Why QE Didn’t Cause Hyperinflation

[RandomGuy]

Oddly enough, I found this blog through a respondant to the nitwit that Parker quoted about Hyperinflation.

Much better sourced, with actual data and shit. This is what decent economic analysis looks like.

http://azizonomics.com/2011/08/15/why-qe-didnt-cause-hyperinflation-2/


Hyperinflation is an entirely different phenomenon. It tends to occur not when countries print too much money, but when they produce and circulate too few goods and services. The money printing is usually a desperate after effect. The classic examples of Weimar Germany and Mugabe’s Zimbabwe confirm this idea — Weimar Germany was devastated by the production standstill in the Ruhr industrial region, and Robert Mugabe obliterated Zimbabwe’s agricultural infrastructure. So — as Japan enters its third lost decade — is the United States headed for a growth-free and deflation-heavy future?

In my view the answer is no, for one very simple reason. Japan has been in a state of stasis supported by debt. While its government has massive debts — over 220% of GDP — these debts are predominantly owed to domestic creditors. Japan also has a very high personal and household savings rate. America, on the other hand, is in huge debt to hostile foreign creditors, but not only this, monetary easing is not so much a domestic policy as it is an international one, because of the dollar’s role as the global reserve currency. Essentially Japan’s slowdown and life-support was never quite as threatening to its ability to produce the necessary goods and services as America’s. Japan is less dependent on imports than America, which relies on its largest creditor to export vast quantities of consumer goods, basic materials and components. Japan does not have the same corrosive trade deficit with China.

So will we ever get to see hyperinflation in America? It depends on China’s response to America’s slouch. [the part about China is about right, and worth reading click on the link if you want it, or just ask and I will post it--RG]

[101A]

Light, upbeat read. Thanks. (hording ammunition and seed)

[Nbadan]

Upbeat? Geezzz RG, just post you were wrong about hyperinflation already...

[2centsworth]

Guy started off making a few common, but understandable mistakes. However, by the end he's just making stuff up as he goes along.


... Weimar Germany — forcing consumers to use an armful or wheelbarrow of cash to purchase a loaf of bread. Let’s look at the monetary base: Weimar Germany is a common example, but totally misunderstood and not comparable to the United States.

Weimer was forced to print loads of money to buy foreign currencies to repay war reparations. The US Dollar is sovereign (http://mmtwiki.org/wiki/Monetary_Sovereignty).


Hyperinflation is an entirely different phenomenon. It tends to occur not when countries print too much money, but when they produce and circulate too few goods and services.I agree with this, which would lead one to believe high unemployment would lead to hyperinflation (too few goods and services). However, globalization has changed this dynamic. China, India, etc... produce enough cheap goods to tame prices.


Japan does not have the same corrosive trade deficit with China.Again, this is a populist belief, but nothing can be further from the truth. Our trade relationship with China is mutually beneficial.

A trade war or a successful reversing of the trade imbalance would create strong inflationary pressure. funny thing is the blogger states this later in his post, which is totally contradictory to saying our trade imbalance is corrosive.

China likes selling the US cheap stuff. Hence, they continue to manipulate their currency.


It depends on China’s response to America’s slouch. If — as mainstream economists hope — China can be patient enough to allow America to resolve its debt problems, eradicate its trade deficit, and manufacture more at home then hyperinflation is very unlikely
OMG, what ignorance. The exact opposite is true. Manufacturing all the junk we buy at Walmart and Target here in the states would quadruple those prices overnight. Common F'n sense tells you that's inflationary. Manufacture the I-phone in the states and the damn thing would cost $5000.


If China, on the other hand (http://azizonomics.com/2011/08/06/xinhua-china-has-right-to-demand-us-address-debt-problem/), decides that it is sick of being America’s foot stool,Really how stupid is that. China is America's foot stool? The Chinese have seen the biggest explosion in their middle class and economic growth rates that are off the freakin charts primarily because of their relationship with the states. Yeah, they want to shit on their best customer. No freakin sense.


