Summary: How we handle our fears shows much about ourselves, our ability to see and think. Such as fear of inflation, a major obsession of Right since the crash. Here we look at the warning, see what actually followed, and briefly review the basis of these fears.
Contents
- The inflationistas’ story.
- What inflation?
- Warning: velocity.
- A lesson from the past: Weimar.
- Measuring inflation.
- For More Information.
- Giving Conservatives the last word.
(1) The inflationistas’ story
Few things pay as easily and well as feeding people’s fears (not nearly as much work as raising food to feed people’s bellies). It’s a simple process: tell a story that validates people’s political beliefs and gives a simple account of complex phenomena (otherwise people will see the con). Forecasts of hyperinflation do both quite well.
- Slamming those that conservatives don’t like: Obama and the Federal Research
- Slamming policies that your wealthy backers don’t like: anything that risks inflation (creditors love mild deflation, like that during the Gilded Age).
- Telling a simple story about the mind-bendingly complex dynamics of money.
During the past five years many people have ridden this horse. Let’s look at one example. Red emphasis added.
(a) “HYPERINFLATION SPECIAL REPORT“, Issue Number 41 by John Williams’ Shadow Government Statistics, 8 April 2008 — Excerpt:
- Inflationary Recession Is in Place
- Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
- Hyperinflationary Depression Remains Likely As Early As 2010
The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. … The U.S. has no way of avoiding a financial Armageddon.
(b) “HYPERINFLATION SPECIAL REPORT“, Commentary Number 263 by John Williams’ Shadow Government Statistics, 2 December 2009 — Excerpt:
- Economy and Financial System Face Eventual Great Collapse
- Government and Fed Actions Have Narrowed Hyperinflationary Great Depression Timing to Next Five Years
- High Risk of Ultimate Dollar Crisis Unfolding in Year Ahead
The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment.
… Before the systemic solvency crisis began to unfold in 2007, the U.S. government already had condemned the U.S. dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable. The U.S. economy also already had entered a severe structural downturn, which helped to trigger the systemic solvency crisis.
The intensifying economic and solvency crises, and the responses to both by the U.S. government and the Federal Reserve in the last two years, have exacerbated the government’s solvency issues and moved forward my timing estimation for the hyperinflation to the next five years, from the 2010 to 2018 timing range estimated in the prior report.
(c) “Hyperinflation Update .. By John Williams” at the Save America Foundation, 21 September 2013 — Excerpt:
THE END GAME NEARS. The United States faces a likely hyper-inflationary depression before the end of 2014. That forecast has been in place for years, and still remains. The ultimate, complete debasement of the U.S. dollar became inevitable in recent decades…
Only one year remains on the clock to this absurdly confident forecast. There were many people making such forecasts in 2010 and 2011. Now, three years later, let’s see the actual trends.
(2) Look at the numbers: inflation? collapse of the US Dollar?
(a) The Fed’s target for core Personal Consumption Expenditures Price Index is 2%, a floor that allows time for them to react before it falls into deflation. The inflationistas’ forecasts have proven false, with inflation now below the Fed’s target. If the economy slows (instead of the expected acceleration) this could become a serious problem. Click to enlarge.
(b) Collapse of the US Dollar?
Nope, not yet.
(3) One reason to worry: monetary velocity
“‘How did you go bankrupt?’ Bill asked. ‘Two ways,’ Mike said. ‘Gradually and then suddenly.”
— Ernest Hemingway in The Sun Also Rises (1926). It also applies to inflation.
The fears of Right-wing economists about inflation and dollar weakness have been proven wrong — decisively wrong, as inflation has slowed, not accelerated. But these fears are not irrational.
Velocity is the speed with which money moves through the economy. It is the ratio of the money stock (in this case, M2) to GDP.
Falling velocity has more than offset the Fed’s monetary expansion, so inflation has fallen. Only drastic (perhaps) destabilizing action by the Fed could prevent an ugly burst of inflation if velocity should suddenly and rapidly reverse. There is zero evidence of this today. But who can say what the future holds, especially if the Fed does not start the taper in the next few quarters? See the posts listed at the end for more information about our great monetary experiment.
The other measures of velocity show similar patterns, although not so impressive.
(4) A scary lesson from the past: the Weimar inflation
Large monetary expansions, like ours, have been done before. It’s a seemingly easy solution to potentially destabilizing government deficits and stagnant economies. Most often this results in inflation — sometimes hyperinflation. But not always, as Japan and the US have shown (so far, at least).
