Let’s learn about hyperinflation. Who knows what the future holds for us?

Summary:  What makes an experiment is uncertainty about the outcome, no matter how great people’s confidence. That applies to the great monetary experiments now in progress by China, Europe, America, and Japan. Europe since 2008, the USA since 1998, and Japan since 1988 all have common histories: confident leadership, unexpected crises, and repeatedly wrong forecasts.

After all that it will astonish historians how we worship the power of central bankers. But that power neither makes them omnipotent, nor their theories accurate. Today’s post by Nathan Lewis discusses one of the possible outcomes.

“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

Today’s guest post:

What is “Hyperinflation”?
By Nathan Lewis at New World Economics, 13 October 2013
Reposted with his generous permission

Bernanke Green Lantern

Contents

  1. A history of hyperinflation
  2. Hyperinflation: not what you might think
  3. What hyperinflation looks like
  4. USA in the 1970s; Mexico in the 1980s
  5. Other lesser-known episodes
  6. Why not us? Or rather, why not us yet?
  7. About the author
  8. For More Information
  9. A Last Resort, if all else fails …

(1) A history of hyperinflation

The word is tossed around, and many have an opinion about it, without having any real clear idea of what it means.

We all probably have some mental picture of the “billion dollar banknote” or “price of coffee rises as you drink it” kind of hyperinflation, as happened in Germany especially in 1923.

Children - 1923 Germany
Children learning to manage money, Germany 1923

But, this is somewhat rare. Not as rare as you might think, but it constitutes only a small portion of those events which I think are legitimately labeled “hyperinflation.” This table lists fifty-three of the most intense hyperinflations in recent history:  The Hanke-Krus Hyperinflation Table.

The least intense hyperinflation listed on this table is a 55.5% increase in “prices” in a month in Kazakhstan in 1993, which works out to a doubling of prices every 47.8 days. However, this table leaves out many hundreds of events which are legitimately called “hyperinflation” in my opinion, and in the opinion of those who lived through them, and historians.

You see what I mean when I say that it is “not as rare as you might think.” Here’s Wikipedia on various hyperinflations.

(2) Hyperinflation: not what you might think

Extreme hyperinflations like these tend to grab people’s attention. However, I would suggest that they are actually less relevant than some milder cases.

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Let’s say you start with the price of a cup of coffee at $1. After a few years, the price of the cup of coffee is $100. I say that most of whatever is going to happen has already happened by that point. The “purchasing power” of $1 has already declined by 99%. There actually isn’t much difference between a cup of coffee that goes from $1 to $100, and from when it then goes to $1000, or $1 million, $1 billion or $1 trillion. It’s just the last bit from 99% to 99.999999% loss of “purchasing power.”

Germany, 1923
Money is always useful

I call it the “final clownshow.” Many countries never get there.

There is no particular dividing line between “inflation,” as the U.S. experienced in the 1970s, and “hyperinflation.” It is somewhat arbitrary. However, there is a point at which certain things begin to change, which I think is a legitimate point at which to add the “hyper-” prefix.

I’m using the word “inflation” here too as it is popularly conceived. These terms don’t have clear definitions. Although I can apply clear definitions to them, and have in the past (in my book Gold: the Once and Future Money), nobody else shares my definitions. I now think it is best to avoid them altogether, or, to use them as others might understand them, in a vague and casual way.

The International Accounting Standards Board, which is the general rule-maker for accounting worldwide, has a specific definition of “hyperinflation.” IAS 29 says that hyperinflationary accounting standards apply when “the cumulative inflation rate over three years is approaching, or exceeds, 100%.” By “inflation rate” they basically mean the official Consumer Price Index. FASB, the standards-making body for U.S. accounting, has the same definition as the IAS.

See Wikipedia on Inflation Accounting.  Thus, for them, “hyperinflation” is a rise in the CPI of 100% or more over a period of three years. It works out to 26% per year compounded, or 2.0% per month.  2%/month probably doesn’t seem very “hyper-.” It certainly doesn’t make the price of your coffee go up in the thirty minutes it takes to drink it.

(3) What hyperinflation looks like

But, the IASB is not just throwing out these definitions on a whim. This is based on real-life experience, of many corporations that have had to deal with accounting in situations of hyperinflation. For example, in the 1980s, essentially all of Latin America — pretty much everything south of Texas — experienced hyperinflation. The Latin American subsidiaries of Coca-Cola, for example, had to ask for guidelines on how to do their accounting in this environment. So, this admittedly arbitrary definition is nevertheless based on an enormous amount of real-life experience.

When you get annual CPI rises on the order of 26% per year, over a period of three years — the minimal requirements of “hyperinflation” according to IAS 29 — certain essential elements of the modern market economy start to break. For example, accounting breaks. Here’s Wikipedia on some of the problems I’m talking about:

Historical cost basis in financial statements

Fair value accounting (also called replacement cost accounting or current cost accounting) was widely used in the 19th and early 20th centuries, but historical cost accounting became more widespread after values overstated during the 1920s were reversed during the Great Depression of the 1930s. Most principles of historical cost accounting were developed after the Wall Street Crash of 1929, including the presumption of a stable currency.

