Eric Janszen on Hyperinflation vs. High Inflation

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I'm sure I'll stumble into 'angels on the head of a pin' territory here, but isn't the argument that monetary stimulus doesn't matter if it's not subsequently lent to someone by the banks? That while monetary stimulus may eventually be inflationary the lag is long enough that it doesn't help prevent an ongoing descent into depression? Where fiscal stimulus is immediate?

Or something along those lines?

Yes, I've seen that side too. That's partly why I used the helicopter drop analogy.

The new money gets ito everyone very quickly and at roughly the same time, in other words with zero lag and with no 'interference' from banks or any other intermediary.

Fiscal stimulus would be way slower than a helo drop. Before someone brings up how long it takes to print cash, The Fed already has almost $200 billion of cash that is in vaults and unissued - about $600 for every man, woman & child in the US... one helluva start.

But my real point is that it makes zero sense to me that, regardless of the amount or form of monetary stimulus, Koo asserts that it won't or can't work to produce inflation.

[jk]

Re: Eric Janszen on Hyperinflation vs. High Inflation

my notes on the interview, for those who, like me, find it hard to concentrate on audio material:

Janszen interview june ’12


Deflation vs inflation – since there is no gold standard the fed can expand its balance sheet without restriction. So after tech bubble had a brief period of deflation, then reflation. Same pattern as housing/credit bubble burst.
Can guarantee any benefits nominally, but not in real terms.


Aggregate credit is being extinguished by payoff, default, etc. but this is compensated by public sector continuing to create money via “borrowing it into existence.” As private debt shrinks, public debt expands so as to at least maintain money supply.


Since ’08 there has been decline of private debt outstanding, but this offset by gov’t.


But what if the gov’t gets hawkish?


The first greenspan bubble of the late ‘90s with burst in early 2000’s set in motion a process in which the gov’t has to repeatedly stimulate by expanding money supply over and over again in order to keep the economy growing and keep money supply growing. This was predicted by richard koo [“the balance sheet recession”], and is what has been happening in japan for the last 20 years. [jk- but note japan is net creditor, u.s. is net debtor but global reserve currency- important distinctions.]


Ron paul opens discussion of role of fed- good for discussion to happen, but better to fix than try to abolish it. Otherwise congress will just print endlessly to bestow bread and circuses on their constituents.
====


What is hyper-inflation versus high inflation?


In 70s inflation never got to 20%. Hyper=100% or higher annual rate of inflation.
Generally, hyperinflations are out of control inflationary process, loss of faith in a currency. Korea had high inflation 20-40% and functioned well- but it is/was industrial, no FIRE sector. You can’t have high inflation in a highly levered economy, an economy with a big FIRE sector, without major problems.


Hyperinflation is a wipe out- hyperinflation FOLLOWS a currency collapse. tends to be after losing a war. Germany in 1920’s, japan after ww ii. The memory of these processes is the basis of the inflation-phobic policies of both japan and germany.
To have hyperinflation you have to have
1. a ruined economy, with virtually no output and therefore no foreign investment [and so no foreign demand for the currency for investment, and no foreign demand for products since there is virtually no output to sell on international markets]. Most of the time this follows losing a war.
2. Political isolation. No foreign gov’ts interested in helping manage things.
Thus, with no demand for currency, so currency collapses. This produces COST PUSH inflation. The central bank then has no choice but to print to allow the circulation of goods and services at the new higher price level.


Re u.s.
u.s. economy is not going to a position of no sig output. In fact, if u.s. is doing badly, everyone else will be doing worse.
Also, 15% of global gdp is already held in foreign dollar reserves outside u.s., so there is already a massive investment in dollars, and so the u.s. will not be in a position of no demand for dollars. [jk- not to mention that oil is traded in dollars! This provides at least a minimal level of ongoing dollar demand.]
Also, u.s. is a massive global player in every realm, it can’t and won’t be thrown under the bus.


