Real e Finance means business
The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
____________________________________
____________________________________
________________________________________________________________
The truth and nothing but...
How Today's
"Deflation" Can
Turn Into
Tomorrow's
Hyperinflation
Jan 4, 2012
"Deflation" Can
Turn Into
Tomorrow's
Hyperinflation
Jan 4, 2012
Since the 2008 Credit Crisis, deflation has been the primary worry of
mainstream economists and monetary and fiscal policies that utilize
various forms of “money printing” have been implemented throughout the
world to try to stop it. Unfortunately, money printing combined with
deflation can potentially lead to hyperinflation.
Hyperinflation is a little understood and little studied phenomenon. Even
inflation itself is only partially understood and traditional university
economic programs devote minimal attention to it (just ask someone with
an economics degree what courses they took in inflation). Almost no one
seems to have made the connection between deflation and
hyperinflation, which are intimately related. Hyperinflation in fact could
actually be defined as a self-feeding cycle of severe deflation combined
with escalating money printing.
Historical analysis shows that hyperinflation is a creature of damaged and
dysfunctional economies. It does not come from overheated economies
that continue to grow out of control resulting in ever higher inflation rates.
This mythical view may have been created because government stimulus
measures the employ money printing in its various guises to deal with
deflation can briefly make the economy fervent because of a declining
currency. This creates high export demand since foreigners can buy the
country’s goods cheaply and high internal demand because the
population becomes desperate to get rid of any currency it holds. This
phase does not last however and it takes place just prior to the final
hyperinflationary spike. It was seen in Weimar Germany in 1922 because
Germany had a developed manufacturing economy and most of the rest
of the world wasn’t experiencing currency devaluation.
In many cases in the past, war preceded hyperinflation. This happened in
Germany and Eastern Europe after World War I and in Eastern Europe and
Japan and East Asia after World War II. It also occurred in the United States
after the Revolutionary War (arguably the first case of hyperinflation in
history) and in the South at the end of the Civil War. Demand can collapse
after a war and this will cause prices to drop (the U.S. had sharp deflation
after World War I for instance). Governments, who were already printing
money to support the war effort, then frequently print more to stimulate the
economy. If the economy isn’t brought back to real functionality however,
a country’s currency loses its value and an ever-increasing amount of
money has to be printed to create the same amount of stimulus.
Even if there is no war, hyperinflation can exist just because an economy is
dysfunctional. This would describe the cases of hyperinflation in South
America, post-colonial Africa, and in Eastern Europe during the collapse
of communism. When an economy just can’t create enough demand on
its own, the authorities stimulate demand by printing money. This leads to
the same cycle of currency devaluation and ever-increasing money
printing in an attempt to keep up with the loss of value taking place. In
reality, the economy is continually shrinking, even though prices start
heading toward the heavens.
While this has happened in a number of countries over time, mainstream
economists continually make the claim that real inflation can’t exist if
there is slack in the economy. Hyperinflationary economies actually have
maximum slack, with Zimbabwe in the 2000s being the extreme
example. Unemployment reached 94% there, while the inflation rate was
climbing to the sextillion percent level (a number so huge it might as well
be infinity). Despite this real world example that took place right before
their eyes, a number of economists had no trouble looking right into the TV
camera and telling the public that inflation can’t exist if there is excess
capacity in the economy. If they had been testifying in court, they would
have been arrested for perjury.
Since hyperinflation has only occurred in certain countries at certain times,
it is important to ask what it the key factor or factors that lead to it. The
short answer would be: deflation created by demand destruction, followed
by money printing that is taking place because the ability to borrow doesn’
t exist or has been exhausted. Since developed countries have better
credit and can borrow more, hyperinflation is less likely to occur in them
than in more marginal economies – at least until their lending sources dry
up.
Deflation in and of itself does not lead to hyperinflation. It depends on
what the root cause of the deflation is. There were deflations in the late
1800s and in the 1920s in the U.S. due to technological innovations and not
demand destruction as commonly takes place after wars. Lack of
demand was not the cause of falling prices, rising supply was. The exact
opposite situation takes place after a destructive war or in an economy in
a post-bubble era (as is the case currently in the U.S., the UK, Europe and
Japan). In the latter case, demand needs to be stimulated, in the former it
doesn’t.