A drastic fall in goods circulating in America — as the result of Chinese export tariffs, yuan flotation, or an outright export ban — could be a hyperinflation trigger.This dude can't make up his freakin mind. First, he says the US needs to eradicate our trade deficit and then he says a drastic fall in goods because of an export ban is hyperinflationary.

I'm convinced he's making this up as he's goes along.

[ElNono]

Weimar Germany is a common example, but totally misunderstood and not comparable to the United States.

Weimer was forced to print loads of money to buy foreign currencies to repay war reparations. The US Dollar is sovereign (http://mmtwiki.org/wiki/Monetary_Sovereignty).

This is true to an extent.

Printing money does devalue the currency against foreign currencies (that are not printing at the same rate) and thus make imports more expensive, creating inflation. Hyperinflation normally is preceded by a period of high inflation, and that high inflation on an economy heavily dependent on imports is itself the reason goods and services normally stall and get you into the hyperinflationary spiral.

It's very rare to see a "normal" economy go directly into hyperinflation. You normally go first into an escalating inflation that, if not controlled, can spiral into hyperinflation and when you reach that stage devaluing the currency is basically all you have left to stop it. Plenty of examples of this, including the Brazil and Argentina economies in the 80's and 90's.

We're currently in a vicious cycle with China. China makes a lot of dough from the trade imbalance right now. If they would invest all of that money in the social or job aspects of their country, they would become non-competitive fairly quickly. If they sit on that cash, it would simply lose value over time and put more pressure on their currency. So what they do is lend it back to us and accrue interest.

One way to break the cycle would be to fix the trade imbalance gradually. You don't need to do it overnight. Would it bring some inflation? Sure. But at the same time you would be creating jobs here and propping up the local economy.

The other way to break the cycle is simply stop gradually borrowing (at least as much as we do now) from them. I'm sure that at the beginning they would seek other countries to lend to, but they would be taking on much riskier debt, and it's unlikely they can lend at the same rate they lend to the US. The more cash reserves, the more they need to print money to dilute the value of their currency and the weaker their competitive position becomes.

At some point we're going to have to get out of this cycle. It won't happen overnight, but I think we need to get started, whichever road you want to take.

[RandomGuy]

Upbeat? Geezzz RG, just post you were wrong about hyperinflation already...

I must have missed this.

How was I wrong about hyperinflation?

[RandomGuy]

This is true to an extent.

Printing money does devalue the currency against foreign currencies (that are not printing at the same rate) and thus make imports more expensive, creating inflation. Hyperinflation normally is preceded by a period of high inflation, and that high inflation on an economy heavily dependent on imports is itself the reason goods and services normally stall and get you into the hyperinflationary spiral.

It's very rare to see a "normal" economy go directly into hyperinflation. You normally go first into an escalating inflation that, if not controlled, can spiral into hyperinflation and when you reach that stage devaluing the currency is basically all you have left to stop it. Plenty of examples of this, including the Brazil and Argentina economies in the 80's and 90's.

We're currently in a vicious cycle with China. China makes a lot of dough from the trade imbalance right now. If they would invest all of that money in the social or job aspects of their country, they would become non-competitive fairly quickly. If they sit on that cash, it would simply lose value over time and put more pressure on their currency. So what they do is lend it back to us and accrue interest.

One way to break the cycle would be to fix the trade imbalance gradually. You don't need to do it overnight. Would it bring some inflation? Sure. But at the same time you would be creating jobs here and propping up the local economy.

The other way to break the cycle is simply stop gradually borrowing (at least as much as we do now) from them. I'm sure that at the beginning they would seek other countries to lend to, but they would be taking on much riskier debt, and it's unlikely they can lend at the same rate they lend to the US. The more cash reserves, the more they need to print money to dilute the value of their currency and the weaker their competitive position becomes.

At some point we're going to have to get out of this cycle. It won't happen overnight, but I think we need to get started, whichever road you want to take.

Incomes are rising in China, and even that country has a limit to its labor pool. That will solve the imbalance in and of itself, as their labor costs rise.

