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Guest Post: Explaining Hyperinflation
Submitted by John Aziz of Azizonomics
Explaining Hyperinflation
This is a post in three sections. First I want to outline my conception of the price level phenomena inflation and deflation. Second, I want to outline my conception of the specific inflationary case of hyperinflation. And third, I want to consider the predictive implications of this.
Inflation & Deflation
What is inflation? There is a vast debate on the matter. Neoclassicists and Keynesians tend to define inflation as a rise in the general level of prices of goods and services in an economy over a period of time.
Prices are reached by voluntary agreement between individuals engaged in exchange. Every transaction is unique, because the circumstance of each transaction is unique. Humans choose to engage in exchange based on the desire to fulfil their own subjective needs and wants. Each individual’s supply of, and demand for goods is different, and continuously changing based on their continuously varying circumstances. This means that the measured phenomena of price level changes are ripples on the pond of human needs and wants. Nonetheless price levels convey extremely significant information — the level at which individuals are prepared to exchange the goods in question. When price levels change, it conveys that the underlying economic fundamentals encoded in human action have changed.
Economists today generally measure inflation in terms of price indices, consisting of the measured price of levels of various goods throughout the economy. Price indices are useful, but as I have demonstrated before they can often leave out important avenues like housing or equities. Any price index that does not take into account prices across the entire economy is not representing the fuller price structure.
Austrians tend to define inflation as any growth in the money supply. This is a useful measure too, but money supply growth tells us about money supply growth; it does not relate that growth in money supply to underlying productivity (or indeed to price level, which is what price indices purport and often fail to do). Each transaction is two-way, meaning that two goods are exchanged. Money is merely one of two goods involved in a transaction. If the money supply increases, but the level of productivity (and thus, supply) increases faster than the money supply, this would place a downward pressure on prices. This effect is visible in many sectors today — for instance in housing where a glut in supply has kept prices lower than their pre-2008 peak, even in spite of huge money supply growth.
So my definition of inflation is a little different to current schools. I define inflation (and deflation) as growth (or shrinkage) in the money supply disproportionate to the economy’s productivity. If money grows faster than productivity, there is inflation. If productivity grows faster than money there is deflation. If money shrinks faster than productivity, there is deflation. If productivity shrinks faster than money, there is inflation.
This is given by the following equation where R is relative inflation, ?Q is change in productivity, and ?M is change in the money supply:
R= ?M-?Q
This chart shows relative inflation over the past fifty years. I am using M2 to denote the money supply, and GDP to denote productivity (GDP and M2 are imperfect estimations of both the true money supply, and the true level of productivity. It is possible to use MZM
for the money supply and industrial output for productivity to produce different estimates of the true level of relative inflation):
Inflation and deflation are in my view a multivariate phenomenon with four variables: supply and demand for money, and supply and demand for other goods. This is an important distinction, because it means that I am rejecting Milton Friedman’s definition that inflation is always and only a monetary phenomenon.
Friedman’s definition is based on Irving Fisher’s equation MV=PQ where M is the money supply, P is the price level, Q is the level of production and V is the velocity of money. To me, this is a tenuous relationship, because V is not directly observed but instead inferred from the other three variables. Yet to Friedman, this equation stipulates that changes in the money supply will necessarily lead to changes in the price level, because Friedman assumes the relative stability of velocity and of productivity. Yet the instability of the money velocity in recent years demonstrates empirically that velocity is not a stable figure:
And additionally, changes in the money supply can lead to changes in productivity — and that is true even under a gold or silver standard where a new discovery of gold can lead to a mining-driven boom. MV=PQ is a four-variable equation, and using a four-variable equation to establish causal linear relationships between two variables is tenuous at best.
Through the multivariate lens of relative inflation, we can grasp the underlying dynamics of hyperinflation more fully.
Hyperinflation
I define hyperinflation as an increase in relative inflation of above 50% month-on-month. This can theoretically arise from either a dramatic fall in ?Q or a dramatic rise in ?M.
There are zero cases of gold-denominated hyperinflation in history; gold is naturally scarce. Yet there have been plenty of cases of fiat-denominated hyperinflation:
This disparity between naturally-scarce gold which has never been hyperinflated and artificially-scarce fiat currencies which have been hyperinflated multiple times suggests very strongly that the hyperinflation is a function of governments running printing presses. Of course, no government is in the business of intentionally destroying its own credibility. So why would a government end up running the printing presses (?M) to oblivion?