Countries also don’t print money if they can borrow it. Less developed
countries have limited and sometimes no borrowing ability and this means
they turn to money printing early on and this makes them more prone to
hyperinflation. Since developed countries can borrow money, they do so
for as long they possibly can. This has allowed Japan to get its debt to GDP
ratio to an astounding 229%. The U.S. is already over 100% (based on
official numbers, the ratio using more realistic numbers is much worse)
and rising rapidly. Despite its twenty years of economic malaise, Japan
has managed to support demand by running huge and continuing budget
deficits funded by the massive savings of its people (money printing has
been relatively minor). It is not likely any other developed country will be
able to accomplish what Japan has done. Japan also seems to have
reached the end of the borrowing road and will have to start revving up the
printing presses in the near future.
In contrast to the Japanese, Americans save little and haven’t been able
to fund their budget deficits internally for decades —the U.S. relies on
foreign sources for this money. When the Credit Crisis arose, foreign
lending became inadequate and money printing began in earnest. The
Federal Reserve increasing its balance sheet by over $2 trillion is only one
example of this. While foreign lending might have continued to fund $400
billion dollar annual budget deficits, it was not adequate to support the
$1.42 trillion, $1.29 trillion and$1.30 trillion deficits that occurred in 2009,
2010, and 2011. Trillion dollar deficits are going to with the U.S. for many
years into the future and the only way they can be completely funded is by
printing more and more money. The EU isn’t in much better shape either
and has been unable to fund its peripheral country debt by borrowing. Its
current solution is to print money through massive credit expansion.
Claims that money printing won’t be harmful in the 2010s because
inflationary policies were utilized during the 1930s Great Depression and
they worked well back then are moreover completely misleading. The
debt level of the U.S. government, businesses and consumers were
minimal at that time compared to what exists today. Huge amounts of
untapped borrowing capacity existed then, but this is no longer true.
Consumer credit expanded so much in the intervening years that during
one month of the Credit Crisis it dropped more than the entire amount
outstanding at the end of World War II. An apt analogy might be one drink
of alcohol won’t be harmful. If you haven’t had anything to drink yet it isn’t
likely it will be. If you have already had twenty glasses, it might cause fatal
alcohol poisoning. The global financial system now risks being poisoned
by money printing.
The monetary authorities worry about deflation and attempts to handle it
with money printing are nothing new. The current actions are disturbingly
similar to what took place in Weimar Germany in the early 1920s. They
handled their deflation problem with money printing as well. As prices
rose, instead of facing reality, the economics establishment acted in
concert to deny the obvious. Deflation was cited as the biggest danger to
the economy until it became laughable. When inflation exploded, the
usual scapegoats — foreigners, speculators and minorities — were
blamed by the government. Unless human behavior has changed in the
last 100 years, the same scenario is likely to play itself out again in the
2010s.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetuo
mainstream economists and monetary and fiscal policies that utilize
various forms of “money printing” have been implemented throughout the
world to try to stop it. Unfortunately, money printing combined with
deflation can potentially lead to hyperinflation.
Hyperinflation is a little understood and little studied phenomenon. Even
inflation itself is only partially understood and traditional university
economic programs devote minimal attention to it (just ask someone with
an economics degree what courses they took in inflation). Almost no one
seems to have made the connection between deflation and
hyperinflation, which are intimately related. Hyperinflation in fact could
actually be defined as a self-feeding cycle of severe deflation combined
with escalating money printing.
Historical analysis shows that hyperinflation is a creature of damaged and
dysfunctional economies. It does not come from overheated economies
that continue to grow out of control resulting in ever higher inflation rates.
This mythical view may have been created because government stimulus
measures the employ money printing in its various guises to deal with
deflation can briefly make the economy fervent because of a declining
currency. This creates high export demand since foreigners can buy the
country’s goods cheaply and high internal demand because the
population becomes desperate to get rid of any currency it holds. This
phase does not last however and it takes place just prior to the final
hyperinflationary spike. It was seen in Weimar Germany in 1922 because
Germany had a developed manufacturing economy and most of the rest
of the world wasn’t experiencing currency devaluation.
In many cases in the past, war preceded hyperinflation. This happened in
Germany and Eastern Europe after World War I and in Eastern Europe and
Japan and East Asia after World War II. It also occurred in the United States
after the Revolutionary War (arguably the first case of hyperinflation in
history) and in the South at the end of the Civil War. Demand can collapse
after a war and this will cause prices to drop (the U.S. had sharp deflation
after World War I for instance). Governments, who were already printing
money to support the war effort, then frequently print more to stimulate the
economy. If the economy isn’t brought back to real functionality however,
a country’s currency loses its value and an ever-increasing amount of
money has to be printed to create the same amount of stimulus.