To see one example of how this arises, despite skilled central bankers, see this excerpt from Dying of Money: Lessons of the Great German and American Inflations by Jens O. Parsson (pseudonym for attorney Ronald H. Marcks), published 1974. A free online version is posted here.
This text was popular in Summer 2010, when there were widespread forecasts of hyperinflation. Parsson’s explanation is only partially correct, but the phenomenon is real. Of course in 1923 money was a physical thing; they literally ran their printing presses to create money. Today’s e-money can be better controlled by the Fed.
Inflation is not a problem today. But fears of inflation are a factor driving the Fed governor’s to slow the rate of monetary expansion (“tapering” QE3), and eventually normalize both interest rates and the money supply. There is too-little experience of this on such a large scale in modern economies for certainty about the likely effects.
Excerpt from Chapter 17: “Velocity”.
{Discussing the German inflation of 1914 – 1923} Velocity took an almost right-angle turn upward in the summer of 1922, and that signaled the beginning of the end. An explosive rise in velocity thus accurately marks the point of obliteration of an inflated currency, but it does not cause itself. People cause velocity, and they only cause hypervelocity after prolonged abuse of their trust. The German mark had been undergoing massive dilution for over two years, and the people only at last realized it when they turned on the velocity.
… The fact that the collapsing German inflation rested mainly on velocity, a volatile and psychological phenomenon, is not reassuring and does not mean that the inflation was unique to its own circumstances. It is a warning never to inflate even distantly near the point of stampeding the people, and if they do stampede do not follow.
… Money velocity is thus much the more sluggish, in the beginning of an inflation, of the two partners in aggregate demand, quantity and velocity. Later on, it is much the more prone to explosion. But velocity presents us with still another obstacle to gauging inflationary potential accurately.
The problem is that it is not really actual velocity at all that we would like to know for our price equation, but equilibrium velocity. Actual velocity is no more than a rate of flow that happens to be occurring at the present moment. The price equation using actual velocity has often been criticized, and quite properly, as a tautology which discloses nothing about inflationary potential. The mathematical relationships are so inviolable that the equation using current velocity must balance out at the current price level, telling nothing about where the price level is bound.
On the other hand, people’s underlying liquidity preference is an equilibrium cash balance that people would like to arrive at, not what they have succeeded in arriving at to date. Equilibrium velocity is to actual velocity as a pressure is to a flow, or as voltage is to amperage in electricity. The rate of flow is always moving toward where the pressure is now. If we could know and substitute equilibrium velocity for prevailing velocity in our equation, we would have no tautology at all but an infallible calculation of equilibrium prices and inflationary potential.
… Unfortunately, if actual velocity is difficult to measure, equilibrium velocity is impossible. The best we can hope to do is to deduce equilibrium velocity from surrounding circumstances including the behavior of actual velocity. The usual relationships between money quantity and money velocity will also help considerably. Velocity is always a follower. As long as quantity inflation is continuous, moneyholders continuously hold more money than they want, however little that may be, and actual velocity is continuously lower than equilibrium velocity.
No matter how high or rapidly velocity may have risen, so long as monetary inflation continues it is always lower than it is going to be and therefore always understates inherent inflationary potential.
(5) Measuring Inflation
(a) Rebuttals to ShadowStats
“Addressing misconceptions about the Consumer Price Index“, John S. Greenlees and Robert B. McClelland, Monthly Labor Review, August 2008 — Excerpt:
“A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator”
John Williams of Shadowstats admits to James Hamilton (Prof Economics, UC San Diego) that their numbers are bogus, just the CPI plus a fudge factor:
I’m not going back and recalculating the CPI. All I’m doing is going back to the government’s estimates of what the effect would be and using that as an ad factor to the reported statistics.
Also see “The Trouble With Shadowstats“, John Aziz, 1 June 2013.
(b) An alternative measure of inflation
Paul Krugman notes that the US billion price index closely matches the government data — disproving critics like Shadowstats. More precisely it measures the same prices as the goods-only CPI calculated by the Bureau of Labor Statistics:
- “The Billion Price Index“, 18 February 2011
- “Billion Price Update“, 2 June 2011
- “Billion Price Update“, 1 April 2012
(6) For More Information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about all posts about inflation, about economic statistics, about monetary policy, and especially these about the repeated claims of booming inflation…
- Can Obama turn America into something like Zimbabwe? — No.