Well, the majority of these hyperinflationary episodes were associated with the end of World War II or the breakup of the Soviet Union. Every single case in the list was a time of severe physical shocks, where countries were not producing enough food, or where manufacturing and energy generation were shut down out of political and social turmoil, or where countries were denied access to import markets as in the present Iranian hyperinflation. Increases in money supply occurred without a corresponding increase in productivity — leading to astronomical relative inflation as productivity fell off a cliff, and the money supply simultaneously soared.
Steve Hanke and Nicholas Krus of the Cato Institute note:
Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy—to name a few.
So in many cases, the reason may be political expediency. It may seem easier to pay workers, and lenders, and clients of the welfare state in heavily devalued currency than it would be to default on such liabilities — as was the case in the Weimar Republic. Declining to engage in money printing does not make the underlying problems — like a collapse of agriculture, or the loss of a war, or a natural disaster — disappear, so avoiding hyperinflation may be no panacea. Money printing may be a last roll of the dice, the last failed attempt at stabilising a fundamentally rotten situation.
The fact that naturally scarce currencies like gold do not hyperinflate — even in times of extreme economic stress — suggests that the underlying mechanism here is of an extreme exogenous event causing a severe drop in productivity. Governments then run the printing presses attempting to smooth over such problems — for instance in the Weimar Republic when workers in the occupied Ruhr region went on a general strike and the Weimar government continued to print money in order to pay them. While hyperinflation can in theory arise either out of either ?Q or ?M, government has no reason to inject a hyper-inflationary volume of money into an economy that still has access to global exports, that still produces sufficient levels of energy and agriculture to support its population, and that still has a functional infrastructure.
This means that the indicators for imminent hyperinflation are not economic so much as they are geopolitical — wars, trade breakdowns, energy crises, socio-political collapse, collapse in production, collapse in agriculture. While all such catastrophes have preexisting economic causes, a bad economic situation will not deteriorate into full-collapse and hyperinflation without a severe intervening physical breakdown.
Predicting Hyperinflation
Hyperinflation is notoriously difficult to predict, because physical breakdowns like an invasion, or the breakup of a currency union, or a trade breakdown are political in nature, and human action is anything but timely or predictable.
However, it is possible to provide a list of factors which can make a nation or community fragile to unexpected collapses in productivity:
- Rising Public and-or Private Debt — risks currency crisis, especially if denominated in foreign currency.
- Import Dependency — supplies can be cut off, leading to bottlenecks and shortages.
- Energy Dependency — supplies can be cut off, leading to transport and power issues.
- Fragile Transport Infrastructure — transport can be disrupted by war, terrorism, shortages or natural disasters.
- Overstretched Military — high cost, harder to respond to unexpected disasters.
- Natural Disaster-Prone — e.g. volcanoes, hurricanes, tornadoes, drought, floods.
- Civil Disorder— may cause severe civil and economic disruption.
Readers are free to speculate as to which nation is currently most fragile to hyperinflation.
However none of these factors alone or together — however severe — are guaranteed to precipitate a shock that leads to the collapse of production or imports.
But if an incident or series of incidents leads to a severe and prolonged drop in productivity, and so long as government accelerates the printing of money to paper over the cracks, hyperinflation is a mathematical inevitability.
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Hey Fonz. I'll put together a chart for you and paste it later. You are 100% on the nose dive. I'm just looking @ "real money" , positioning. Sovereigns, Central Banks ect. They tend to prime trades, before they dive in. Thanks for all your great enthusiasm, and ideas.
Thanks man I'd love to see what you have.
how far down do you see it going?
Well here I am prone to listen to Schiff. He sees the dxy going to 20. The DXY is largely measured against the euro so that may in fact make the dollar look good. Against the Remnimbi etc....man I just don't know. I also struggle with the aspect that with employment sucking so bad and wages so low....that may actually make this more stagflationary than hyperinflationary. So gas may cost $7 a gallon instead of the hyperinflationary $75 a gallon but it may as well be $75 a gallon to 90% of most of us. So tough to say.
