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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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Tue, 11/13/2012 - 19:35 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Krugman <3 Larry Hatheway

 

Hatheway will soon insist this was merely a "thought experiment," much like Krugman's thought experiment to provoke hostile extraterrestrials into invading planet earth as a stimulative event.

 

Wait....that wasn't a thought experiment, after all....

Tue, 11/13/2012 - 19:37 | Link to Comment spankthebernank
spankthebernank's picture

Sometime shortly after 1913 Economics was rendered useless.

Tue, 11/13/2012 - 19:54 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Are you suggesting we went to a 'casino chip' model economy in 1913 (based on a meeting in 1910), and that there are a select few who get to increase or decrease the casino chip supply at their sole discretion?

Tue, 11/13/2012 - 20:06 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

More casino chips for them. Less for the rest of us.

Tue, 11/13/2012 - 20:32 | Link to Comment kaiserhoff
kaiserhoff's picture

Why do economists still have jobs, if three card Monte is illegal???

Fucked up planet.

Tue, 11/13/2012 - 22:13 | Link to Comment NidStyles
NidStyles's picture

Because real economists do not play three card.

Tue, 11/13/2012 - 22:55 | Link to Comment Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

"Economic Science" = Bank Profit Science

Wed, 11/14/2012 - 07:35 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

Unexpected inflation is what TPTB desire to inflict. Unexpected inflation is what we try to avoid. Guess who is likely to win? (Other than PM investors, if they are allowed to keep it).

Tue, 11/13/2012 - 20:13 | Link to Comment SILVERGEDDON
SILVERGEDDON's picture

Moe, meet yer brother, Ron. Moe - ron. Has a nice ring to it, wouldn't you say ? 

Fuck me gently, these idiots will be the first to go if the SHTF.

It's already got to the point for most folks that they have to jerk off the dog to feed the cat, economically speaking.

There's some rocket science economics for ya. 

Tue, 11/13/2012 - 19:33 | Link to Comment ACP
ACP's picture

Actually, the house could be paid off in less time...

Tue, 11/13/2012 - 20:01 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

Sure, for the house you bought before the 1000% inflation went into effect. After it goes into effect the cost of production also rises by that same amount. His theory is meaningless because input costs will rise just as fast as the prices a business could charge. It would be like a dog chasing its tail. It gets nowhere fast.

Tue, 11/13/2012 - 20:34 | Link to Comment kaiserhoff
kaiserhoff's picture

Oh, it could happen, as a side effect of a currency collapse.

There would also be a small (ahem) starvation problem.  Plan accordingly.

Tue, 11/13/2012 - 21:34 | Link to Comment ACP
ACP's picture

I'm not in any way saying it's good. 'We the informed' need to stay on the ball for any situation that might occur.

Tue, 11/13/2012 - 19:34 | Link to Comment czarangelus
czarangelus's picture

How come I know what velocity of money means and these people don't?

Tue, 11/13/2012 - 19:48 | Link to Comment Zero Govt
Zero Govt's picture

because you're not paid to not know about it

see Paul Krugman who surely can't be as bigger village idiot as we think he is .....can he???

Tue, 11/13/2012 - 21:34 | Link to Comment piceridu
piceridu's picture

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

Upton Sinclair


Tue, 11/13/2012 - 22:36 | Link to Comment wee-weed up
wee-weed up's picture

In light of the recent election...

"It is difficult to get a voter to understand something, when his freebies depend upon his not understanding it."

Apologies to Upton Sinclair

Tue, 11/13/2012 - 19:36 | Link to Comment SHEEPFUKKER
SHEEPFUKKER's picture

1000% inflation.....no worries, it will be transitory I'm sure. 

Tue, 11/13/2012 - 19:43 | Link to Comment Cheesy Bastard
Cheesy Bastard's picture

They would have it under control in 15 minutes.

Tue, 11/13/2012 - 19:56 | Link to Comment Matt
Matt's picture

As long as everyone has advanced notice that we are going to devalue their money so everything costs 100x as much, no one will panic at all. We can just announce that in one year's time, we will increase the money supply by $1 quadrillion, and everything will work out fine.

Tue, 11/13/2012 - 20:05 | Link to Comment TruthInSunshine
TruthInSunshine's picture

But the critical question is what TIPS will yield if inflation is running at 1000%?

Can someone ask Larry Hatheway? Thanks.

Tue, 11/13/2012 - 21:09 | Link to Comment Ibird
Ibird's picture

And the soon to be thrust upon us - floating rate treasury notes

Tue, 11/13/2012 - 19:52 | Link to Comment Acet
Acet's picture

That is correct - not soon after it got to 100%, it would turn 1001%, then 1002 and so on, always accelerating. It would pass 10000% within a month from that ...

Tue, 11/13/2012 - 19:42 | Link to Comment nmewn
nmewn's picture

Larry's running neck & neck with Krugman for the coveted Idiot Economist of the Year Award...I love a good horse race.

