Ron Paul’s people could probably direct you to someone. Otherwise, you are just blowing smoke…and I say that as someone who almost got fired in 1999 for investigating the President’s Working Group on Financial Markets, aka the Plunge Protection Team. You can read about it in my chapter in the book “Contemporary Post Keynesian Analysis”, and I think Sprott, a Canadian investment management firm, also makes reference to my work in this area. But that is enough tin foil tea partying for one day…and the day is still young.

  20. MyLessThanPrimeBeef

    Those with a lot of money want deflation.

    Those with a lot of debt want inflation.

    In general, the indebted young want inflation, preferably without increasing the federal defici/the national debt, and the cash rich old want deflation.

    At this time, you can’t have a policy that satisfies everyone, just like they can’t satisfy Northern Europe and the Club Med countries both.

  21. Frank Ohsen

    Inflation or hyperinflation is ultimately about confidence. Relatedly to this article no economist regardless of historical precedent can absolutely state unequivocally that a currency confidence crisis will or will not occur solely due to fiscal deficits. But there is NO doubt whatsoever that debt monetization is a precursor, a prerequisite if you will to heightened inflation or hyperinflation probabilities to such confidence crises.

    Regardless of the foregoing, no truly competent economist (if indeed one exists nowadays) can also state that Black Swans under massive monetization are somehow mitigated. Indeed therein lies the real issue at hand between deflationists and inflationists. In a perfect predictable world either camp can support their position through numbers and historical precedent. But where either camp’s predictive modeling falls apart or let’s say becomes significantly ‘adjusted’ is under the Black Swan.

    I’ll give you one prime example of a Black Swan that’ll throw out all the predicting theories hereto expounded into the significant ‘adjustment’ phase: a major disruption in crude oil caused by war or other means.

    Consequently the fact that Black Swans have occurred with enough regularity throughout history should also be enough to categorize the author’s and other’s into the realm of delusion and determined wishful thinking – a mere snapshot in time when all parts are not in ever heated motion.

    The bottomline line is that economies and their currencies are not static entities. And any author that excludes Black Swans from their position especially when debt monetization IS occurring as it is here in the U.S. is IMO not to be taken seriously enough to change the argument one way or another as to whether their case supporting the likelyhood of deflation, inflation, or hyperinflation, or that a currency’s confidence level will remain sufficiently intact or that the chances of it dislocating disproportionately are mitigated because of historical precedent provides no more of an answer to what will actually occur than rolling a pair of dice.

    One can therefore suppose you can probably fathom that I don’t think very highly of the vast majority of economists or their predictive powers much less the accuracy of their subjectivity while encased in White Swan environments.


    1. Greg


      Did you not read Robs post? No he didnt use the term Black Swan but he most assuredly acknowledged that certain surprise factors which cause supply shocks are part of the hyperinflation picture and at least (in his opinion and others’) must be considered equally necessary in assessing the conditions which lead to runaway currency devaluation.

      He is by no means saying that hyperinflation isnt possible simply that the monetary conditions of today (even if you accede the analysis of the situation to the “errorists”) are not sufficient and that the necessary supply disruptions are unlikely and probably reversible with coordinated action on the part of international authorities.

      1. MacroStrategy Edge

        Just to clarify, the supply “shocks” need not be shocks, nor need they be exogenous events. If you look at the process I described, it can be a completely endogenous, organic result that the aggregate supply curve (or if you don’t buy into aggregations, the supply curves for each product) shift in an adverse fashion because entrepreneurs look around and realize they might as well deploy their financial capital in assets that do best in a hyperinflation environment – namely, durable goods or tangible assets that have very limited supplies (are hard or impossible to produce or reproduce) which will go up the most in price. Why bother producing things, in other words, when you speculate on the price of copper, buy farmland, or collect Chinese urns from the Ming Dynasty.

        No Black Swan needed – sorry Taleb, they are not flapping around everywhere we look.

        1. Frank Ohsen

          “No Black Swan needed – sorry Taleb, they are not flapping around everywhere we look.”

          I agree they may not be everywhere ‘flapping’ but even if they’re not flapping doesn’t mean they’re not still out there. The question yet remains what modeling will you use when QE and swan event(s) collide? Btw, a Swan in this case can be as ‘small’ as pockets of civil unrest which IMO presently in this nation of high unemployment there definitely is this particular Swan that has at least one wing twitching in some of our large economically depressed cities.

          The point being is that vulnerabilities are greatly enhanced under the present Fed guise of extend and pretend. It will not take much of a Swan at all to upset the precarious balance. Right now for the most part the Fed is ignoring the market and it appears will continue to ignore it for the foreeable future according to so many words from BB. You need to expound on what likely will happen to our currency when something greater than the market forces their hand. And by forcing their hand I again mean for example a loss of global confidence which equates into escalating interest rates which we can ill afford to cover.


