Tag Archives: inflation

The Economist recommends taking the easy path to inflation. But what if it’s closed?

Summary:  If the great monetary experiments underway in Japan and America succeed, then the world will change. Aggressive fiscal and monetary stimulus will become routine, even normal. For better or worse. Already the normalization process has begun by people unaware that in this new century the easy path to inflation has been closed, with as yet unknown consequences.

Money whirlpool

Christian Science Monitor, 8 November 2010



  1. The world has changed, yet they still dream of monetary magic
  2. About inflation
  3. The Boomers’ secret lust for inflation
  4. For more information


(1)  The world has changed, yet they still dream of monetary magic

QE3 will raise the Federal Reserve’s assets by almost 40% in its first year. Japan has adopted an even bolder strategy. One of the two arrows of the three arrows to Abenomics is doubling the money supply in two years in order to raise inflation to 2%. If these monetary experiments work, then the world will change. Already the yearnings for inflation, simmering since the crash (but expressed in euphemisms), are now expressed openly.

Secular stagnation: The second best solution“, The Economist, 21 January 2014  — Excerpt:

WITH a string of talks and op-ed columns, Larry Summers has revived discussion in the “secular stagnation” hypothesis. Income has become concentrated in the hands of groups, like reserve-accumulating foreign governments and the rich, with low propensities to consume, the thinking goes. That has generated excess saving and pushed down real interest rates until they are substantially negative at many durations. That, in turn, has made life very difficult for central banks, which have struggled to stoke up adequate demand with nominal interest rates wedged up against zero.

Mr Summers identifies three broad solutions to the problem.

  • One is to do nothing, or not much anyway, on the demand side. This is not a particularly attractive solution, as it implies a very long slump in which incomes are lower than they need to be, unemployment is higher, and the economy’s potential is eroding.
  • Another is to raise inflation expectations in order to reduce real, or inflation-adjusted, interest rates until demand is where we’d like it to be. This policy is not without its downsides …
  • The last option to address stagnation is to have the government soak up excess savings and boost demand through deficit-financed public investment.

The third option is quite clearly Mr Summers’ preferred course of action. And it is a very attractive option. It is a rare rich country that doesn’t have a list of infrastructure needs that could justifiably be addressed in the best of times. Pulling those off the shelf and taking them on amid rock-bottom interest rates and weak demand is a no-brainer. Unfortunately, governments are discinclined to seize these opportunities. That makes it very important to sort out the relative attractiveness of alternative solutions to stagnation.

My sense is that Mr Summers reckons the inflation strategy is not as easy to deploy successfully as I make it out to be. QE purchases focused on safe assets might have an ambiguous effect on the economy: boosting asset prices through portfolio balance effects but limiting lending growth by sucking up the supply of good collateral. And as Brad DeLong notes, high inflation could conceivably undermine the safe-asset status of some government securities. Meanwhile, central banks might not be comfortable mustering the bluster to convince markets that higher inflation is ahead. And if they did, increases in long nominal rates could create their own financial difficulties.

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Are we following Japan into an era of slow growth, even stagnation?

Summary: Understanding events requires not just see what’s happening today and guessing about the future, but also grading past expectations vs the actuals. Otherwise we live in the now, like cats, with little ability to shape our world. This is one way, perhaps the best way, to evaluate experts in fields other than our own. Doing so takes us from the warmth of their confident words, and opens us to see surprises, valuable since experts seldom confess to them. Today we’ll examine the big macroeconomic surprise in 2013, and its warning.

Japan: Help

Ask not for whom the bell rings, for it rings for thee

“Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that.”
— John Donne (1572-1631), Devotions Upon Emergent Occasions


  1. The big macroeconomic surprise of 2013
  2. The ECRI points to Japan
  3. Larry Summers points to Japan
  4. Other economists speak up
  5. For More Information

(1) The big macroeconomic surprise of 2013: falling inflation

This graph of  US inflation tells an interesting story. In 2011, as inflation rose, conservatives prepared themselves for the I-told-you-so rapture of dollar collapse and hyperinflation (this was the opening salvo, on 11/15/10). Niall Ferguson cleared a space on his mantel for a Nobel. But inflation peaked in January 2012, entering a steep decline. In the 4th quarter of 2012 everybody expected that the Fed adding a trillion dollars to its balance sheet would change that. So far it has made little difference.

This is Core Personal Consumption Expenditure Index, which provides one of the best available measures of inflation and its momentum.

FRED: PCE core

This is a shocking surprise. The Fed began the third round of quantitative easing (QE), a form of unconventional monetary policy, in September 2012 at $40B/month, and boosted it to $85B in December. Here’s what economists expected to see in 2013, as measured by the Core Personal Consumption Expenditure Index:

After a year of QE, the Fed pumping out a trillion dollars, economists have lowered their forecasts for inflation. We live in a world of wonders.

Take a moment to absorb this. For five years inflation has been below the Fed’s 2% floor, despite three rounds of QE. That’s bad. They set a floor for a good reason: deflation is lethal for a high-debt economy like ours. A steady 2% inflation does little or no harm (despite giving conservatives reason to whine about the 20th century’s drop in the US dollar (during which time the US became the world’s superpower). A 2% floor gives the Fed a cushion of time to act when it’s breached, and time for their actions to have effect.

What insights can we draw from this? Opinions differ. There is one theory, obvious for several years but seldom mentioned (too scary): we now follow Japan down a path of slow growth and deflationary tendencies. In June 2010, during the euphoria about our “V” shaped recovery, I wrote about it: We are following Japan’s path of decline. The real test comes later this year.

After three years of slow growth despite intense stimulus, now a few bold economists warn us of this danger.

(2)  The Economic Cycle Research Institute points to Japan

Becoming Japan – part 2“, ECRI, 4 November 2013:

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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


  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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