Measuring unit principle

Under a historical cost-based system of accounting, inflation leads to two basic problems.

First, many of the historical numbers appearing on financial statements are not economically relevant because prices have changed since they were incurred. Second, since the numbers on financial statements represent dollars expended at different points of time and, in turn, embody different amounts of purchasing power, they are simply not additive. Hence, adding cash of $10,000 held on December 31, 2002, with $10,000 representing the cost of land acquired in 1955 (when the price level was significantly lower) is a dubious operation because of the significantly different amount of purchasing power represented by the two numbers.

By adding dollar amounts that represent different amounts of purchasing power, the resulting sum is misleading, as one would be adding 10,000 dollars to 10,000 Euros to get a total of 20,000. Likewise subtracting dollar amounts that represent different amounts of purchasing power may result in an apparent capital gain which is actually a capital loss. If a building purchased in 1970 for $20,000 is sold in 2006 for $200,000 when its replacement cost is $300,000, the apparent gain of $180,000 is illusory.

Misleading reporting under historical cost accounting

In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued.

Ignoring general price level changes in financial reporting creates distortions in financial statements such as:

  • reported profits may exceed the earnings that could be distributed to shareholders without impairing the company’s ongoing operations,
  • the asset values for inventory, equipment and plant do not reflect their economic value to the business,
  • future earnings are not easily projected from historical earnings,
  • the impact of price changes on monetary assets and liabilities is not clear,
  • future capital needs are difficult to forecast and may lead to increased leverage, which increases the business’s risk when real economic performance is distorted.

These distortions lead to social and political consequences that damage businesses (examples: poor tax policies and public misconceptions regarding corporate behavior).

Another thing that often breaks is the financial system. This is generally not a matter of bank insolvency or default, but rather one of lenders and borrowers being able to work together. At an annual CPI of 26%, you might expect that lenders won’t lend except at an interest rate of more than 26%, and on very short terms of under a year, because nobody knows what might happen next. What tended to happen in Latin America in the 1980s is that domestic-currency lending dried up altogether. Typical interest rates actually soared well above the CPI rate, to 100% or more, for small-scale borrowers, like small local businesses. Naturally, volumes shrank to a pittance. It basically became a form of loan-sharking, taking advantage of a desperate few.

On the larger scale, the economy was capital-starved. What lending existed was done in foreign currencies, although even that was usually among larger and well-established corporate borrowers primarily. The local, small scale economy basically was finance-free.

Other things break.

  • Any sort of long-term contracts or agreements.
  • Wage agreements and contracts for services have to be renegotiated several times a year.
  • Public and private pensions, annuities, life insurance, and of course any kind of long-term bonds or lending becomes worth a lot less, or even worthless.

The tax system also might break, either taxing at much too high a rate (for example, on corporations who seem to have enormous “profits” because their cost-of-goods-sold is based on FIFO accounting, or capital gains based on years-ago purchase prices), or too low (for example, on regular income, which is paid on April 15 for the entire previous year, in a dramatically devalued currency with very little current value).

Actually, the IASB described hyperinflation in these terms:

The International Accounting Standards Board does not establish an absolute rate at which hyperinflation is deemed to arise. Instead, it lists factors that indicate the existence of hyperinflation:

The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

  • Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
  • Interest rates, wages, and prices are linked to a price index; and
  • The cumulative inflation rate over three years approaches, or exceeds, 100%.

In other words, things start to break. Not only the things listed here start to break. These are just a few of a great many elements of the money economy that stop functioning properly when the money goes bad.

(4)  USA in the 1970s; Mexico in the 1980s

One reason I called the 1970s experience in the United States “inflation” rather than “hyperinflation” is that these things didn’t break. Interest rates rose to mid-teens levels, but the financial system didn’t dry up and blow away as it did in Latin America. The U.S. income tax system, which was not automatically indexed to inflation in those days, was on its way to choking off the economy altogether as the middle class rose into tax brackets intended for the very wealthy. But, it didn’t quite get there. Things almost broke, in the 1979-1980 time, but that’s when Paul Volcker panicked and did whatever he had to do to avoid that outcome.

Here’s what hyperinflation looked like in Mexico during the 1980s:

Mexican peso: 1955-2012
Value of 1000 Mexican pesos (1 million pre-1993 pesos) in US dollars

Between 1982 and 1988, the value of the peso went from 26/dollar to 2,300/dollar; in other words, a decline in the exchange value of the peso by about 100:1 during those six years. (In 1993, they knocked three zeros off the peso.) The official Mexican CPI looked like this:

Mexican CPI
Mexico: Official CPI, YoY% Change, 1970-2012

The official CPI rose by an annual rate of between 55% and 180% during that time period, typical throughout Latin America during this era. This fits the IASB definition of “hyperinflation,” and indeed that’s what Mexicans called it at the time. However, even the peak 180%/year rise works out to 8.9% per month,

Maybe doesn’t strike you as very “hyper.” Nevertheless, if the value of your pensions, savings, bonds, etc. fell by a factor of 100:1 over six years, you would be a little peeved. If your $100 pension was then worth only $1, it wouldn’t really matter that much if it then went from $1 to $0.10 or $0.01, and at what rate of speed that might happen.