- Is the US Government deliberately underestimating inflation? — No.
- The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe.
- Why the U.S. cannot inflate its way out of debt.
- We can try to inflate away the government’s debt, but we’ll go broke before succeeding.
- More invisible signs of looming US inflation!, 22 February 2011
- Inflation is coming! Inflation is coming! — About repeated false warnings.
- Inciting fear of inflation in our minds for political gain (we are easily led).
- Update on the hysteria about inflation, the invisible monster about to devour us!.
- Conservatives were correct: we have record-breaking inflation! What’s next?
(7) Giving Conservatives the last but daft word
From that September 2013 article by the Save America Foundation:
Pingback: Lessons from the failed forecasts of inflation since the crash? - Global Dissident
“Falling velocity has more than offset the Fed’s monetary expansion, so inflation has fallen. If it should suddenly and rapidly reverse, only drastic action by the Fed could prevent an ugly burst of inflation.”
I prefer a different way of expressing this. A focus on the velocity is misleading because it makes the whole thing look like mechanics.
The Fed pumped much money / liquidity into the economy. This liquidity isn’t being used in the conventional way, much of it serves as reserves.
Sooner or later the economy may normalise somewhat before it hits the next wall because of its unsustainability and imbalance.
This return to more normal mode of operation will require the Fed to withdraw the liquidity (“to taper”), and that’s going to be tricky for them. Too quick = economic recovery / growth strangled, too slow = prices run away aka inflation.
The whole thing is immensely tricky not the least because of communication difficulties, crowd behaviour, credibility and the role of expectations.
There’s little reason to expect hyperinflation during or because of this reversion of Fed policies, but inflation up to 6% could easily happen for a short period (months).
_____________
Disclosure: I thought back in ’08 or so there might soon be a high USD inflation, but I was thinking of an intentional, strategic rip-off of creditors: A debt deletion scheme of a country which cannot sustain its trade or budget.
Interestingly, both the U.S. government and the Greek government followed the exact opposite course. They kept playing old games and in fact doubled down on them.
Maybe I expected a much more strategy-driven behaviour when in reality the decision-makers were merely attending a briefing or meeting on the issue once in a while, otherwise hurrying from one distraction to the next.
Last dingo,
Economics is partially mechanics. But only partially because people are also components — and the machine changes over time as technology and society evolve.
Descriptions are largely metaphors, which is one reason they are not an accurate basis for predictions. The other reason is that economics is complex, far too much so for non-economists to do more than make guesses.
One last point: the current monetary policies by the central banks of Japan, Europe, and United States are experiments. The conditions and dynamics are in many ways unique, which makes reliable forecasts even more accurate.
Cullen Roche argues that historical cases of hyperinflation are explained by factors other than the money supply, and that “‘money printing’ is often the response to exogenous and unusual events and not the cause of the hyperinflation”:
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FM Note: Cullen Roche is the founder of the financial services firm Orcam Financial Group and the popular financial website Pragmatic Capitalism.
Coises,
That sounds like the sort of explanation practicioners come up with. Not much explanitory juice.
The usual economists’ version is “hyperinflation is always and everywhere a fiscal phenomenon.” That is, centeral banks print as necessary to finance government deficits when they determine this to be a better alternative than borrowing (then can be many reasons for making this choice).
These posts discuss how we might get onto a path leading to inflation:
As I understand it, an important point of Mr. Roche’s paper can be taken as a warning about words. Inflation and hyperinflation are qualitatively distinct phenomena. It’s easy to slip into the notion that hyperinflation is just exaggerated inflation, that it has the same causes as inflation. If I’m not misreading him, Cullen makes the case that based on the historical incidents we call hyperinflation, it is a very different thing. Valid worries about inflation, even high inflation, are not by themselves grounds for worry about hyperinflation.
I would argue that we already have inflation of a sort: rising profits and asset values that are disconnected from improvements in production represent (re)inflation in the rentier segment of the economy (aka a bubble).
I’m not sure which is worse: thinking that the masters of the universe didn’t foresee that QE would support reinflation/recovery for the 1% while doing nothing much for the real economy… or thinking that they did.
Something I wonder about is this:
Since extremely low interest rates have failed to reinvigorate the real economy… is there any reason to think higher interest rates would hurt much, either? Everyone seems to think so. What if interest rates have little to do with anything outside of Wall Street right now, due to some other economic dysfunction that is not yet understood?
