Mises’s policy advice was instrumental in helping to stop hyperinflation in Austria in 1922. In his Memoirs, however, he expressed the view that his instruction — halting the printing press — was heeded too late. FULL ARTICLE by Thorsten Polleit
Source link: http://blog.mises.org/11505/hyperinflation-money-demand-and-the-crack-up-boom/
Hyperinflation, Money Demand, and the Crack-up Boom
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Magnificent! I will use this in my Austrian econ class at the U. of Iowa this term.
Everyone at LvMI seems to be sold on only one resolution to the current fiat fiasco – hyper inflation.
Why is no one making a case for a deflationary depression inspite of the Fed’s worst efforts?
Bob Prechter at Elliot Wave seems to be a better analyst than all the PhDs at LvMI.
If this financial crisis resolves with a Deflationary Depression and LvMI hasn’t explained the possibility of this potential scenario, it will not reflect well on LvMI.
Please, will a devil’s advocate with Austrian Econ credentials please step forward.
Mike
Imagine that banks keep 100% gold reserves against pesos that each promise 1 oz of gold. As more of those pesos are issued (and backed by 100% reserves of gold), each peso will still be worth 1 oz of gold, even though the quantity of pesos might have risen relative to the output of goods. Now suppose new currencies are issued on the same 100% principle: guilders worth 1 oz of silver, lira worth 1 oz of copper, ducats worth 1 bushel of wheat, shekels worth 1 square foot of land, etc. Increased issue of these moneys will also not affect their value.
Now change one thing: denominate all of those moneys in silver, even though they are backed by gold, copper, land, etc. For example, the peso formerly claiming 1 oz of gold will now be denominated as 15 oz of silver, or whatever the going gold/silver rate is, even though the actual asset into which it is convertible is 1 oz. of gold. If you think that this change of denomination will make those moneys lose value, then call yourself a quantity theorist. If not, welcome to the backing theory.
“If you think that this change of denomination will make those moneys lose value, then call yourself a quantity theorist. If not, welcome to the backing theory.”
I’m sorry, but that’s just stupid. These currencies would not survive long in the same competitive environment. This is how money arises in the first place. Before money substitutes can be used, more marketable commodities must become commonly used in indirect exchange. If some commodities are more marketable than others, so will the money substitutes. If all a currency needed was to be backed by something with a market value, we’d have millions of currencies. This would actually destroy money – a common medium of indirect exchange.
Even if there were several different commodity currencies and money substitutes, changing the backing of one substitute to another doesn’t increase the money supply. It demonetizes one commodity and monetizes another. If done properly (selling the old backing at a rate for the new backing that allows it to fully back its notes), it won’t have an impact on prices, because it isn’t an increase in money supply.
Now, if let’s say the new-backing commodity’s known total supply is already completely held against notes, then banks converting from the old backing to the new backing either could not back their notes at all, or would have to get banks holding the new backing to sell them some and reduce their outstanding notes.
In other words, the converting bank would sell its silver for gold certificates of another bank and redeem them. This is not a money supply expansion…
“Bob Prechter at Elliot Wave seems to be a better analyst than all the PhDs at LvMI.”
You must be new to this game, Prechter has been calling for (and continually been wrong about) systemic deflation for decades now… I almost hope we get some more price deflation soon or he may jump off a bridge in shame at some point…
“Please, will a devil’s advocate with Austrian Econ credentials please step forward.”
A number of Austrian-sympathetic commentators have been predicting (hyper)deflation for quite some time now… just google it and I’m sure you can find most of them. Here’s a start: http://globaleconomicanalysis.blogspot.com/
The point that everyone in the deflation camp seems to miss is that if a regime is committed enough they can ALWAYS increase the supply of money faster than a rise in demand from cash-hording, deleveraging, debt repayment etc. They also think that you can’t increase money without borrowing it into existence; the fact that the fed blatantly did(and does) this by monetizing financial assets in the secondary market has not deterred them.
If the gov wanted to they could issue and monetize $3 trillion across the treasury curve and send out a check of ~ $10,000 to every man woman and child. You think that might have some effect on prices. No? What about $30 trillion or $300 trillion?
FDR managed to stop deflation in 33′ – after the money supply had dropped drastically from 1000s of bank failures – by going off gold and devaluing USD by executive fiat. And this was in the days before the FDIC, totally irredeemable national bills of credit, and Helicopter Ben! In those days the productive sectors of society were generally vigilant about soft/easy money, but now…
@Mike Stoddard
What do you believe is a deflationary depression, as opposed as an intervention depression? Do you think the Great Depression was? Or Japan since 1991?