Not sure what effect their poor capital allocation will have on that.

[boutons_deux]

Chinese labor costs will never rise to the level of industrial countries. US labor costs will decline Chinese levels, as WC desires.

[scott]

Eh... nevermind.

[CosmicCowboy]

Eh... nevermind.

:lol

my sentiments on boutons exactly...

[ElNono]

Incomes are rising in China, and even that country has a limit to its labor pool. That will solve the imbalance in and of itself, as their labor costs rise.

Not sure what effect their poor capital allocation will have on that.

Sure. But at the rate China has been doing trade all around the world, their incomes should've risen much, much more and quicker. The trade imbalance with the US alone is nearly 1/3 of a trillion dollars for 2010 alone. That's a heck of a lot of money coming in.

I don't disagree that "eventually" the imbalance will sort itself out as incomes raise. The question is do we just sit it out and wait? Or do we try to do something to progressively accelerate it?

[2centsworth]

I can give you guys no greater gift to economic discussion around here.

Impossible for Fed to Create Inflation (http://www.huffingtonpost.com/warren-mosler/it-must-be-impossible-for_b_1096118.html)

SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY (http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf) (read short chapter Deadly Innocent Fraud #5)

the free book is a treasure box of goodies for liberals to attack republicans:)

[ElNono]

I can give you guys no greater gift to economic discussion around here.

Impossible for Fed to Create Inflation (http://www.huffingtonpost.com/warren-mosler/it-must-be-impossible-for_b_1096118.html)

SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY (http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf) (read short chapter Deadly Innocent Fraud #5)

the free book is a treasure box of goodies for liberals to attack republicans:)

Thanks. :tu

[DMX7]

Regardless of the reason why, we don't have hyperinflation despite what Mr. Paul predicted.

[CosmicCowboy]

Regardless of the reason why, we don't have hyperinflation despite what Mr. Paul predicted.

Yet...

And I'm not saying we will have HYPERinflation...but 10% rate is certainly not out of the question IMHO. You have the money supply being artificially manipulated for political purposes and the pendulum WILL swing back. I'm old enough to remember having to pay 200 basic points upfront to get a 14% 30 year mortgage. I am SERIOUSLY considering cashing out my home equity on a new 30 year note at <4% and plowing it right back into the house and adding another 1000sf super kitchen/living room and a pool and perimeter fence and gate while costs are down and interest is dirt cheap.

[Wild Cobra]

Yet...

And I'm not saying we will have HYPERinflation...but 10% rate is certainly not out of the question IMHO. You have the money supply being artificially manipulated for political purposes and the pendulum WILL swing back. I'm old enough to remember having to pay 200 basic points upfront to get a 14% 30 year mortgage. I am SERIOUSLY considering cashing out my home equity on a new 30 year note at <4% and plowing it right back into the house and adding another 1000sf super kitchen/living room and a pool and perimeter fence and gate while costs are down and interest is dirt cheap.
After this period of artificially low inflation, I think it can be expected.

[angrydude]

Regardless of the reason why, we don't have hyperinflation despite what Mr. Paul predicted.

http://www.shadowstats.com/imgs/sgs-cpi.gif?hl=ad&t=

inflation is sort of defined by how you measure it, you know?

And if you think America is anywhere near out of this economic quagmire you are in for a rude awakening.

[Wild Cobra]

http://www.shadowstats.com/imgs/sgs-cpi.gif?hl=ad&t=

inflation is sort of defined by how you measure it, you know?

And if you think America is anywhere near out of this economic quagmire you are in for a rude awakening.
We all know the CPI-U is crap, but that alternate one is too high as well. The truth lies somewhere between.

[Winehole23]

Of course, none of these quantitative measures of the state's role tells us how well government is actually working. For that we must turn to very different kinds of data. Every year the World Economic Forum (WEF) publishes a Global Competitiveness Index (http://reports.weforum.org/global-competitiveness-2011-2012/), which assesses countries from all kinds of different angles, including the economic efficiency of their public-sector institutions. Since the current methodology was adopted in 2004, the United States' average competitiveness score has fallen from 5.82 to 5.43, one of the steepest declines among developed economies. China's score, meanwhile, has leapt from 4.29 to 4.90.