Coises,
Your thoughts on this are reasonable. It’s just that economics is complex. Think about such speculations about the DoE’s fusion program, or NIH’s programs using genetic engineering to develop new drugs. People who would consider it mad to criticize the DoE and NIH scientists, do so with the Fed’s economists. After all, isn’t macroeconomics simple?
Just to mention one detail, inflation is not just “stuff going up”. It is a rise in the general price level of goods and services. Land prices rising, profits increasing — neither of these is inflation.
Neither are inflation and hyperinflation differet phenomena. Dynamics of many things increase with magnitude. The ancient aphorism is that to increase a quntity 10x is to change its quality. Think of the humn body at 30 degrees F, 90, 98, 110, 140, 200, 220. Changes of many kinds. Some specific numbers are critical: going from 30 to 35, 95 to 105, 210 to 220.
“QE would support reinflation/recovery for the 1% while doing nothing much for the real economy… or thinking that they did.”
That’s not how public policy works. At any moment there are only a few options available both politically AND operationally. Should the official advocate one of them, all of them, none of them? Often it’s a choice of choosing the most effective of weak options, or the best of bad ones.
“is there any reason to think higher interest rates would hurt much, either?”
Conservatives say this all the time. When you daughter is sick, lying in intensive care. The docter says that the drugs have produced only a slight improvement. Do you demand that the drugs be stopped, since they produced ony small improvement? After all, what are the odds that without the drugs she would be much sicker?
>What if interest rates have little to do with anything outside of Wall Street right now, due to
>some other economic dysfunction that is not yet understood?
I think is kind of an interesting thought experiment, at least. What happens if rates rise? I’m open to the possibility you have the right instinct here and the effect of rates on ‘main street’ is maybe less than we think. There are some isolated real estate bubbles happening in the USA, and this would put ice on those, but that’s actually kind of a good thing.
We have a hint already with announcement/non-announcement of the Fed tapering. Massive dumping of bonds, but bond investors are grown ups and they should be able to deal with this.
What really killed the taper and higher US rates, was that fear this would pull money from overseas bond markets, and push the developing world and southern-EU deeper into depression/recession. I think this is actually kind of a fundamental flaw in the whole world economy. That rate changes have effects across economies that have vastly different needs.
Cathryn,
This is the problem with faux economics. It sounds superficially plausible. I suggest getting information from people who actually know stuff.
The Fed was alarmed by the rapid rise in rates for very sound reasons. Most importantly, the effect on interest-rate sensitive sectors of the economy — such as construction and auto mfg. These also happen to be among the strongest parts of the economy.
With GDP tracking below the 2% “stall speed” — Q3 was estimated at 1.6% – 2% *before* the shutdown — the Fed was unwilling to risk a recession by policy changes that would further increase rates. Current conditions are in some ways like those *during* recessions, so it would be a bad time to start one.
Some economists believed the risk of continued QE was greater than the risk of recession from tapering. There are no obvious or certain answers to these questions.
“Most importantly, the effect on interest-rate sensitive sectors of the economy — such as construction and auto mfg.”
I’m just feeling skeptical of all this focus on interest rates, especially for something like new car sales. I just see how people live, and I have an idea why they don’t buy new cars. It’s a crappy job market, underemployment, high student loan debt and high housing costs. You can tweak the interest rate and maybe the payments go up and down by $50-$100 a month or so, but ultimately, it’s only going to be a very marginal change. The brick and mortar economy — it’s broken in ways that go beyond just interest rates.
“The brick and mortar economy — it’s broken in ways that go beyond just interest rates.”
I picture doctors in conference, carefully adjusting doses of Lipitor and anti-hypertensives… no one pointing out that the patient gets no exercise, drinks three six packs of beer a day, and eats like a pig.
A crude analogy, but it seems to me that the “when all you have is a hammer, everything looks like a nail” trap can capture experts, too… maybe especially experts?
On the other hand, a statement like the one I just wrote should be supported by examples, and none come to mind.
Coises,
I like your analogy, which addresses a widespread fear — not yet really even a theory. Lots of us share it.
“when all you have is a hammer, everything looks like a nail” trap can capture experts, too… maybe especially experts?”
I think that is not fair to our experts and political leaders. The choice is to use the available tools — operationally AND politically available — or do nothing. The tools might work to cure, or might help — but are unlikely to hurt. Think of the medical analogy. What would you want your daughter’s doctor to do?