The Great Depression was occasioned by deflation, but this is not likely to re-occur. Then notes were backed by gold, and rumors of devaluation prompted bank runs. Also, regulations against bank branching caused greater bankruptcies. From a devaluation standpoint, it doesn’t matter today if you have cash or checkbook money. There will be no bank runs, which are one of the few ways money can deflate. There’s also the FDIC to deter individuals from worrying about their bank’s fiscal security. Bankruptcies can still occur, but FDIC insurance means that the money supply won’t be sharply hit. And with a pure fiat currency, bailouts, etc. can be conducted more easily.
Deflation corresponds to rising interest rates, liquidation of unprofitable investments, defaults, bankruptcies, and high interest rates. As such, politicians dislike deflation much more than inflation, as they tend to emphasize short-term gains over long-term. Short-term pain is intolerable. Long-term pain is someone else’s problem. All pure fiat currencies favor inflation.
The worse policies of the great depression were artificially elevated wage rates, bailouts, central planning, high taxation and tariffs, unemployment insurance, and union rights. …and inflation of the money supply…
Japan fares similarly due to similar policies. They’ve never come close to any sort of deflationary spiral. The reason they haven’t hit the opposite end yet is that the Japanese have known that money printing policies were temporary. Things will soon change as the government finds itself unable to fund its debt.
Same thing with America. The inflationists are early, not wrong. There may likely be LESS inflation than usual for some time. Many prices may fall. Eventually, however, the politicians will either need to default on creditors or welfare-beneficiary voters…or print money. Defaulting on creditors won’t work – the government can’t fund itself without debt. Voters will not tolerate a clear default on owed entitlements. Unless the gov’t can set up a police state and retain power without clear democratic legitimacy, we should expect hyperinflation at some point.
Does anyone have a copy of “Dollarkurs und Goldmark im Verhältnis zur Papiermark 1918–1923,” cited above?
I am doing my senior project on inflation in the Weimar Republik, and that may be a great source to draw from.
Jon O. said: “The point that everyone in the deflation camp seems to miss is that if a regime is committed enough they can ALWAYS increase the supply of money faster than a rise in demand from cash-hording, deleveraging, debt repayment etc.”
I’ve got to agree with you there Jon. The government will find a way to increase the supply of money in the economy. If the banking system is not willing to lend it out, the government will go around them (I.E. cash for clunkers, etc.) If that fails the government will nationalize their banking systems outright. The deflationists seem to think that governments, through their central banks are powerless to inject ever increasing amounts of fiat money into their economies when that never has been the case.
Jon. O wrote:
And countless Austrian commentators have been predicting hyper-inflation for quite some time now. It hasn’t happened either. By the same reasoning (that it hasn’t happened yet), hyper-inflation must be a discredited theory. Hyper-inflationists have continually been proven wrong. We have had continual low levels of inflation, and that must be what we are bound to have for the indefinite future!
In contrast to most of the population who think (or at least desperately hope) that things can go along forever as is, the one thing in common between both deflationists and inflationists is that they argue that we are due for huge monetary problems. Members of both camps have been arguing for decades that the collapse (inflationary or deflationary) is just around the corner.
I look at charts such as the one linked below (source: theautomaticearth.blogspot.com) and conclude that we are heading for problems of historic proportions. Some commentators are predicting that the crisis will erupt anew during 2010. Personally, I wouldn’t stake my reputation (inconsequential though it is in this debate) on the timing. I am only certain that it is inevitable.
I still continue to grapple with discerning the mechanisms of hyper-inflation versus deflationary collapse. Though I continue to think it through, I envision the situation as a tipping point. That point approaches, as described in the article:
Those familiar with my monetary views might expect me to quibble on some of the language in that quote. However, doing so would be a distraction from the point at hand. Certainly, our problems arise from trying to address overwhelming debt by going deeper into debt.
I add the condition that, along with excessive debt, the economy must also have be suffering from reduced productivity. Even highly leveraged entities may be capable of greater levels of debt, regardless of servicing cost, if they can employ the loaned funds productively enough. However, if they intend to use the debt for consumption, they are constrained by their debt loads. At the limit, if their debt service is equal to their income, it is a mathematic impossibility to take on more debt even if it is offered at zero percent nominal rates. [A couple of notes here: first, inflationist blow-hard Gary North neglects this fact. Second, though nominal rates may be zero, real rates may be high if the money supply is contracting.]