I also have this weird feeling that if Romney wins he pulls a Kito and cans Bernanke, stops the fed from buying treasuries, crashes the bond market and we get hit with massive austerity....hence saving the dollar. Thats how these private equity guys roll sometimes.
thats a bold call fonz. it would take biiiiiiig cajones by romney. im not sure the masters of the universe will allow that kind of willful behavior.......and i dont think that could even be contemplated until romneys second term......... but pm buyers beware, fonz sees a romney victory bearish for pms....................................
if Romney wins he pulls a Kito and cans Bernanke, stops the fed from buying treasuries, crashes the bond market and we get hit with massive austerity
The Preznit can't tell the Fed chief what to do.
He can fire Bernanke, but he can't hire a new chief who wants to crash the bond market, because the only candidates are BANKERS, and none of them want to crash the bond market.
Congress could potentially prevent the Fed from crashing the bond market, but not the Prez. How do you figure THOSE odds?
Great article!
Put your wealth into hard stuff. Most of the blow-hards on this blog don't have any $. Many ZH'ers are a bunch of losers pounding on their keyboards in their grow-up bedrooms! They have no solutions but like to blame their failure on current society. Things are fucked-up but so r u!
The fake money "printed" by bernanke is not reaching spenders, I think the inflation is caused by the banksters speculating with this dodgy QE money, driving up the price of goods and services. So it's not inflation in the traditional sense, the inflation of old was before the advent of electric credit, this is more like binary inflation!!
Guys couple questions bout this whole inflation argument. What will happen and will the fed every sell back these assets and if so at low interest rate or higher? Also, couldn't the purchase of these MBs off banks bs just basically be considered bailing them out since they are worth shit. If so how does this cause inflation esp if the banks are not lending the money.
And one more the Ecb policy that is sterile and won't increase money supply how is this possible and how can it cause inflation.
Sorry I'm a noob jus trying to get edukated.
Thanks
Fig newton
What will happen and will the fed every sell back these assets and if so at low interest rate or higher? Also, couldn't the purchase of these MBs off banks bs just basically be considered bailing them out since they are worth shit. If so how does this cause inflation esp if the banks are not lending the money.
************
It wont "cause" inflation-it is inflation (increse in money supply) but it is not really inflationary because the money only moves amongst banks from the Fed to the commercials -
The Fed balance sheet unwind that will have to happen at some point-likely forced by the bond market-is where the danger of forced abnormal inflation will happen-
The Fed balance sheet is full of garbage-unmarked by the market-when the Fed is forced to auction this toxic crap off-who will buy it at today's artificially marked value?
Who will be the buyer of last resort and where will the money come from?
Now explain: Hypersomnia.
If you set the alarm on your "android device", at least 3 times a day, (you have hyper-insomnia).
If you have "Bi-Polar" insomnia, you look at your smartphone (quotes app), in the grocery store cart, like it's a ( New Born Baby)!
/sarc
Great write-up. I like your redefinition of hyperinflation, and would suggest that in our current economic environment there is just such a productivity shock waiting in the wings as the catalyst: disruption to global oil supply via ill considered strike on Iran. This is the singular event that would send prices globally skyrocketing and push us over that cliff.
but WE have launched the attack on Iran. The hyperinflation they're dealing with is not of their own making. Was this authorized by the Pentagon? If so has it changed anything? I really know so little about how the Middle East functions...it's an injection of uncertainty that causes me to say "another risk that can't be quantified." Tempting a military move by your own is tempting fate indeed. At the same time not showing strength when strength is required (assassination of the US Ambassador and his security detail in Libya) is ALSO a problem. "that's why they get paid the big bucks." but the MEDIA has a duty to report these things...they do not save for here...and are thus exacerbating failure...if not creating it outright. THIS IS NOT A JOKE. SOLDIERS LIVES ARE ON THE LINE. "Wilding with the money" strikes me as VERY dangerous indeed...given the circumstances. The article also forgot the US South's hyperinflation after the Civil War btw. That one was MASSIVE. I still believe the Battle Royale between Big Industry and Government Hyperinflationists is being won by the former...but is it a battle we want in the first place? Do we really have that many "enemies within"? I think the answer is "not in the Stars dear Brutus...but in ourselves."