That’s why I say most of the action happens in the first 100:1, and the rest is just the “clownshow at the end.” In the case of Mexico, it never got there. In 1988, the value of the peso was stabilized against the dollar and the hyperinflation ended, although the peso did have another incident in 1995.

(5)  Other lesser-known episodes

The worst thing about “the clownshow at the end” is not really the “rate of inflation,” which is not actually so relevant. It is really the time lost. By this point, the economy is reduced to subsistence. Things are very difficult. People are just trying to get enough to eat. This can go on for a few months, or it can go on for several years. It’s the time — the time spent in this period of despair and bare subsistence — that is the real “cost” of hyperinflation at that point.

Germany, 1923
Liquidity operations in 1923 Germany

These kinds of IASB-defined hyperinflations don’t even show up in the Hanke-Krus table or Wikipedia’s list of hyperinflation events, although they are certainly hyper-destructive.

There are also many examples of currencies, like the Turkish lira, which decline by a 30%-50% rate every year, fitting the IASB definition of hyperinflation, for perhaps decades at a stretch.

Japan had a hyperinflation in the 1945-1950 period, when the value of the yen went from about 4/dollar to 350/dollar. This again was about a 100:1 devaluation, much like that of Mexico, in about the same time period. It doesn’t show up in these lists.

The French Franc was worth 40/dollar in 1939, and 350/dollar in 1949. This was not quite hyper, but it was still a 10:1 devaluation over a period of ten years. At 26% per year, it is right on the borderline of the IASB definition of “hyperinflation.” (Actually, most of this appears to have been after 1945, because during the German occupation, the value of the franc was fixed at 20/mark, and the mark was worth, in prewar terms, about 2 marks/dollar. This would compress the French hyperinflation into the 1945-1950 period, or 10:1 in only five years, or 58% per year.) France also had about a 5:1 devaluation during and soon after WWI, not quite hyper but quite significant nonetheless.

The Italian lira was 20/dollar in 1941, and 625/dollar in 1950, a 30:1 devaluation in eight years (53% per year). (The U.S. dollar was worth $35/oz. of gold in both 1939 and 1950, roughly speaking.) Italians had other things to worry about besides the value of their money; it wasn’t the only thing that was destroyed in the war years. But, nevertheless, it was a hyperinflation event that generally isn’t remembered by historians. Germany also had another hyperinflation after WWII, again in the 1945-1950 period.

What I find is that, basically, all the countries in the world have experienced some sort of hyperinflation in the last 100 years. All of them!

The exceptions are basically the anglo-speaking countries: Britain, the U.S., Canada, Australia and New Zealand. That’s one reason that understanding and experience of hyperinflation is rather poor in the English-speaking world, but rather familiar in the Spanish-speaking world. We think it doesn’t happen often because the anglo-speaking countries — just 5 out of the 150 or so countries in the world — haven’t had it in the last 200 years. (Actually, there was hyperinflation in the Confederacy during the Civil War.) But, in the rest of the world, it has been drearily familiar.

(6)  Why not us? Or rather, why not us yet?

The reason that there hasn’t been hyperinflation in the anglophone world is because of the tradition of Hard Money embraced by the British and the American colonies that became the United States. This is why Britain, and then the United States, became the leaders of the world monetary systems of those times, with the premier international “reserve” currencies. But, as we can see, this tradition has been getting rather soft recently. The anglophone world is starting to look a lot like the rest of the world in these matters.

Perhaps the U.S., Britain etc. are even leading things in this regard, while the Chinese and others say “stop!” Even Brazil, a serial hyperinflationist, is saying stop (with Chinese prompting).

“Never say ‘Never Again’.”
— Micheline Connery to her husband, Sean

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(7) About the author

Nathan Lewis is the principal of Kiku Capital Management LLC, which manages a private investment partnership. He was formerly the Chief International Economist and Global Strategist for firms providing investment research to institutions.

His book Gold: the Once and Future Money was published by Agora Book Publishing and John Wiley in 2007, and is now available in five languages.He has written for the Financial Times, Huffington Post, Nikkei Business, Daily Reckoning, Japan Times, Daily Yomiuri, Pravda, Asian Wall Street Journal, Dow Jones Newswires, Worth, and other publications. He has a weekly column at Forbes.com.

His website is New World Economics.

He has spoken before audiences at the Heritage Foundation, New York Society of Securities Analysts, Utah Gold Money Summit, and other venues. In August 2012, he testified before the House subcommittee on Domestic Monetary Policy on the topic of “parallel currencies.”

Here is a series by Lewis at The Huffington Post, explaining the hidden workings of our financial system, using Goldman Sachs as the lens.  I recommend reading them.