It is here that things get a bit fuzzy for me. Some deflationists argue that monetary authorities can not sufficiently inflate the monetary base to offset credit destruction even if they wanted to. I am not sure of that though I find one intriguing hypothesis to be that money will suffer deflation in this scenario until an economy is sufficiently isolated, at which point it will hyper-inflate. The commentator advancing that theory has not responded to my query for elaboration.
For certain, if monetary authorities either choose to not or fail to inflate sufficiently to offset credit contraction, deflation will occur. As bob noted, the FDIC deters bank runs which would indeed very quickly contribute to inflation. Yet they are not unimaginable if the public’s confidence is shaken that the FDIC is willing and able to guarantee deposits. My expectation is that the administration will do what it must to back up the FDIC. Given its essentially insolvent position, that will be re-capitalization, and the Treasury will have to pump up government debt levels to do so. The question here is who will buy that debt. Perhaps this is where isolation comes into play. If buyers can not be found, it must either give in to the deflationary collapse or else physically print money. The later could well lead to hyper-inflation.
In any case, bank runs need not occur for deflation to arise. Consider bank balance sheets of today. Those familiar with the situation know that forcing price discovery on their assets would require massive write-downs on the “marked-to-myth†assets currently being held at par. [These include, at the extreme, HELOCs at full value on homes with underwater mortgages; the first mortgages not having been paid in a year.] If something occurs to force discovery (at the limit, insufficient cash flow will force it), insolvent banks will be brought to light. Though the FDIC may cover the substantial losses, the surviving banks will surely tighten credit. As the majority of what is used as money is in reality circulating credit, tightening credit might decrease the money supply even without bank runs and even if bank reserves were recapitalized by the FDIC.
In any case, though not the deflationary collapse foretold (at least not yet?), if you trust the now-discontinued series published by shadowstats, we are already experiencing deflation:
http://www.shadowstats.com/alternate_data/money-supply-chartsâ€>
Though M1 and M2 and rising precipitously, M3 is contracting. I am not certain if that trend will continue, accelerate or reverse.
I should review my posts before submitting. A few corrections:
1. The link to debt-to-GDP did not print. Without linking it, here it is as a text. You can copy it into a browser:
http://4.bp.blogspot.com/_9ZzZquaXrR8/SlFRqh1OFkI/AAAAAAAAENI/M-btT2xlRqM/s1600-h/DebtGDP.gif
2.
Make that “…quickly contribute to deflation.”
3. I’m not doing too well with my html. Though you could copy it into a browser as shown, here is a link (assuming I do it right this time):
http://www.shadowstats.com/alternate_data/money-supply-charts
Deflation of Inflation ???
Well, thanks for all the responses.
I just felt there hadn’t been a cogent Austrian case made (by one of LvMI’s PhDs) for deflation.
As to the final resolution, I don’t know.
I just don’t think it is a slam dunk for hyper-inflation.
Mr. Market will have the last word!
Michael Stoddard:
For the record, my expectation for the near term is deflation. To be sure, in terms of M3 money supply as defined by shadowstats, the case is closed. We are currently in a deflationary period though certainly not a disorderly collapse (not yet, at least).
But then again, my credentials as an Austrian are no more than as a casual student — certainly not a LvMI PhD. I don’t think that you’re going to find many (if any) academics in the LvMI school arguing for deflation. But hey, if that’s what they believe, they should stick with their message. Though I disagree on this point, I don’t think that the school is enhanced by finding voices for minority opinions just to head off potential future criticism. If their principles push them to predict hyper-inflation, Austrians should stick to them.
Granting that deflation has occured during relatively recent memory (the US and most of the world during the Great Depression and Japan during the 1990s), I do think that it would be interesting to see a description from an LvMI academic of the mechanisms by which deflation occurs. While its possibility may appear to be explained away by arguing about changes since FDR, how did it occur in Japan?
If the site’s managers are following this, I hope that they will recommend the subject for a future article.
Jon O. linked to Mish Shedlock’s site generally. I direct you to his response, near the end of 2007, to an article written by Peter Schiff (an Austrian darling):
http://globaleconomicanalysis.blogspot.com/2007/12/not-your-fathers-deflation-rebuttal.html
Be sure to follow the link at the bottom of the thread that goes to Schiff’s reply. If nothing else, note the gracious exchange between these guys. I have been a fan of both, though more of Mish recently since I can no longer agree with Schiff’s positions (unless he has changed them recently – I haven’t been following).
Mish sums up his rebuttal to Schiff’s reply with this:
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