Tue, 11/13/2012 - 19:48 | Link to Comment Dr.Awkward
Dr.Awkward's picture

is there a "Gary Johnson" type candidate?  This seems all too familiar..

Tue, 11/13/2012 - 20:03 | Link to Comment Dr. Engali
Dr. Engali's picture

Tyler Durden.

Edit. I just read the coveted award was for top idiot economist so I take my nomination back. Since there are no Gary Johnson people(he would have been much better than the two official choices). I nominate Joe Kernen.

Tue, 11/13/2012 - 19:50 | Link to Comment Zero Govt
Zero Govt's picture

hard to bet against reigning champion Krugman

...but with lines like 1,000% inflation is ok so long as we know it's persistent and consistent he's coming up behind Paul real fast!!

Tue, 11/13/2012 - 19:55 | Link to Comment Dr.Awkward
Dr.Awkward's picture

He says it confidently behind a desk full of SPAM and small calibre weapons

Tue, 11/13/2012 - 20:03 | Link to Comment nmewn
nmewn's picture

Thats what I was thinking...why not 10,000% Larry?

Its incredible.

Tue, 11/13/2012 - 20:27 | Link to Comment Manthong
Manthong's picture

It’s a scary thought and maybe foolish, but anybody who has stacked a thousand or more ASE’s would do OK as long as they could defend it.

Tue, 11/13/2012 - 21:24 | Link to Comment nmewn
nmewn's picture

Or as long as the state or your neighbors have no idea you have it ;-)

Its really tough out there George, ya know? Yep, real tough here too Fred, barely getting by myself. No food, no water, no heat, wearing rags as you see. Its a real mess.

(Tough shit for Fred)

Tue, 11/13/2012 - 21:28 | Link to Comment BooMushroom
BooMushroom's picture

32 feet per second per second is fine, too. But eventually even Felix Baumgartner runs out of altitude.

splat.

Tue, 11/13/2012 - 19:44 | Link to Comment Rainman
Rainman's picture

1000% inflation don't work when 99% gots no money. Larry's not drinking enough. Now go write 'ZIRP 4-eva' on the blackboard 1000 times in Japanese.

Tue, 11/13/2012 - 19:46 | Link to Comment Dr.Awkward
Dr.Awkward's picture

so if we start using usd's as TP now.....

Tue, 11/13/2012 - 19:51 | Link to Comment akak
akak's picture

Funny how Mr. Hathaway fails to mention the fact that wages NEVER keep pace with rising prices and the rising cost of living.  Which of course is by design, as that is the purpose of fiat currency depreciation --- to steal value from the many for the well-connected few. 

Inflation is not some plague that strikes out of nowhere, by random, with no perpetrator --- it is an inherent policy of fiat-issuing governments and central banks.  No, more than just a policy, in fact: inflation is a necessary condition for the very existence of the ongoing scam of central banksterism and its fiat currency abomination.

Tue, 11/13/2012 - 19:53 | Link to Comment Urban Redneck
Urban Redneck's picture

Savings keep pace with inflation about as often as wages do (outside the investments of the .0001)

Tue, 11/13/2012 - 19:56 | Link to Comment akak
akak's picture

Good point, and a grievous omission on my part. 
Thanks.

Tue, 11/13/2012 - 19:47 | Link to Comment knukles
knukles's picture

(face in hands.... John Kerry, 1000% inflation... sobbing)

Tue, 11/13/2012 - 20:08 | Link to Comment nmewn
nmewn's picture

Forget Kerry's foibles!...look over here...we've got Musket Love at CENTCOM!...and he's the perfect pick to cut it!!!

Tue, 11/13/2012 - 20:37 | Link to Comment kaiserhoff
kaiserhoff's picture

I'm behind in the drinking game.  Did you say muskrat fever trumps military intelligence?

Tue, 11/13/2012 - 21:26 | Link to Comment nmewn
nmewn's picture

lol...musket was a play on Muskrat Love...please don't tell anyone ;-)

Tue, 11/13/2012 - 20:24 | Link to Comment knowless
knowless's picture

Don't taze me bro..

Tue, 11/13/2012 - 19:48 | Link to Comment Insideher Trading
Insideher Trading's picture

1000% inflation is extremely desirable if you're the manufacturer of wheelbarrows. 

Tue, 11/13/2012 - 19:52 | Link to Comment akak
akak's picture

And printers.  And ink.  And several billion rounds of ammunition to be sold to FEMA.

Tue, 11/13/2012 - 19:49 | Link to Comment Dr. Engali
Dr. Engali's picture

I can say for sure that I am expecting 1000% inflation.... and that's unacceptable.

Tue, 11/13/2012 - 19:49 | Link to Comment Urban Redneck
Urban Redneck's picture

And UBS had 10,000 people who were LESS worthy of a salary than this genius...