Even more fascinating is the WEF's Executive Opinion Survey (http://reports.weforum.org/global-competitiveness-2011-2012/), which produces a significant amount of the data that goes into the Global Competitiveness Index. The table below selects 15 measures of government efficacy, focusing on aspects of the rule of law ranging from the protection of private property rights to the policing of corruption and the control of organized crime. These are appropriate things to measure because, regardless of whether a state is nominally a market economy or a state-led economy, the quality of its legal institutions will, in practice, have an impact on the ease with which business can be done.



Table: Measures of the rule of law from the WEF Executive Opinion Survey, 2011-2012
http://foreignpolicy.com/files/fp_uploaded_images/120209_chart.JPG
(Note: Most indicators derived from the Executive Opinion Survey are expressed as scores on a 1-7 scale, with 7 being the most desirable outcome.)



It is an astonishing yet scarcely acknowledged fact that on no fewer than 14 out of 15 issues relating to property rights and governance, the United States now fares markedly worse than Hong Kong. Even mainland China does better in two areas. Indeed, the United States makes the global top 20 in only one: investor protection, where it is tied for fifth. On every other count, its reputation is shockingly bad.



The implications are clear. If we are to understand the changing relationship between the state and the market in the world today, we must eschew crude generalizations about "state capitalism," a term that is really not much more valuable today than the Marxist-Leninist term "state monopoly capitalism" was back when Rudolf Hilferding coined it a century ago.



No one seriously denies that the state has a role to play in economic life. The question is what that role should be and how it can be performed in ways that simultaneously enhance economic efficiency and minimize the kind of rent-seeking behavior -- "corruption" in all its shapes and forms -- that tends to arise wherever the public and private sectors meet.



We are all state capitalists now -- and we have been for over a century, ever since the modern state began its steady growth in the late 19th century, when Adolph Wagner first formulated his law of rising state expenditures. But there are myriad forms of state capitalism, from the enlightened autocracy of Singapore to the dysfunctional tyranny of Zimbabwe, from the egalitarian nanny state of Denmark to the individualist's paradise that is Ron Paul's Texas.
The real contest of our time is not between a state-capitalist China and a market-capitalist America, with Europe somewhere in the middle. It is a contest that goes on within all three regions as we all struggle to strike the right balance between the economic institutions that generate wealth and the political institutions that regulate and redistribute it.



The character of this century -- whether it is "post-American," Chinese, or something none of us yet expects -- will be determined by which political system gets that balance right.
http://www.foreignpolicy.com/articles/2012/02/09/we_re_all_state_capitalists_now?page=0,2

[ElNono]

I can give you guys no greater gift to economic discussion around here.

Impossible for Fed to Create Inflation (http://www.huffingtonpost.com/warren-mosler/it-must-be-impossible-for_b_1096118.html)

SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY (http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf) (read short chapter Deadly Innocent Fraud #5)

the free book is a treasure box of goodies for liberals to attack republicans:)

Mosler isn't wrong, but he doesn't really answer the real question: What happens when China doesn't want to get paid through a checking account in the Fed anymore?

Theoretically speaking, the US would simply stop importing Chinese goods, but in reality that would spark major inflation.

I do think it's a great read regardless...

[spursncowboys]

Sure. But at the rate China has been doing trade all around the world, their incomes should've risen much, much more and quicker. The trade imbalance with the US alone is nearly 1/3 of a trillion dollars for 2010 alone. That's a heck of a lot of money coming in.

I don't disagree that "eventually" the imbalance will sort itself out as incomes raise. The question is do we just sit it out and wait? Or do we try to do something to progressively accelerate it?

Doesn't China use the dollar for all their exports?

[ElNono]

Doesn't China use the dollar for all their exports?