Other posts here by Nathan Lewis:

(8)  For More Information

(a)  Poss about our great monetary experiment:

  1. Bernanke leads us down the hole to wonderland! (more about QE2), 5 November 2010
  2. The World of Wonders: Monetary Magic applied to cure America’s economic ills, 20 February 2013
  3. The World of Wonders: Everybody Goes Nuts Together, 21 February 2013
  4. The greatest monetary experiment, ever, 20 June 2013
  5. Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine., 19 September 2013
  6. Different answers to your questions about the momentous Fed decision to delay tapering, 20 September 2013
  7. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013
  8. Two warnings about quantitative easing, the taper, and what comes next, 27 September 2013

(b)  Posts about monetary stimulus:

  1. A solution to our financial crisis, 25 September 2008 — Among other things, large monetary action
  2. Important things to know about QE2 (forewarned is forearmed), 21 October 2010
  3. Bernanke leads us down the hole to wonderland! (more about QE2), 5 November 2010

(c)  Posts about hyperinflation:

  1. Can Obama turn America into something like Zimbabwe?, 22 February 2010
  2. The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe, 2 March 2010
  3. Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation, 17 December 2011
  4. What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!, 17 February 2012

(d)  Posts about Inflation:

  1. Inflation is coming! Inflation is coming!, 7 February 2011
  2. Inciting fear of inflation in our minds for political gain (we are easily led), 28 February 2011
  3. Update on the inflation hysteria, the invisible monster about to devour us!. 15 April 2011
  4. What every American needs to know about the Federal Reserve System, 31 March 2012
  5. The lost history of money, an antidote to the myths, 1 December 2012
  6. Lessons from the failed forecasts of inflation since the crash, 5 October 2013

(9)  A Last Resort: if all else fails, one remains who can help us

Bernanke's Prayer

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39 thoughts on “Let’s learn about hyperinflation. Who knows what the future holds for us?

  1. There is no chance of hyperinflation in USA in next 20 years. No chance. There is no mechanism present yet by which we could get there. There is no mechanism for it.

    To understand that you need to know that there are two economies in US. Economy of 1% and economy for 99%.
    Economy of 1% is experiencing high inflation while the economy of 99% is aproaching dangers of deflation (as few months ago FM wrote about age of permanent deflation) again.
    While employment and prosperity of 99% stagnates, economy of 1% is booming.

    Yes, FED printed $3T and gave it to 1% so they returned what they lost in 2008, but there is no mechanism for that wealth to be “trickeld” down to 99%.
    Again, there is no mechanism present today by which that wealth can reach 99% and cause high inflation, as long as there is preservation of property rights.
    Only mechanism that such wealth goes into 99% economy is by redistribution of tax proceeds and government deficit.
    Such redistribution is geting weaker as time goes trough the succes of Republicans with neoliberal policy and forcing austerity on 99% while 1% is getting huge stimulus.
    But 1% already have so much and had even without those $3T given to them, that they can not spend it into the economy of 99%, Their consumption reached ceiling long time ago, so they can not add anything more to agregat demand. They have so much money that they can not spend all of it, ever, so giving them even more doesn’t add to AG. So $3T given away can not rise inflation.

    As redistribution is getting weaker since 2008, 99% economy is getting starved of money so really real unemployment is still rising. Real unemployment is hiden in employment participation rate Young people that never got a job does not get registered as unemployed. There is more and more of them which is registered in employment praticipation rate. The job numbers are flat since 2009 while population grows. There is no threat of inflation from 99%.

    Only way that US can experience hyperinflation is by whole world deciding not to sell the products to US, not only by China. The whole world have to do that and no country with US military stations will ever do that.
    Another one is if Tea Party somehow succed in persuading people not to pay taxes, but due to the recent governmental crisis there is backlash on those efforts. If US looses ability to enforce taxation, US$ will loose value and acceptance. But there is no such danger at all.

    Any pressure from inflation is amortized by imports so floating exchange plays huge role in reducing the risk of high inflation. There is no net benefit to the US from reserve currency status. It is the floating exchange that does it. Same works for UK, Canada, Australia, Japan and New Zealand. They have no reserve currency status but have floating exchange rate and no debt in foreign currency.

    1. Jordan,

      Among the many many silly things you have posted, revealing your lack of knowledge about economics, this is perhaps the most foolish:

      “There is no chance of hyperinflation in USA in next 20 years. No chance. There is no mechanism present yet by which we could get there. There is no mechanism for it.”

      Please stop making stuff up about economics, and stick to citing actual experts. Read those Econ 101 texts!

    2. You want me to read those that brought us the GFC and still not know how we got here?
      Talk about broken OODA loop.

    3. Jordan,

      “{I} still not know how we got here”

      Yes, my guess is that is an accurate description. Stick to citations of experts. You say you read widely, so that should be easy for you.

  2. this is a great post. learned a bunch from it. kinda scary to think that 2% inflation month over month would do the economy in.

    1. Underscore,

      Good point! It is easy to forget how delicately balance our world is. Esp if one looks only at the USA, one of the big winners in the past century.

      Looking at other nations gives us a better understanding of the wide range of possible outcomes.

    2. yes, any percentage increase over a timeline ends up being compounded exponentially. It’s a matter of how short or long that timeline happens to be.

      Its kind of like being asked the question:

      What would you like your salary to be for a month when starting a new job?

      -2 dollars a day
      -25,000 dollars each week
      -1 cent per day that doubles each day of the month for 31 days
      -2.5 million dollars for the month

      Just do the math.

