Guest Post: 1000% Inflation?

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

UBS’ Larry Hatheway — who once issued some fairly sane advice when he recommended the purchase of tinned goods and small calibre firearms in the case of a Euro collapse — thinks 1000% inflation could be beneficial:

When 1000% inflation can be desirable


In fact, the costs associated with inflation (price change) are less than commonly supposed. There is the famous “sticker price cost” – the cost of constantly changing price labels – but in a world of electronic displays and web based ordering this is not a serious economic cost (in fact, it never was). To take an extreme position, one can make the economic argument that there are only limited costs in having inflation running at 1000% per year, with one caveat. 1000% inflation is perfectly acceptable, as long as the 1000% inflation rate is stable at 1000%, and it is anticipated. Of course, one can argue that high inflation tends to be associated with high inflation volatility and uncertainty (and that is true empirically), but economically it is the volatility and uncertainty that does most of the damage.

 

The maximum damage from inflation comes if it is unexpected or if it is unpredictable.Unexpected inflation causes damage, because the investor who holds bonds yielding 1% for a decade is going to feel cheated if inflation turns out to be 1000%. Of course, no one would voluntarily buy 1% yielding bonds if 1000% inflation was expected. Thaler’s Law comes into operation here; people dislike losing money more than they like making money. As a result episodes of unexpected inflation will lead to a significant adverse reaction on the part of consumers.

 

Unpredictable inflation is damaging because it causes uncertainty over an investment time horizon – and that uncertainty is a risk that will demand a compensating premium. What the inflation uncertainty risk does is raise the real cost of capital. If I think inflation will be 3% but I am not sure whether it will be 3%, 0%, or 6%, I am likely to demand compensation for the 3% inflation risk but then additional compensation for the possibility that the inflation risk is as high as 6%. The additional compensation is an addition to the real cost of capital.

Nope.

This is fairly typical mistake for an economist. In an imaginary economic model, it is possible to assume that inflation is stable, and that it is predictable, and to draw conclusions based on those (absurd) assumptions. In the real world, inflation and the effects of inflation are never predictable, because human behaviour — the micro-level phenomena on which macro-level phenomena like “inflation” are founded — is never fully predictable or stable. This means that future rates of inflation will always be uncertain, and renders Hatheway’s point meaningless.

As Hatheway readily admits, high inflation is associated in the real world with inflation volatility and uncertainty. It is not relevant to say that the real issue is not the high rate of inflation, because there has not been a single case in history where such a high rate of inflation has resulted in stability or predictability. Getting to a 1000% inflation rate is an inherently volatile path, historically one which has resulted in panics, crashes and breakdowns.

And beyond that, such a path would completely undermine the currency and instruments denominated in the currency as a store of value. There are no empirical examples of such high rates of inflation being tolerated, because at every stage in history such effects have been intolerable; when such rates of inflation set in, nations just end up ditching the currency, as happened most recently in Zimbabwe.

That is why 1000% (or 100%, or 50%, or probably even 10%) inflation will never be “perfectly acceptable”.

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zarjad's picture

Why 1000%, why not 1000000000000000000000000000000000000000%?

Matt's picture

Apparently, any rate of inflation works, as long as it is predictable and stable.

Citxmech's picture

Well hell, why don't they have expirations dates on currency too.  If the money in your paycheck was only valid for  two weeks, that would encourage all those "currency hoarders" out there to spend now instead of save.  That would really stimulate the economy, eh?

JFC

Citxmech's picture

Of course the really stupid part of this is the assumption that wages will follow in lockstep.  If you had a currancy system based upon a desirable rate of inflation (which we do thanks to the theiving Fed) you can't build in the same rate of wage growth into the system or the banksters get no benefit.  These cocksuckers could derive the same benefit by just skimming everyone's paycheck. . .

Oh wait. . .

 

 

Papasmurf's picture

Has the Fed ponzi started posting on ZH?

The big unzip's picture

FOLLOW THAT! Bernanke

IridiumRebel's picture

I'm Ben Bernanke and I approve this message.

Yen Cross's picture

 Me too. i don't forget! I sure hope you don't need that generator, or "RED gas cans" any more. :-)

IridiumRebel's picture

Good memory.

House motto:

"I'd rather have it and not need it then need it and not have it."

eclectic syncretist's picture

Somehow I don't think the cost of iphones and ipads is going up 10-fold/year anytime soon.

Gold, silver, foodstuffs.....maybe.

akak's picture

 

Somehow I don't think the cost of iphones and ipads is going up 10-fold/year anytime soon.

That's because you can't eat them.

But hey, come on now, we gotta throw the BLS some kind of bone in order for them to be able to continue to claim that inflation is only 1%, right?

Yen Cross's picture

Kunckles and  akak/   Let's not do this?