When the rest of the world doesn't absorb all of the flow of dollars exiting USA it's game over. The value of a currency comes from the mind of the holder. When they lose confidence in the dollar the following hyperinflation will blow your mind. Imagine all those dollars produced and hoarded coming home to roast.
But no worry, that was the plan all the time. And if you own the new SoV (store of value) youl'll be fine. If not, you are shit out of luck!
Gold, got get you some "Aristotle"
there is this ....
http://kcur.org/post/economic-roundtable-post-keynesian-theory
Economic Roundtable: Post-Keynesian Theory
.
http://solari.com/articles/quantitative_easing/
.
QE3 – Pay Attention If You Are in the Real Estate Market
By Catherine Austin Fitts
" I used to have a deputy who said that the FHA mortgage insurance funds were where mortgages went to die. That was, however, before the creation of MERS, derivatives and the explosion of mortgage fraud during the 1990's which in combination with the “strong dollar policy” engineered what I have referred to as a financial coup d’etat."
...
..
.
"..Finally, the way the Fed has engineered the Slow Burn to date is to continually offset monetary inflation with labor deflation. It is worth contemplating how much labor deflation will be required to offset QE3 and how sufficient additional labor deflation might be engineered. Ben Bernanke was quite clever to tie QE3 to unemployment. The problem has become the solution, which is the basis for QE-Infinity. " caf
.
Wall Street Rolling Back Another Key Piece of Financial Reform
POSTED: September 20,
Read more: http://www.rollingstone.com/politics/blogs/taibblog/wall-street-rolling-...
.
" ..The details of this law are pretty hairy, but the basic idea is simple: provided a bank isn’t dumb enough to only provide advice, or to ask for separate compensation for advice, it doesn't owe anyone any goddamn fiduciary responsibility. So they can keep screwing cities and towns as much as they’d like.
On the whole, this reminds me a lot of an episode of the classic British spoof show Brass Eye, which describes the sale of dangerous drugs as completely proscribed by law – unless the sale is conducted "through a Mandrill.""
mt
Read more: http://www.rollingstone.com/politics/blogs/taibblog/wall-street-rolling-...
.
we have entered an entirely new, to us, paradigm of
criminality. also, we are approaching the moment where,
at any instant, one might logically expect either
nuclear annihilation, global financial collapse or
environmental Armageddon on any particular morning,
no warning given other than it was obvious to anyone
willing to take the time to look into it.
.
stranger it becomes by the day, best to you.
.
then again ...
@.." Prices are reached by voluntary agreement between individuals engaged in exchange. " ...
comment: you use the word "voluntary" but fail to differentiate between the words "need" and "want" ,
this differentiation at the heart of the matter.
what has happened is the "authorities", monopolists
of "money" or credit creation (controllers of the
monopolists of use of violence), law, and terrorism,
(controllers of the use of enforcement of said
bought with power and fiat laws) have engineered
a system by which control of credit and money creation
and distribution, systemic and structurally, determine
pricing of not only "wants" but "needs", such as water,
air, housing and food.
money.
they have, as of 1913, made money, legal tender,
their play thing, their prerogative, their domain,
their own special friend that the world must bow to
or risk criminal prosecution and personal execution
if not long years of humiliation and punishment.
i think they call it financialization and securitization....modern day
criminal crony capitalism. here you can be a vulture
and be nominated for president , or support it and be
president, as long as you appeal to the confused
margin (masses). the shit is not a subject of debate.
see?
that is the truth has no place here, in these halls,
on this platform !
they might as well debate lubricants used for sexual
pleasure enhancement, no one would be the wiser.
.
so putting numbers to it, quantifying the life we live,
fails. why? because the music is not on the sheet it
is in the air where the heart feeds. ongoing
.
oh jeez, i forgot this ....
American Monetary Institute Conference 2012
by Steve Keen on September 22nd
http://www.debtdeflation.com/blogs/2012/09/22/american-monetary-institut...
,
and this.