  3. We are living in the world described in Irving Fisher’s paper “The Debt-Deflation Theory of Great Depressions”. It is very hard to experience hyperinflation in this environment when yours is the reserve currency. Every financial shock since 2008 has seen a further flight to quality in USD/Treasuries, even in the face of massive Federal deficits and Fed Reserve balance sheet expansion.

    What we’ve seen is the bifurcation of credits in the very manner described by Fisher. In successive waves the bonds of Greece, Portugal, Spain, and Italy have seen increases or blow-outs in spreads. Who is next? France perhaps? During each of these episodes USD rallied.

    If the USD were to see hyperinflation, it would be after all the rest. After the Yen, after the Euro, etc. It is a case of the USD being the worst currency in the world, except for all the others.

    Don’t get me wrong — I do not like QE and I do not like seeing total Fed Gov debt north of 100% GDP on the way to 200% of GDP.

    The cynic in me thinks it is a US policy goal to see the break-up of the Euro and removal of the Yen from the ranks of reserve currencies, leaving USD as the “one currency to rule them all”.

    1. Bonesetter,

      The subject of reserve currencies is largely one of myth in a world of floating currencies.

      The reserve currency is a big deal in a world of fixed currencies. But after the collapse of Bretton Woods (i.e., when President Nixon knocked down its decayed remnants) it is not clear what a reserve currency means.

      In fact currency reserves in foreign banks are held in rough proportion to their share of the sovereign bonds outstanding. Another, and far less important factors (globally) are the extent of mercantilist policies (widely adopted during the growth phase of export-driven economies), where foreign currency-denominated debt is held to depress the value of one’s currency vs. that of a major trading partner.

      US imports are quite small compared to those of most nations (typically 14-18%/gdp), nor do we manage the value of our currency (that’s probably hubris, allowing it to be too strong). So we hold only tiny reserves (including our gold).

      It makes little difference in what currency international transactions are demoninated, despite the large amount of fiction written about this. The world could do so in terms of IMF special drawing rights, and might do so in the future.

      Nor does reserve currency status provide a large benefit to us. To the extent it makes the US dollar over-valued, it probably on net harms us. Most of the stronger nations in the world seek weak currencies (e.g., Germany among the developed nations, China among the emerging nations).

    2. Let me re-phrase: It is very hard to experience hyperinflation in this environment when US Treasuries have the “flight to quality” effect.

      Hyperinflation is a measure of capital outflow. It can be an outflow to hard goods (like in Wiemar, and the Germans had a wonderful word for it, flight-to-real-things or something like that). It can be an outflow to another nation’s currency or bond market.

      For the USD to experience hyperinflation, the capital in USD securities must flow somewhere. But the Yen, Euro, RMB — these all are worse havens for capital than USD. The Euro has had the goal of creating as deep a market for currency and sovereign bonds as USD/UST, but the flaws in the Euro’s structure have been exposed by the crisis. Perhaps a Federal Europe comes to be and solves the problems, but that is a long way off. It is far and away more likely that there is a currency crisis in Yen, Euro or RMB when compared to USD.

    3. Bonesetter,

      “It is very hard to experience hyperinflation in this environment when US Treasuries have the “flight to quality” effect.”

      That is correct, but is just another way of saying that we are not experiencing hyperinflation, or even accelerating inflation (which is below the Fed’s target range). So lots of things must change for such a radical change of state.

      The relevant question is if we have laid a foundation for such events — fuel for the fire? We can only speculate.

      I tilt to the deflationary side of the debate. But others have different views. The key error is too state forecasts with certainly, which I consider an indicator of low credibility for the analysis.

      The actual outcome will result from impossible-to-reliably predict policy actions in response to impossible-to-reliably predict events.

      “Hyperinflation is a measure of capital outflow. ”

      That confuses the response to hyperinflation to the event itself. Hyperinflation is a change of state, not a capital flow (that’s not well-stated. hope it conveys the Geist).

  4. The reason that there hasn’t been hyperinflation in the anglophone world is because of the tradition of Hard Money embraced by the British and the American colonies that became the United States.

    I don’t understand the rationale behind this statement.

    Didn’t the 1944 Bretton Woods system pretty much place every country (English-speaking or not) except the United States on a par as to how “hard” its money was? And since the end of that system in 1971, no significant currency has been “hard,” has it?

    1. That is a big myth that hard currency had anything to do with preventing hyperinflation. only effect of hard currency is guaranteing fast boom and bust cycles. Hiting the ceiling of debt growth fast and hard wnd then quick deleverage.

      What saved those countries of hyperinflation was no destruction of producing capacity.
      Evary hyperinflation was caused by destruction of production capacity at the time of bad governing. Actually it would be bad governing causing wars that would destroy productive capacity. Lewis’ text mentions that but then passing over that fact started making up the resons of the lack of hyperinflation.

    2. Jordan,

      “That is a big myth that hard currency had anything to do with preventing hyperinflation.”

      Please list those episodes of countries with a “hard currency” that had hyperinflation. That is, nations that had a hard currency and experienced hyperinflation without debasing the currency (i.e., abandoning a hard currency).