Not sure, but ultimately, it doesn't matter due to what they do with those dollars. It's fairly well explained in the Currency Intervention (http://en.wikipedia.org/wiki/Currency_intervention) entry in Wiki:

When a consumer in the U.S. buys a Chinese product, Chinese manufacturers are paid in US dollars. These U.S. dollars are then deposited in a U.S. bank account. At this point, the Chinese exporter needs to convert dollars into yuan. Through its commercial bank it sells the U.S. dollars to the Chinese central bank, the People's Bank of China. Since the trade between the United States and China does not balance, there is a shortage of yuan and a surplus of U.S. dollars in the Chinese central bank (therefore the Yuan must be 'created'). The usual remedy to this situation used in international trade would be for the Chinese central bank sell its dollars on international currency markets and buy yuan in exchange, resulting in a self-correcting system: the U.S. dollar weakens and the Chinese yuan strengthens, until equilibrium is restored and the trade gap closes.

However, in order to avoid this situation (which would decrease Chinese exports), the Chinese central bank chooses a different solution: it slows the appreciation of the Yuan, or in some cases effectively pegs the CNY against the USD. The central bank net buys USD, then sterilizes the excess dollar flows by buying dollar-denominated assets, such as U.S. treasuries. This has the effect of keeping the excess dollars out of the currency exchange markets, where they would cause a correction in the exchange rates. Thus, the Chinese central bank manipulates the exchange rates by creating yuan and buying U.S. debt. This "printing" of Chinese Yuan by the central bank is not without consequence, however, since in excess (if yuan are created faster than domestic economic output) it would eventually lead to inflation, causing consumer prices to rise.

[DMX7]

http://www.shadowstats.com/imgs/sgs-cpi.gif?hl=ad&t=

inflation is sort of defined by how you measure it, you know?

And if you think America is anywhere near out of this economic quagmire you are in for a rude awakening.

Sorry, your graph doesn't change the fact that we don't have hyperinflation.

[CosmicCowboy]

Sorry, your graph doesn't change the fact that we don't have hyperinflation.

Steering the economy is not like driving a car. Corrections aren't immediate and are all on a time delay.

The best analogy is the water temperature in a shower. The Fed steps in and the water is cold...to cure that they slam the hot water on full and when it finally reaches the shower head it scalds them.

Again, I'm not claiming inevitable hyperinflation, but I think it's pretty obvious that we will soon see increased inflation again. We just can't keep running trillion dollar deficits and monetizing it.

[Agloco]

No one in this thread is speaking any English tbh. For the slow guy here:


What I'm gathering is that China is acting as an effective buffer to hyperinflation and it is one of the reasons why we will likely not see any?

Oversimplified I'm sure.

[2centsworth]

No one in this thread is speaking any English tbh. For the slow guy here:


What I'm gathering is that China is acting as an effective buffer to hyperinflation and it is one of the reasons why we will likely not see any?

Oversimplified I'm sure.

I would argue, yes, in the short-term. However, china's own battle with inflation and pressure on the chinese yuan may eventually lead to inflation here. Not to mention, oil prices spiking is naturally inflationary.

Lastly, and to answer El Nono's question, there are currently no viable alternatives to the us dollar considering the dollar is the worlds reserve currency. We shouldn't take our reserve status for granted or abuse its privileges.

[RandomGuy]

I would argue, yes, in the short-term. However, china's own battle with inflation and pressure on the chinese yuan may eventually lead to inflation here. Not to mention, oil prices spiking is naturally inflationary.

Lastly, and to answer El Nono's question, there are currently no viable alternatives to the us dollar considering the dollar is the worlds reserve currency. We shouldn't take our reserve status for granted or abuse its privileges.

Yup.

Oil acts as a "tax" on moving things around.

At some point it is far cheaper to simply move the raw materials to a factory that is very close to the source of consumption.

That will mean a rebound in manufacturing that is precisely what seems to be currently happening, and projected to continue, for a lot of reasons, some of which are unrelated to oil, but related to higher labor costs in China.