VerbeWarp
"Madness is rare in individuals, but in groups, parties, nations, and ages it is the rule." ~ Friedrich Nietzsche
http://verbewarp.blogspot.com/
.
the actual definition of inflation is "Fed policies that even a cab driver finds predictable...without use of a computer for mathematical purposes even." to underestimate such a danger is to indeed be clueless cuz "blame the cab driver for financial Armageddon" is not good math. Nor science even! i still firmly believe that everything the Fed inflates business is successfully deflates..."until they don't" of course. clearly we have already had massive amounts of inflation because how can housing prices collapse but lumber and copper prices soar? and of course "the theory that this is how we export our way out of this" is truly mind boggling...and in a certain sense now...in need of a clinical response. we shall see if over the coming days and weeks whether or not we've just had a super spike in the price of fuel. i don't believe...and will never believe if what Valero appears to have done to California makes any business sense whatsover. http://www.foxbusiness.com/news/2012/10/04/valero-suspends-gasoline-sale...
government officials need to demand answers to this and they need to demand them now. there are no problems with the Valero refineries...so taking product that exists off market...well, here's the stock price on the news: http://seekingalpha.com/symbol/vlo?source=search_general&s=vlo up 3 percent today, but down the same after hours. i simply cannot fathom such hostility towards the consumer especially when we're pumping massive amounts out of North Dakota that are trapped in North America, of the highest quality and cost the least. The oddity that certain political figures think "losing markets is a great idea too" is really lunacy. And no...we're not talking Delaware. We're talking CALIFORNIA here! a RATIONAL discussion of this matter is in order Mr. Chairman!
Very simply explained OBumer said no to oil drilling. SURPRISE!
Where the hell is my hyperinflation! Everyday for the last four years Zerohedge has been warning that hyperinflation is imminent. Maybe you guys are operating in geological time. Its like waiting for fucking Godot!
We're still waiting on a commonly accepted alternative form of transaction medium...
Rockpile - Knife and Fork
http://www.youtube.com/watch?v=lh-jUgG_KYY
.
Muddy Waters & The Rolling Stones - Mannish Boy - Live At
http://www.youtube.com/watch?v=32YQYJuxyn0
.
In your chart, are you using real GDP or nominal GDP to estimate productivity ?
Nominal (mainly because nominal is directly observable) but you could use real if you wanted to. (Though "real" GDP is a debatable concept altogether).
It seems like your initial inflation definition could make sense but your approximation doesn't.
Using slightly different terminology than you do, and the definition of V (velocity)
V = nominal_GDP / M or M * V = nominal_GDP
and
%(AB) ~ %A + %B which means the percent change in the product of 2 variables is approx equal to the sum of their percent changes for small changes in A & B. That's easy to show with simple algebra. So combining those 2 equations gives,
%M + %V ~ % (M * V) = %nominal_GDP.
Then using your approximation and the equation directly above,
inflation = %M - %nominal_GDP ~ -%V
So your plot above of %M2 - %nominal_GDP (M2NS-GDP) is simply a plot of -1 * %V. I plotted that using FRED and it looks identical to yours:
http://research.stlouisfed.org/fredgraph.png?g=bqk or,
http://research.stlouisfed.org/fred2/graph/?g=bqk
When Brown (2012) revisited the Weimar Republic hyperinflation she found that none of the factors mentioned in this article were responsible. What was the cause was that following WW! Germany was forced to privatice its central bank, which the Rothschilds took control of and then used to fund the attack on its currency that caused the hyperinflation. Furthermore she found that historically in countries where the government owned the right to create its own money and linked its issuance to productivity there were extended periods (500 years) without depressions or hyperinflation. This article reeks of being Rothschild zionist funded propaganda.
That would seem to support this article as to why Hitler tried to murder every jew... http://www.scribd.com/doc/8634450/Germany-and-the-Jews-by-Benjamin-H-Fre...
He was of course wrong - what he should have done was put all bankers in jail for treason. Just as we should now
Positive variations in the money base (i.e. more available money) will not necessarily lead to inflation.
It depends how that money is spent, what destination it reaches. If it's used to make credit easier then yes people will start buying more.
But if on the other hand it is used to invest in infrastructure like data network, public transportation, research (i.e. more people to work and better infrastructures for companies making them more efficient) then this leads to general increased productivity which is just the opposite of inflation.
JM Keynes used to say that, but apparently nowadays Mr Keynes' theories have been reduced to "reckless money printing no matter what".
IMHO
I don't know which is worse; fiat currency with no backing, or fractional banking.