“When all you have is a monetary policy (fiscal policy that can come from Congress only is out of question), everything looks like too high interst rate”
I have collected over 30 different explanations for hyperinflation. Of all of these, Cullen’s is the most bogus I can find. Look at others and look at MMT/MR here:
http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html
I like it very much that you cited a passage where velocity calculations are largely tautological.
How it is calculated it tells you how much it can tell about inflation.
But what matters is that most of what you posted applys for monetary systems under Gold Standard or fixed exchange rate with countries with debt in foreign currency.
USA is not such economy, would you accept, but most importanty comprehend, that we have fiat money? With fiat money means comparing it to Gold Standard effects?
It means that inflation from imports is aleviated trough weakening domestic currency.
Weaker domestic currency inflates imported prices but counteracts it with increased production at home.
Let’s go back to see why that is different then under GS or fixed exchange rate.
Under GS, prices and wages still rise due to credit creation by banks making demand for imports rise. Banks tend to credit existing assets more then new production, which gives rise in asset prices higher then new production can follow it. Asset prices make people more richer hence driving demand for imports while production that will satisfy such wealth is not growing, so imports are rising. Rising imports do not devalue currency, it rises interest rates for more borrowing from abroad. When scare about rise in interest rates forces less imports the prices skyrocet due to lack of supply and domestic production can not fill the demand fast enough because it was destroyed.
This does not go along this line because US is not under GS or fixed exchange rate nor it borrows in foreign currency And the most importantly there is extra available production capacity at home.
What determines possibility of inflation is;
1) Fiat money
2) available capacity (capital and labor available capacity is large due to recent unemployment)
3) borrowing in foreign currency.
You can see that there is no possibility that expansion in velocity or money supply can cause inflation untill unemployment is reduced to 4%. ( even tough in 2005 when unemployment was around that level it did not show any hint at inflation from this causes.)
Where did inflation can come under fiat currency? From rising oil prices or from destruction of farm production/ drought. Having available oil production capacity recently will aleviate demand for imports and rise in oil prices, so we are clear from such preassure in short future. That is why we need to develop alternatives for oil use.
Another risk of inflation aleviated comes from what coises wrote; Newly money supply can go into paper asset prices, not only into demand for production and services.
Fiat money is very important factor in being able to control inflationary preassures.
Under GS even tough government is not allowed to issue new currency, private banks are not limited by anything in printing money except by the private desire to take on more debt. This causes Boom and Bust cycle under GS.
Let’s go back some more to establish mechanisms for inflation.
1) Wage push inflation =Increased demand without available capacity (full employment)
2) Supply pull inflation = increased demand for money for capital investment no matter interest rates.
3) commodity shock =widespread drought, increased WORLD demand for oil, materials.
We can see that today there is, under fiat money, NO threat of inflation at all unless world scale drought happens. Once we get to the full employment then you can start thinking about inflation but not about hyperinflation.
I see that you believe in Trillion dollar platinum coin causing inflation.
It is impossible to go that way since there is no mechanism to use it unless Congress decide on extra deficit spending.
TDPC is only a mechanism to break the gridlock in Congress, it can not be used for spending/ to increase demand.
Treasury spends only what Congress decides with federal budget. So it is federal budget spending that decides fiscal spending not how much Treasury has money for such spending. TDPC can only increase Treasury’s balance sheet.
Fed can spend only what rises prices of paper assets, it can not push it into the real economy.
What is the size of the Federal Budget that Democrats are pushing with CR? It is $986 B in deficit which is lower then last year’s $1100 B deficit.
Imagine that Treasury gets $100 T on its balance sheet today? would that enable them to spend it? Would that change government spending?
Lets imagine that Treasury have suddenly $100 T negative on its balance sheet, would that change government spending?
In both cases the answer is NO.
No matter what Treasury debt or credit is, only thing that can change government spending is what Congress decides with its budgets.
TDPC can be used only to break the irrational fear about Treasury’s balance sheet, about $17T debt, to break the gridlock in Congress that is caused by such fears. Improving Treasury’s balance sheet will not increase spending but can only make people see that Treasury’s balance sheet is not an issue for fiat currency, it is only an issue in people’s minds.
Congress can decide on spending no matter what T’s balance sheet is and FED will enable T to spend whatever Congress decides.
Simply; US debt is not an issue at all from the economic standpoint. But such nonissue is in fears of inflation and debasement of currency.
DeBASEed currency????? The word itself implys that there should be a BASE for the currency.