    3. Ok, i admit that i was wrong about that.
      Hard money is preventing inflation by causing depression or a recession since fiat money.
      What is worse, hyperinflation or depression?
      Ok. extreme hyperinflation causes the society to disintigrate but rarely they get there.

    4. Jordan,

      “What is worse, hyperinflation or depression?”

      That is a silly question. Each is painful in its own way, depending on that nation’s circumstances — and the magnitude and duration of the event. There are no master yardsticks with which to compare different forms of pain.

  5. MV=QP
    M does not have to go up to produce inflation, V can go up after a prolonged period of low V. But, Velocity doesn’t go up on its own and can not be targeted by policy.
    So, another way for inflation is trough Q. Quantity can be destroyed that will produce inflation. As Lewis wrote, hyperinflation is usualy caused by wars, in other words, destruction of Q.

    We have experienced a large destruction of Q in 2008 with the closing of many small businesses and unemployment. Some of the slack was mitigated with imports and rest of it with the fall in AD which lowered Velocity. All of the slack by domestic Q can be mitigated by imports without a blip from inflation. Inflation will go into local Q, or ireplacable production like healthcare, government, construction and military production, but that is another large topic.

    How much is the world willing to give us their goods in order to replace domestic Q?
    At the time of the GFC, the world’s willingess is even larger then when things were good. China grew thanks only to AD that was provided by US, since they lack AD domesticaly, and even more so today then before industrialization, they are dependent on US importing their goods, nobody else can replace such role of the uS, so they will accept dollars in exchange for their hard work.
    Many, many countries today would love more than anything to add some of the US originating AD since they can not figure out themselves how to rise domestic AD, they all talk about foreign investments or exports. They desperatly seek foreign AD/ i.e. $US to buy their stuff.

    Why is US refusing to provide many countries with US AD ($ for goods), that they desperatly seek?
    Because Congress decided that public debt is THE problem and is refusing to raise spending.

    US hegemony is comming only from willingnes to provide AD to other countries, by preventing that from happening Congress is destroying US hegemony in the world.
    Hegemony is not threatened by printing dollars, US hegemony is provided by printing dollars and giving it to the world in exchange for goods.

    There is 27% fall in US provided AD to the world since 2008.

    Please do not ask me to cite “experts” on this. Many economists wrote this in many pages and in economic lingue. I am just writing it in simple terms. But if you want to read economists about this, then you can read The Global Minotour by Yanis Varoufakis.

    Just as the Athenians maintained a steady flow of tributes to the Cretan beast, so the ‘rest of the world’ began sending incredible amounts of capital to America and Wall Street. Thus, the Global Minotaur became the ‘engine’ that pulled the world economy from the early 1980s to 2008.

    The question not raised here is; Where the world was getting $US from? From US buying all their goods/ providing AD to the world economies.
    And many countries would love more then anything to receive that US AD since they can not figure out themselves how to raise domestic AD. Neither does US can figure out how to raise domestic AD. There is the fall of 27% in USA provided AD to the world.

    Print money and spread it to the population and americans will then be able to provide AD to the world. Plenty of countries are demanding US hegemony, will we provide it or slash it ourselves?

    1. Could you let me know what stuff did i make up, so i can provide citation from “experts”.
      I have to say that soft sciences, like economics, sociology or politics have experts on both or all sides.

    2. Jordan,

      “I have to say that soft sciences, like economics, sociology or politics have experts on both or all sides.”

      False. Absurdly false. Those social sciences are like all the sciences in that they have areas of agreement surrounded by a frontiers of debate. The social sciences, being younger and less mature, have smaller areas on consensus agreement.

      Stick to quotations and citations.

    3. DAB,

      Let’s not get carried away. MMT is a theory, and one with little theoretical or empirical support in the economics literature. No amount of blog posts can substitute for that.

      That does not mean that it is incorrect, merely that it is early stage work. However, that lack of grounding perhaps explains the often wildly incorrect statements by its lay followers — contradictory to the analysis of the economists in the MMT school.

      For details see these posts about MMT on the FM website.

      The often extreme wildly false comments — nested amidst the ones by experts — are similar in nature to the other threads with lay true believers.

      *. Conservatives about taxes, the magic of free markets, and — my favorite — in 2008 insisting that the US could NOT be near a recession.

      *. Global warming zealots insisting that the IPCC and peer-reviewed literature are wrong. My favorite response was to a brief post citing the papers from a recent conference — without commentary: calling me a “troll”. The one posting it, Maclaren, probably thinks climate scientists who disagree with him are trolls, too. That’s common view among such people.

    4. Yes laymen are dangerous… and I agree with your statements in general but considering the long history of all the various operational realities that are summarized by MMT, going back as far as Marriner Stoddard Eccles as well as the massive amounts of published work, it’s hard to say it isn’t published in economics literature. This is after all what is taught in certain universities around the world here at the University of Kansas City as well as others in Australia among other places.

      Also notice that some of those links are to well respected economists.

      But my interest isn’t necessarily with their policy prescriptions but with the operational realities of the system that are opposite to what many think they are.