Even if there is no war, hyperinflation can exist just because an economy is
dysfunctional. This would describe the cases of hyperinflation in South
America, post-colonial Africa, and in Eastern Europe during the collapse
of communism. When an economy just can’t create enough demand on
its own, the authorities stimulate demand by printing money. This leads to
the same cycle of currency devaluation and ever-increasing money
printing in an attempt to keep up with the loss of value taking place. In
reality, the economy is continually shrinking, even though prices start
heading toward the heavens.
While this has happened in a number of countries over time, mainstream
economists continually make the claim that real inflation can’t exist if
there is slack in the economy. Hyperinflationary economies actually have
maximum slack, with Zimbabwe in the 2000s being the extreme
example. Unemployment reached 94% there, while the inflation rate was
climbing to the sextillion percent level (a number so huge it might as well
be infinity). Despite this real world example that took place right before
their eyes, a number of economists had no trouble looking right into the TV
camera and telling the public that inflation can’t exist if there is excess
capacity in the economy. If they had been testifying in court, they would
have been arrested for perjury.
Since hyperinflation has only occurred in certain countries at certain times,
it is important to ask what it the key factor or factors that lead to it. The
short answer would be: deflation created by demand destruction, followed
by money printing that is taking place because the ability to borrow doesn’
t exist or has been exhausted. Since developed countries have better
credit and can borrow more, hyperinflation is less likely to occur in them
than in more marginal economies – at least until their lending sources dry
up.
Deflation in and of itself does not lead to hyperinflation. It depends on
what the root cause of the deflation is. There were deflations in the late
1800s and in the 1920s in the U.S. due to technological innovations and not
demand destruction as commonly takes place after wars. Lack of
demand was not the cause of falling prices, rising supply was. The exact
opposite situation takes place after a destructive war or in an economy in
a post-bubble era (as is the case currently in the U.S., the UK, Europe and
Japan). In the latter case, demand needs to be stimulated, in the former it
doesn’t.
Countries also don’t print money if they can borrow it. Less developed
countries have limited and sometimes no borrowing ability and this means
they turn to money printing early on and this makes them more prone to
hyperinflation. Since developed countries can borrow money, they do so
for as long they possibly can. This has allowed Japan to get its debt to GDP
ratio to an astounding 229%. The U.S. is already over 100% (based on
official numbers, the ratio using more realistic numbers is much worse)
and rising rapidly. Despite its twenty years of economic malaise, Japan
has managed to support demand by running huge and continuing budget
deficits funded by the massive savings of its people (money printing has
been relatively minor). It is not likely any other developed country will be
able to accomplish what Japan has done. Japan also seems to have
reached the end of the borrowing road and will have to start revving up the
printing presses in the near future.
In contrast to the Japanese, Americans save little and haven’t been able
to fund their budget deficits internally for decades —the U.S. relies on
foreign sources for this money. When the Credit Crisis arose, foreign
lending became inadequate and money printing began in earnest. The
Federal Reserve increasing its balance sheet by over $2 trillion is only one
example of this. While foreign lending might have continued to fund $400
billion dollar annual budget deficits, it was not adequate to support the
$1.42 trillion, $1.29 trillion and$1.30 trillion deficits that occurred in 2009,
2010, and 2011. Trillion dollar deficits are going to with the U.S. for many
years into the future and the only way they can be completely funded is by
printing more and more money. The EU isn’t in much better shape either
and has been unable to fund its peripheral country debt by borrowing. Its
current solution is to print money through massive credit expansion.
Claims that money printing won’t be harmful in the 2010s because
inflationary policies were utilized during the 1930s Great Depression and
they worked well back then are moreover completely misleading. The
debt level of the U.S. government, businesses and consumers were
minimal at that time compared to what exists today. Huge amounts of
untapped borrowing capacity existed then, but this is no longer true.
Consumer credit expanded so much in the intervening years that during
one month of the Credit Crisis it dropped more than the entire amount
outstanding at the end of World War II. An apt analogy might be one drink
of alcohol won’t be harmful. If you haven’t had anything to drink yet it isn’t
likely it will be. If you have already had twenty glasses, it might cause fatal
alcohol poisoning. The global financial system now risks being poisoned
by money printing.
The monetary authorities worry about deflation and attempts to handle it
with money printing are nothing new. The current actions are disturbingly
similar to what took place in Weimar Germany in the early 1920s. They
handled their deflation problem with money printing as well. As prices
rose, instead of facing reality, the economics establishment acted in
concert to deny the obvious. Deflation was cited as the biggest danger to
the economy until it became laughable. When inflation exploded, the
usual scapegoats — foreigners, speculators and minorities — were
blamed by the government. Unless human behavior has changed in the
last 100 years, the same scenario is likely to play itself out again in the
2010s.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetuo
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