What is the BASE for fiat currency?
“I see that you believe in Trillion dollar platinum coin causing inflation.”
I see that you still do not understand what you read.
I see that you still should read Wikipedia, or any better yet, an Econ 101 textbook, to learn some basics about economics.
Since you put up a pic of banknote with $1 T, was that not your message?
Giving conservatives the last word!????? After they cried about inflation and hyperinflation????
Then what is your message with it if not that Obama will cause inflation with a Trilion Dollar Platinum Coin?
I sincerely have no idea what else could you have ment by it.
Does econ101 textbooks diferentiate between economies on fixed exchange rate and those with flexible exchange rate?(fixed exchange has the same effect as Gold Standard)
About a month ago Krugman wrote that the biggest lesson from the 2008 GFC he learned was the difference that flexible exchange rate and debt in your own currency makes in an economy comparing it to those that do have fixed exchange rate and debt in foreign currency.
USA, UK, Canada, Japan and Australia do not work under Mundell-Flemming model.
Some other small countries also but i do not know which one.
Japan proved all econ101 textbooks wrong and Krugman admited to it.
I do not subscribe to NYT so i can not search for that Krugman’s post where he admited the difference that fiat money makes.
“I see that you believe in Trillion dollar platinum coin causing inflation.” … “Since you put up a pic of banknote with $1 T, was that not your message?”
No.
(1). It is not a coin. It is a bill.
This graphic is part of the crazy Right-wing insistence since Obama was elected that he is it running America into Weimar or Zimbabwe.
(2) Note the photo of Obama on the bill. If Obama did mint a coin, it would not have his face on it. The intent of this graphic is obviously political, part of the attacks on Obama.
Here is Mathew Iglesias saying about TDPC and its effect;
“Absent new laws, entitlement programs will run on autopilot and discretionary programs will spend what Congress has appropriated and nothing more. Platinum gimmicks don’t change that, they only ensure that Treasury can pay the bills it’s already legally required to pay. Also, there’s no reason this would need to be inflationary.”
I usually do not follow Iglesias, i read Krugman, Mark Thoma, Bill Mitchel, John K Galbreith, Steve Keen, Dirk Ehnts, Yanis Varoufakis, Brad DeLong and bunch of UMKC economists; Stephanie Kelton, Warren Mosler, Bill Black and Richard D Wolff, L Randall Wray who are also reasarch asociates at Levy Economics Institute at Bard College that you also recomended.
Yes, Yglesias gives the consensus opinion about the effects of a one-time use of the “platinum coin”.
The concern is about the political effect on what’s left of the Constitution. It is not a question of economics.
From James K Galbraith
“In the modern world, when the Treasury writes you a check, your bank credits your account. That’s how money creation works.”
http://www.nytimes.com/roomfordebate/2013/10/02/can-obama-ignore-the-debt-ceiling/government-doesnt-have-to-borrow-to-spend
Jordan,
When I suggested you read about Econ 101, I did not mean read it to *us* — let alone sentence by sentence.
If anyone reading this wants instruction in Econ 101, they can probably find it by themselves.
What is the base for fiat currency in order to be deBASEd?
Please go read something to learn about these things. You are deeply misinformed, probably from prolonged exposure to faux economics.
Some recommendations:
“Economics can help understand events in America and the world. Here’s where to find those answers.”
http://fabiusmaximus.com/2010/02/16/economics-3/
Please stop these lectures about things you do not understand. You can post citations and references about things you find important. Otherwise future comments will be moderated.
“What is the base for fiat currency in order to be deBASEd?”
This is not the library reference service. Use Wikipedia, Google, or the Britannica for answers to basic questions about economics.
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=EXCRESNS#
If you’re looking for the ‘low money velocity’ I think this is it. Look at this graph. $1.8 Trillion of excess reserves. For some perspective, the entire US government budget is maybe $3.5 Trillion or so.
This is interesting, and it’s the official Fed ‘don’t worry, be happy’ article on what all this means. It touches on some of the worries discussed here, of inflation fears, etc.
http://www.newyorkfed.org/research/current_issues/ci15-8.pdf
“After presenting our examples, we explain why the money multiplier is inoperative in the current environment, where reserves have increased to unprecedented levels and the Federal Reserve has
begun paying interest on those reserves. We also argue that a large increase in the quantity of reserves in the banking system need not be inflationary, since the central bank can adjust short-term interest rates independently of the level of reserves by changing the interest rate it pays on reserves.”