      One link in particular is the pragcap link which specifically takes issue with the other MMT ones… but it does agree and build upon what it also sees as the basic operational aspects of the system.

    5. DAB,

      “as well as the massive amounts of published work, it’s hard to say it isn’t published in economics literature”

      I understand your view, but disagree. Volume counts for little. There are massive literatures on a wide range of outright pseudosciences (that’s for comparision; MMT is not pseudoscience).

      Which is why I rely on the peer-reviewed literature. Without that even smart people sometimes wind up writing fanzines. People working together, but insufficient internal criticism.

      For an example of how this can add up to little, see the peak oil literature — smart people, but they encouraged each other to greater doomsterism — and progressively less analytical rigor.

      Another current example is the lay climate change literature. Now both wings of it — skeptic and alarmists — are in outright rebellion against the climate science establishment (with, as always in these case, some allies on the inside).

    6. “Which is why I rely on the peer-reviewed literature. ” Again I find myself agreeing with what you say.

      Which of course leads to the question.. realizing we all have different things we wish to do with our free time.. would you be interested in reading a sample of the literally hundreds of publications in peer reviewed journals on MMT?

      http://alittleecon.wordpress.com/academic-mmt/

      As an aside here is a great response from William K. Black.

      Revealed Biases: Why MMT Critics Continue to Rely on Strawman Arguments
      http://neweconomicperspectives.org/2013/07/5683.html

    7. DAB,

      Thanks! I am familiar with the MMT literature, but had not seen this list. It’s more complete than the one’s I’ve included in the MMT posts.

      Note, however, that few on this list are papers directly about MMT published in the peer-reviewed economics literature. That’s what I meant by “little basis”. From a quick look, the only one meeting both criteria is Bell’s — and that’s in a third-tier journal (i.e., low impact score). Again, that’s not an indicator of truth or falsity, just a reflection of the school’s maturity.

      There are many theories considered relatively weakly-based in the relevant science literature with far larger body of work. Again, that does not “disprove” MMT, but shows that is it an early stage “school” or theory.

    8. “Note, however, that few on this list are papers directly about MMT published in the peer-reviewed economics literature. ”

      Yeah but you can’t necessarily write a paper “about” MMT you need to publish specific ideas or parts of MMT, there are many books as well as textbooks though. Viewed in that light they all publish in the biggest journals there are. These ideas and others that have been around for a hundred years. After all Minsky IS MMT… cant get any bigger than that as far as people and publishing goes.

      Anyway… Looks like I have some reading to do myself!

    9. DAB,

      “Yeah but you can’t necessarily write a paper “about” MMT you need to publish specific ideas or parts of MMT, ”

      What are you attempting to say? As stated it is true, but meaningless. How is MMT different in this respect than other subject in the literature?

      “Viewed in that light they all publish in the biggest journals there are.”
      I disagree. The peer-reviewed literature is different than writing books. It forces scientists to test their work vs their peers, then exposes the result to a larger audience of peers.

      “These ideas and others that have been around for a hundred years.”
      That means nothing. Lots of false ideas have long histories. As in “zombie economics”.

      “After all Minsky IS MMT”
      Not if MMT has any specific meaning. Rather Keynes => Minsky => MMT, derivative schools. Hence they overlap. In the posts about MMT this is discussed, and cite an article by Krugman where he describes the large overlap (i.e., area of agreement) between MMT and the mainstream economic consensus. That does not mean everybody is MMT, unless MMT has little unique meaning.

    10. Jordan,

      “Please do not ask me to cite “experts” on this.”

      A reasonable request, since you cannot do so for much of this. Because it is wrong. You are just making stuff up.

      “M does not have to go up to produce inflation, V can go up after a prolonged period of low V.”

      Can you cite examples? In fact V increases have caused inflation after M increases, as in Weimar Germany. That’s described in section 3 of this post.

      “But, Velocity doesn’t go up on its own and can not be targeted by policy.”

      No economic variable “goes up on its own” in the sense you say. And velocity can be controlled by bank regulatory policy. In fact, the instability in US M1 Velocity after 1980 resulted in part from regulatory changes during the 1970s and 1980s (lifting req Q, interest-bearing checking accounts, etc). For the previous 20 years it grew at 2.5% – 3.5%.

      “We have experienced a large destruction of Q in 2008 with the closing of many small businesses and unemployment. Some of the slack was mitigated with imports and rest of it with the fall in AD which lowered Velocity. All of the slack by domestic Q can be mitigated by imports without a blip from inflation. Inflation will go into local Q, or ireplacable production like healthcare, government, construction and military production, but that is another large topic.”

      This suggests you have not the faintest idea what “Q” is in the equation of exchange. It is the real value of final expenditures. Also, “ireplacable production”?

      “How much is the world willing to give us their goods in order to replace domestic Q? nobody else can replace such role of the uS, so they will accept dollars in exchange for their hard work.”

      Countries hold US debt for either own reasons, which have nothing to do with calculation of how much they are willing to work in exchange for dollars. Some are held for transactional basis, to provide currency against possible capital outflows (esp if their nation has substantial dollar-denominated debt), or to suppress the value of their currency. Global currency reserves in each currency are roughly proportional to their share of sovereign bonds outstanding.