Tue, 11/13/2012 - 19:59 | Link to Comment Matt
Matt's picture

That either means that 10,000 people are more sensible and connected to reality than this clown, or that the bank is overflowing with nincompoops. 

Tue, 11/13/2012 - 20:24 | Link to Comment PLira
PLira's picture

Sometimes I see these fools like Larry and Krugman and think to myself, "that's the sperm that won?" Oh, let's definitely throw Leisman's hat in the ring as well.

God, these freaks defy logical thinking.

Tue, 11/13/2012 - 19:49 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Hatheway has to make an uber-uber-ridiculous statement to get attention & make headlines during these times when uber-ridiculous policies rule the day.

Tue, 11/13/2012 - 19:50 | Link to Comment Bansters-in-my-...
Bansters-in-my- feces's picture

Larry needs to play back catcher in a lead toss competition..

Launch your lead how you wish.

Tue, 11/13/2012 - 19:52 | Link to Comment zarjad
zarjad's picture

Why 1000%, why not 1000000000000000000000000000000000000000%?

Tue, 11/13/2012 - 20:00 | Link to Comment Matt
Matt's picture

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

Tue, 11/13/2012 - 20:10 | Link to Comment Citxmech
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

Tue, 11/13/2012 - 20:16 | Link to Comment Citxmech
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. . .

 

 

Tue, 11/13/2012 - 19:57 | Link to Comment Papasmurf
Papasmurf's picture

Has the Fed ponzi started posting on ZH?

Tue, 11/13/2012 - 19:59 | Link to Comment The big unzip
The big unzip's picture

FOLLOW THAT! Bernanke

Tue, 11/13/2012 - 20:04 | Link to Comment IridiumRebel
IridiumRebel's picture

I'm Ben Bernanke and I approve this message.

Tue, 11/13/2012 - 20:09 | Link to Comment Yen Cross
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. :-)

Tue, 11/13/2012 - 20:32 | Link to Comment IridiumRebel
IridiumRebel's picture

Good memory.

House motto:

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

Tue, 11/13/2012 - 20:06 | Link to Comment eclectic syncretist
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.

Tue, 11/13/2012 - 20:10 | Link to Comment akak
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?

Tue, 11/13/2012 - 20:12 | Link to Comment Yen Cross
Yen Cross's picture

Kunckles and  akak/   Let's not do this?

   I  like both of you gentle men

Tue, 11/13/2012 - 20:14 | Link to Comment buzzsaw99
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

Tue, 11/13/2012 - 20:25 | Link to Comment Citxmech
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.

Tue, 11/13/2012 - 21:35 | Link to Comment buzzsaw99
buzzsaw99's picture

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

Wed, 11/14/2012 - 01:49 | Link to Comment RockyRacoon
RockyRacoon's picture

The Chiappa Arms Rhino is a lot of fun!

Wed, 11/14/2012 - 09:18 | Link to Comment toomanyfakecons...
toomanyfakeconservatives's picture

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

Tue, 11/13/2012 - 20:17 | Link to Comment Implicit simplicit
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.

Tue, 11/13/2012 - 20:22 | Link to Comment buzzsaw99
buzzsaw99's picture

lulz. the banks don't have any money.

Tue, 11/13/2012 - 20:19 | Link to Comment Shizzmoney
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

Tue, 11/13/2012 - 20:56 | Link to Comment egoist
egoist'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)

Tue, 11/13/2012 - 21:06 | Link to Comment A Lunatic
A Lunatic's picture

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

Tue, 11/13/2012 - 21:15 | Link to Comment Supernova Born
Supernova Born's picture

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

Tue, 11/13/2012 - 21:40 | Link to Comment BanjoDoug
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.

Tue, 11/13/2012 - 21:56 | Link to Comment are we there yet
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.

Tue, 11/13/2012 - 22:23 | Link to Comment NidStyles
NidStyles's picture

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

Tue, 11/13/2012 - 22:58 | Link to Comment dark pools of soros
dark pools of soros's picture

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

Wed, 11/14/2012 - 09:15 | Link to Comment toomanyfakecons...
toomanyfakeconservatives's picture

Who will guard the guards at these FEMA camps?

Tue, 11/13/2012 - 22:25 | Link to Comment NidStyles
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.

Tue, 11/13/2012 - 23:08 | Link to Comment AR15AU
AR15AU's picture

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

 

Well fuck you all... SILVER, BITCHEZ

Tue, 11/13/2012 - 23:35 | Link to Comment zorba THE GREEK
zorba THE GREEK's picture

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

Tue, 11/13/2012 - 23:45 | Link to Comment DaveA
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%.

Wed, 11/14/2012 - 00:37 | Link to Comment Clowns on Acid
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,

Wed, 11/14/2012 - 03:39 | Link to Comment Bad Lieutenant
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).

Wed, 11/14/2012 - 03:39 | Link to Comment Bad Lieutenant
Bad Lieutenant's picture

.

Wed, 11/14/2012 - 11:12 | Link to Comment GreatUncle
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?

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