  22. Positroll

    “Mainstream economics and popular lore refuse to see this.”
    As a German who was tought that part of history in highschool I was always stunned how that many American economists / journalists could talk about hyperinflation in Germany without acknowledging the historic situation:
    Under the Verasille treaty, Germany lost almost 1/3 of its territory (including some of the most fertile areas) and all its colonies; in addition, the Rhineland – and later the Ruhr area were occupied. Huge reparations had to be paid, in Gold or coal.
    Then in 1921, just before the Ruhrkampf, Germany lost a good junk of Upper Silesia (the other big industrial area of the time besides the Ruhr) to Poland (producing roughly 25% of German coal at the time), despite 60% of the population voting to stay German.
    Despite all that, the German government decided to support the general strike in the Ruhr area by paying the lost wages of more than 2 million workers. Only way to do it: print lot’s of money …

    1. MacroStrategy Edge

      Appreciate your insight Positroll. Precisely what I found, and one part of what Krugman is missing, and the hyperventalists refuse to acknowledge.

      thanks for putting this on the table,


  23. Psittakos

    But what is this thing exactly that mainstream economics and popular lore refuse to see? I have not been inclined to hyperventilate about hyperinflation myself, but suddenly I am noticing that a number of people are rather breathlessly announcing that it can’t happen here. And Krugman’s not so breathless argument (rare for Krugman) that it won’t happen here isn’t good enough for them. Odd.

    1. Greg

      Are you really saying that NO ONE is trying to stoke hyperinflationary fears out there? That Rob and others are creating a strawman? Have you been under a rock? Maybe I spend too much time on financial blogs ( no maybe, I certainly do) but outside of Rob and his MMT cohorts, economists across the spectrum have consistently mistakenly conflated increased reserve positions in the banking system as harbingers of inflation/hyperinflation if “credible” exit plans arent put forth.

      As Rob pointed out in his article, Krugmans denial still comes from a wrong headed view of the modem monetary system and belies old fashioned gold standard thinking.

      1. Psittakos

        “It is not, contra Paul Krugman, all about fiscal deficits, nor is it only about fiscal deficits.”

        Perhaps someone out there is arguing that hyperinflation is all about fiscal deficits and only about fiscal deficits. Krugman isn’t.

        1. Greg

          Krugman seems to be arguing that as long as you can get people to agree to pay fiscal deficits later (more wrongheadedness in regards to how monopoly currency issuers need to operate) that large deficits now are not a sufficient condition. He still thinks that deficits always need to be paid back which is not the proper view in our floating exchange rate currency regime.

  24. Positroll

    “But what is this thing exactly that mainstream economics and popular lore refuse to see?”
    That it takes extreme circumstances to get to hyperinflation and that the current situation is light-years away from that:
    After Versailles, Germany was basically still fighting the war, though with economic means, and was (before it finally gave in) ready to ruin its economy in the process.
    In Zimbabwe, the leader is just barking mad and gives a shit about the broader economy, as long as his cronies can still get along and he can “purify” his country from colonialist influeces.
    Simply taking on too much debt only can lead to inflation like in Argentinia, with 10-20% per year as a worst case scenario. Bad enough, but nowhere like Weimar, where in November 1923, US$ 1 bought you more than 4 trillion Marks and people burned the lower denominated bills to heat their houses … (the inflation rate topped at >10 billion %)

      1. MacroStrategy Edge

        Psittakos –

        Look at the quote I use from Krugman in my article above.

        What does he identify as the source of hyperinflation in this quote?

        “It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press”

        So let’s see: government can’t raise taxes to pay for its spending…hmmm..

        As in, budget deficit, perhaps?

        So what do they do…”turn to the printing presses”…that would be money creation, right?

        Ergo, hyperinflation, which Krugman believes is well understood by himself and his colleagues in mainstream economics, has to do with “monetized” budget deficits…or am I just reaching here?

        Now let’s just ignore for the moment the little problem that you or I or any other household in this nation cannot print money in order to pay taxes or buy Treasury bonds, and all the money we have to do such must ultimately come from the government first, because Paul and most of the rest of his profession have yet to work that one out…

        1. Positroll

          “So let’s see: government can’t raise taxes to pay for its spending…hmmm.. As in, budget deficit, perhaps?”
          Depends how stricly you define “can’t”.
          A simple budget deficit normally just means that politicians prefer to borrow from the future in order to bribe the voters. That’s what Greece has been doing these last years.
          On the other end of the spectrum, you got a situation like Germany 1922-23 where there was almost nobody left to tax, as the main industrial areas (Ruhr, Rhineland, Saar, Silesia) were lost or occupied (and producing for the French / Poles), the traditional markets (former Austrian Empire) were lost, trade was down, personal fortunes had been mostly destroyed during the war years and nobody willing to give Germany any major loans.
          If that’s what Krugman means with “can’t”, I agree with him …

  25. DavosSherman

    “While we still have questions as to whether this is a spoof or not, there are undoubtedly people sitting around in gold wondering whether the old yellow dog is going to get up and bark again anytime soon. Although hyperinflation hyperventilation has been catching on in recent months, especially amongst the deficit errorists, gold has been dead money since late November 2009.”

    Gee, in 2003 gold was around 250 bucks. It is now 1100.

    Bow Wow!!!

    I enjoy reading articles like this. They so remind me of the idiots who missed the housing/credit bubble. Loaning money to people with no income and no documentation and no jobs and thinking it would work out and not have systemic risk.

    Oh, and Enron. More good reads. And let’s not forget the tech bubble. Companies selling cat litter for 8 bucks and expecting people to pay 15 for shipping.

    Here is a reality check for you. Santa and the tooth ferry are fakes but the hyperinflation reaper is coming for the 122 trillion dollars in debt….and the 1.6 quadrillion in the shadows of the banks known as the shadow banking afterworld.

      1. Psittakos

        But what exactly does your understanding of the creation of money tell you about fiscal deficits and hyperinflation? It is not clear to me why you have framed your argument as you have.

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