      “Why is US refusing to provide many countries with US AD ($ for goods), that they desperatly seek? Because Congress decided that public debt is THE problem and is refusing to raise spending.”

      The Federal deficit is not the primary factor limiting US imports.

      I could go on, but much of this is gibberish.

      I have been a good sport, but this is a waste of time. I am moderating your future comments. Questions and cites/quotes from experts will be allowed.

    11. “What are you attempting to say? As stated it is true, but meaningless. How is MMT different in this respect than other subject in the literature?”

      I’m not sure what you’re getting at.. I’m just referring to journal articles and papers being focused. Sure there are journal articles about Keynesian, Monetarism, MMT, and others.. doesn’t make MMT different… I guess it make it the same? I certainly haven’t read everything.. I don’t mean to sell them short if I am.

      “The peer-reviewed literature is different than writing books”
      I wasn’t referring to the books I was referring to the journals..

      “Lots of false ideas have long histories.”
      That was just in regards to the idea this is “new”.. and in a way I guess exactly my point, could be wrong but not necessarily new

      “Not if MMT has any specific meaning.”… of course there is overlap and yes Minsky is one of the shoulders that MMT rest on.

      “That does not mean everybody is MMT, unless MMT has little unique meaning.”
      Couldn’t agree more!

      wow that was a lot of stuff :)

  6. Fabius wrote: “Those social sciences are like all the sciences in that they have areas of agreement surrounded by a frontiers of debate. ”

    The social sciences may have areas of agreement, but its pretty clear to me that they have no anchor in reality like physical sciences are anchored to reality. Physical sciences had pretty much everything explained circa 1880 until a straightforward experiment (thought to be a failure at the time) by Michaelson/Morely showed current theories of light were wrong and in part paved the way for Hertz’ electromagnetic waves.

    Macroeconomics, whether Keynesian or Friedmanian may describe some of the facts, but they don’t seem to be working very well currently.

    1. David h,

      “Macroeconomics, whether Keynesian or Friedmanian may describe some of the facts, but they don’t seem to be working very well currently.”

      Standard macroeconomics has passed an intense and difficult test with flying colors. In 2008-2009 we had a repeat of 1929-1931 — quite similar by most metrics. This time economists were able to recommend — and policy-makers implement — appropriate measures to avoid a depression.

      Furthermore, there were clear forecasts between mainstream economics and the various conservative alternative schools about the response of the US dollar and inflation. The mainstream forecast was totally correct, those forecasting a dollar collapse and inflation (or even hyperinflation) were wrong. See the posts in section 8d “about inflation” for details.

    2. From my perspective, the results of the last 10 years are dismal.

      1. The workforce participation rate is down to 1980 levels:
      http://research.stlouisfed.org/fred2/series/CIVPART/

      2. Federal debt went from 60% of GDP(circa 2000) to 100% of GDP today
      http://research.stlouisfed.org/fred2/series/GFDEGDQ188S

      3. The money pumped into the banks is now parked at the Fed instead of funding economic growth:
      http://research.stlouisfed.org/fred2/series/EXCSRESNS

      What curves can you cite showing successful monetary policy?

    3. David,

      Your are asking too much of economists. To avoid the pits, the frequent depressions that blight the past, is a large accomplishment.

      We live such coddled lives, we forget the lives lived by our ancestors. We think a lack of growth is an injustice to be held against economists.

  7. “So Japan has, in effect, engineered the very kind of loss in confidence that politicians in the US and the UK warn, in dire terms, will be our doom unless we cut social programs. And it has been an unambiguous good thing for the Japanese economy.”

    That is Krugman in Bowlesonomics Versus Abenomics (Bowles of Bowels-Simpson)

    Implications of this post by Krugman covers half of what i wrote in comment you described as making stuff up. I described it in simpler terms and more consistent use of synonyms.

    1. Jordan,

      Stick with citing experts.

      As I have repeatedly shown — repeatedly — your comments are filled with errors. Continue this and future comments will be moderated.

    2. Jordan,

      You took a simple, clear-language article by Krugman, with this as the core:

      Japan — where people had come to expect deflation at around 1% a year, compared with expectations of around 2% inflation in the US and elsewhere — was offering higher real interest rates than its counterparts. The result was a strong yen, which was exactly what a liquidity-trap economy didn’t need.

      As you can see, however, more recently the yen has declined steeply. … Abenomics, which has successfully, at least for now, convinced investors that the Bank of Japan has changed its spots and will keep the pedal to the metal for a long time even after moderate inflation sets in.

      … {their goal is} to convince buyers of JGBs that the value of those bonds will in fact be eroded by inflation, not swelled by deflation. So far, it has succeeded.

      So has this loss of confidence led to rising Japanese interest rates and a recession? Well, no…

      Your comment not only has no obvious relationship to Krugman’s, except incidentally, and has numerous material inaccuracies (as I explained above). Don’t try to improve experts by being “simpler and with more consistent use of synonyms”. That requires a high level of understanding, which you lack. As do I.

      You have awesome self-confidence, belief you can improve an article written by someone with Krugman’s experience as an economist and writer.

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