So my reading of this is that, yes, the money supply has massively expanded. But if the economy starts to overheat, the fed can encourage banks to store their money back at the FED rather than lending to the economy if they increase the interest paid on deposits at the FED. Hmm…. I’m still processing this myself, really.
Cathryn,
This is very complex. Set realistic expectations for yourself. It is the equivalent of looking at the US fusion program. You have the broad outline right. Now for some details.
(1) You have a discontinued series for excess deposits. See here:
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=EXCRESNS#
This is an effect of falling velocity, but it is not falling velocity.
(2). The excerpt you give of a Fed report discusses the money multiplier, not velocity. That is the ratio of M1 (I.e., measure of money supply) to the monetary base. It is also falling, for related reasons to the fall in velocity, but has a different pattern since the crash.
http://research.stlouisfed.org/fred2/graph/?id=MULT
(3). “economy starts to overheat, the fed can encourage banks to store their money back at the FED rather…”
Not exactly. The danger comes from the transition from below-capacity to *full-capacity* condition of the economy. When GDP catches up to potential GDP. Then those excess reserves might drive loan growth and hence inflation.
Unfortunately excess capacity, equilibrium velocity and such are difficult to measure. The best measure is labor: unemployment and wages. Those tell when there is no longer excess labor. Hence the focus on the employment report.
http://en.wikipedia.org/wiki/Money_supply
Yeah, Wikipedia has a nice little chart. Excess reserves are part of the Monetary Base, but not part of M2. So I see now, that all these reserves aren’t directly causing your M2 velocity chart to decrease. That and the college textbook idea of ‘multiplier effect’ is officially dead, really.
“Haying interest on reserves breaks this link between the quantity of reserves and banks’ willingness to lend. By raising the interest rate it pays on reserves, the central bank can
increase market rates and slow the growth of bank lending and economic activity without changing the quantity of reserves. In other words, paying interest on reserves allows the central bank to follow a path for short-term interest rates that is independent of the level of reserves. By choosing this path appropriately, the central bank can guard against inflationary pressures even if financial conditions lead it to maintain a high level of excess reserves.”
With the question of inflation, hyperinflation and all that — the question is, what is the Fed’s plan? If the Fed has a viable plan to stop inflation, then it won’t happen. If their plan doesn’t work, then bad things happen. Part of the plan is right here. I think interest payments on reserves establish a minimum interest rate. If banks get get payed X% by stashing money at the fed, they won’t lend out for any less. Kuu was talking about this same issue — of interest payments on reserves at the Fed.
Really, I just don’t see how we get inflation without a rise in wages. Mucking around with interest rates and consumer credit can only go so far — eventually that has to be paid back with wages. From the 70’s until now we’ve had massive social changes that take all of the upwards pressure off of wages.
Cathryn,
“all these reserves aren’t directly causing your M2 velocity chart to decrease.”
As I said, falling velocity and growing excess reserves are related phenomena — not the same thing. They do not “cause each other, in either direction.
“If the Fed has a viable plan to stop inflation, then it won’t happen. If their plan doesn’t work, then bad things happen.”
Unfortunately, history decisively disproves that comforting theory. Nations adopt risky policies because they believe they are the best available choice, usually believing they can successfully manage it. Usually they are correct, but not always.
“I just don’t see how we get inflation without a rise in wages.”
Sure we can. Prices rising faster than wages is a nightmare scenario, however. Fortunately it is rare. Usually inflation results from overheating growth, poorly managed.
Hyperinflation often results from inability to finance government spending through conventional means. “Hyperinflation is always and everywhere a fiscal phenomenon.” Overstated, but usually correct.
Cathryn,
“I just don’t see how we get inflation without a rise in wages.”
Wages and inflation can run on separate tracks, at different speeds. Japan might be having wages growing slower than inflation, as the Yen falls in value. See “Why Abenomics May Not Work“, Satyajit Das, at Roubini’s Economonitor, 7 October 2013.
I can explain the mechanics of hyperinflation in more than 30 different ways. Predicting when it will hit is a much harder thing. If you know any other explanations please comment at the end of the following post.
http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html
Vincent,
Nicely said. Economics is not yet the point where such general theories are operationally reliable, except at a abstract level.
And, of course, finance systems are evolving. Fully electronic fractional-reserve lending, floating fiat currency systems with massive use of lightly-regulated derivatives have little in common with 18th century gold-based systems.