   I  like both of you gentle men

buzzsaw99's picture

speaking of small calibre firearms:

http://www.ableammo.com/catalog/product_info.php?products_id=83621

had my eye on this beauty today

Citxmech's picture

Nice.  That's not a bad price.  I've always wanted one of those S&W K frame 3" Model 13s the FBI used to use.  It gets you a full-length ejector rod rather than the short ones the 2-1/2" M66s have and better sights for social work.  Most folks want over $800 for a used one (I will not buy a S&W with a lock, period) - and at that price I'd be temped to go all-in on a 4" Python, FTW.

buzzsaw99's picture

Buying an older used gun is a good idea. The new internal locks fail sometimes.

toomanyfakeconservatives's picture

Very nice! Save around $200 and buy used. Revolvers are for professionals, semi's are for wartime and amateurs.

Implicit simplicit's picture

Honey, I'm gonna get gas and milk. You got $630 , or should I just rob a bank on the way.

buzzsaw99's picture

lulz. the banks don't have any money.

Shizzmoney's picture

I'd support inflation of 1000% if my wages went up 1000%.

Hell, I'd take 500% (!), considering the track record to wage-to-true inflation (even CPI, if you parse the numbers). 

The price of milk has gone up 21% in the last 8 years, and my wage has gone up a cool 0.021%.  #baller

User 3461's picture

Decreasing the length of a mile by 10' every year would be fine if you anticipated it. What a stupid position; changing the unit of measurement is destructive in many ways, not the least of which is just the messy bookkeeping. In the case of inflation, consider the AMT.

 

I mention the mile example b/c I wouldn't be surprised if the control-freaks do just that to obtain higher mileage from their battery cars.

(and along those lines, reduce interest rates below zero to get you to buy a house)

A Lunatic's picture

I guess anybody can be an economist........

Supernova Born's picture

The Bernanke remains 100% sure he could contain the negative impacts of 1000% inflation.

BanjoDoug's picture

The article only mentions inflation relative to bonds or potentiial purchasers of bonds.   Joe Sixpack probably isn't a bond buyer, but when his salary only goes up 25% (hopefully) when inflation is running at 1000% how do you think he's gonna feel with that loaded 30'06 hanging in the gun rack in his F150 ?????   I'm guessing he'll get a part time job as a revolutionary.

are we there yet's picture

1000% inflation turns a $100 dollar bill into a dime.

Before that point is reached, barter of goods and services takes over. Also, tax revinue is zero,  most employees will refuse to work, food production and transport would faulter. To be clear, 70% inflation in a short time is a currency collapse, where trade by barter becomes prefered, and cival unrest is likely.

NidStyles's picture

Except the melt value of even a non-silver dime would still be higher than the cost of that $100.

dark pools of soros's picture

they'll just turn the public onto each other and whoever survives will get thrown into FEMA camps

toomanyfakeconservatives's picture

Who will guard the guards at these FEMA camps?

NidStyles's picture

I keep waiting for some ships to be sunken or some dude named John to make a speech. Some of this crap I would expect to read out of a particular fictional novel.

AR15AU's picture

What, no "Silver, Bitchez!!"...

 

Well fuck you all... SILVER, BITCHEZ

zorba THE GREEK's picture

AR15AU... Thank you I needed that. Hi HO Silver away.

DaveA's picture

If policy makers could set inflation to a perfectly predictable 10%, 100%, 1000%, or whatever, it would have none of the allegedly stimulating effects of inflation. Bank balances, debts, prices, wages, and asset values would all increase at the same rate, and no one would be any better or worse off.

If policy makers had such godlike power, it would be just as effective, and much less confusing, to set the inflation rate to 0%.

Clowns on Acid's picture

No worries....Hathaway is just floating an idea for Yellen. The feckin' idiotas are just tryin' to figure out a way we will be able to pay off the debt without rescinding the Affirmative Action Act of 1965,

Bad Lieutenant's picture

Agreed, Hatheway isn't seeing the whole picture. It's pretty ridiculous that he basically circularly establishes that bond prices are always an accurate representation of future prices (yields), only to use it to QED his 1000% experiment. To build on Aziz's commentary, perhaps it's best said that the inflation "oh shit" moment of 'uncertainty' is the transition--or tipping point--from when AAA bond markets go from deluded to accurate (in a hyper-convex, and therefore rapid, fashion).

GreatUncle's picture

The guy is an idiot.

When you look at inflation stricken countries the money becomes utterly worthless. So hit 1000% inflation I want paying in anything but "fiat currency" and that just destroyed your banks.

The little game banks through the use of technology over the last few decades is to ensure your earnings is paid into them where they take a cut on every transaction with any charges if you overdrawn.

Now pay people with tins of baked beans. Trade you a tin of beans for a banana there is no cut in that for the banks?