[Winehole23]

http://pragcap.com/why-is-there-deflation-in-hyperinflation-forecasts

[Capt Bringdown]

Michael Hudson: America’s Deceptive 2012 Fiscal Cliff – Part 3 (http://neweconomicperspectives.org/2013/01/americas-deceptive-2012-fiscal-cliff-part-3.html)

The Federal Reserve’s three waves of Quantitative Easing since 2008 show how easy it is to create free money. Yet this has been provided only to the largest banks, not to strapped homeowners or industry. Ben Bernanke’s helicopter only flies over Wall Street to drop its money. An immediate $2 trillion in “cash for trash” took the form of the Fed creating new bank-reserve credit in exchange for mortgage-backed securities valued far above market prices. QE2 provided another $800 billion in 2011-12. The banks used this injection of credit for interest rate arbitrage and exchange rate speculation on the currencies of Brazil, Australia and other high-interest-rate economies. So nearly all the Fed’s new money went abroad rather than being lent out for investment or employment at home.

U.S. Government debt was run up mainly to re-inflate prices for packaged bank mortgages, and hence real estate prices. Instead of alleviating private-sector debt by writing down mortgages in line with the homeowners’ ability to pay, the Federal Reserve and Treasury created money to support property prices – to push the banking system’s balance sheets back above negative net worth. The Fed’s QE3 program in 2012-13 created money to buy mortgage-backed securities each month, to provide banks with money to lend to new property buyers.

For the economy at large, the debts were left in place. Yet commentators focused only on government debt. In a double standard, they accused budget deficits of inflating wages and consumer prices, yet the explicit aim of quantitative easing was to support asset prices. Inflating asset prices on credit is deemed to be good for the economy, despite loading it down with debt. But public spending into the “real” economy, raising employment levels and sustaining consumer spending, is deemed bad – except when this is financed by personal borrowing from the banks. So in each case, increasing bank profits is the standard by which fiscal policy is to be judged!

Part 1 (http://neweconomicperspectives.org/2012/12/americas-deceptive-2012-fiscal-cliff-part-1.html) | Part 2 (http://neweconomicperspectives.org/2012/12/americas-deceptive-2012-fiscal-cliff-part-2.html)

[Winehole23]

So, five of the seven deflation types are in place today. In addition to worker dismissals, cuts in wages and hours worked are being used to reduce labor costs (wage-price deflation). Commodity prices continue the decline that started in early 2011 (commodity deflation). Excess inventories threaten even lower housing prices (tangible-asset deflation). Stocks are overdue for a decline when investors realize that weakness in global economies can’t be offset by huge injections of liquidity by central banks (financial-asset deflation). And the dollar appears to be reasserting its traditional role as a haven (foreign-currency deflation).


If persistent excess supply and weak demand for goods and services cause the CPI and the producer-price index to fall 2 percent to 3 percent per year, as I expect, those who predict inflation will be in for a big shock.



(A. Gary Shilling is president of A. Gary Shilling & Co. and the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. This is the fifth in a five-part series. Read Part 1 (http://www.bloomberg.com/news/2013-03-20/why-global-economies-face-an-age-of-deflation.html), Part 2 (http://www.bloomberg.com/news/2013-03-21/stimulus-spending-only-delays-chronic-deflation.html), Part 3 (http://www.bloomberg.com/news/2013-03-24/faster-growth-could-end-fed-s-war-on-deflation.html) and Part 4 (http://www.bloomberg.com/news/2013-03-25/the-benefits-of-chronic-deflation.html).)
http://www.bloomberg.com/news/2013-03-26/the-five-ways-deflation-has-already-taken-hold.html

[boutons_deux]

http://www.bloomberg.com/news/2013-03-26/the-five-ways-deflation-has-already-taken-hold.html

right-wing assholes here were hyping hyper-inflation, along with Repugs, as why not to support/increase Barry's stimulus.

They were and are still wrong on that and other economic stuff, like the deficit being an immediate problem that needs immediate, extreme austerity, the govt can't create job and wealth, etc, etc, etc.