Nonetheless, Suppose u.s. economy stops, political isolation, and there is no foreign demand for dollars, the 8000 tonnes of gold held by u.s. can be used to stop a dollar crisis. Note germany has 2nd largest store of gold, followed by imf. Also note argentina, after its crisis, went from having no gold, to buying 55 tonnes of it 2004. Any country with sufficient gold reserves can end a run on its currency by establishing gold backing/convertability. Set rate [gold price denominated in local currency] high enough, however, that most currency holders prefer to hold the currency. I.e. set a penalty rate to convert currency into gold via that country’s central bank.




So if hyperinflation unlikely, what happens?


Janszen’s “Kapoom theory” says that we go through disinflationary cycles in which economy tends to shrink, and gov’t has to step in to reflate. Economy grows for a while but has become dependent on gov’t to expand money supply, i.e. there is not enough private demand for credit, only gov’t borrowing creates new money supply.
But each intervention is less effective, it becomes more inflationary in terms of commodity prices, but less reflationary in terms of stimulating the real economy.


Eventually, the u.s. runs out of tbond buyers, and has to buy its own debt or reduce issuance. At that point markets will tend to discount the dollar.


Policy has been a gradual reduction in the value of the dollar to deflate our external debts, has depreciated about 40% since ’01. Have about another 40% to go. Goal is to get the dollar down to around 60 by 2015 or so. [jk- not clear if he is referring to dxy or trade-weighted.] this would improve our export position. At the same time need to reduce dependency on imported oil to improve overall trade position.


Ultimately, it won’t work, and we find ourselves with a weak dollar, a lot of foreign debt and foreign creditors worried about the value of their reserves. This is a setup for a bond crisis. [jk- note fleck has said process will end in what he calls “a funding crisis.”]


Is there a debt default? It’s a long process of negotiation and gradual steps.


Re rheinhart and rogoff – thinks their book is political to support an austerity agenda. Janszen says he’s in the “what’s going to happen” business, not supporting any political agenda. Thinks the r&r stuff is just the flip side of modern monetary theory arguments that the gov’t can print with impunity.


World’s reserve currency, largest economy in the world is not going to have an overnight crisis. It will happen in stages and steps.


Right thing to do is to gradually write down e.g. mortgage debt, other private debt, so gov’t doesn’t have to run up gov’t debt to compensate.


Peak cheap oil


International monetary system was not designed to cope with sustained cost push inflation from sustained high energy prices. In ’01 recession oil was $12/bbl. Last recession oil only fell to $40. Now on plateau in output; markets have figured out what it will cost to get the oil out of the ground.


Oil exporters dollar reserves have incrd from 8% of gdp to 37% of gdp over last 6 years, i.e. accumulating dollars in place of oil reserves. Putting strains on internatl monetary system, has effect of reducing demand for dollars and may accelerate dollar depreciation.


Military have been aware of oil availability issues for at least 10 years. Thus discussion of “energy independence,” natural gas substitution, etc- this is preparation for future legislation to adapt to peak cheap oil. Likely able to put off an acute crisis for ?10 years, but likely to have some crisis.




Are bonds a short?
Janszen bought bonds in ’00, gold in ’01.
The u.s. economy has been on life support since ’01. Gov’t can fix bond prices. But since this depreciates the dollar, Gold is a way of shorting the gov’t.
euro was badly structured, financial crisis devastating to some weaker european economies, this puts strain on euro currency.
This will cause european investors to flee into dollars and gold. So, not time to short bonds. Go long gold instead.




“hx of interest rates”- “massive tome.” Rates can stay very high or low for long periods, become accepted as normal. In ‘70s had mortgage rates of 9-12%. In 1950’s had mortgage rates of 4-5%. When people all think rates will never change, they start to change, albeit slowly. Thinks rates will peak in the 20%s late in period of sustained high inflation. E.g. Took a while [years] for people to believe volcker was for real.


Gold is the other side of the bond trade. At some point it will reflect the real level of inflation risk and default risk. Guess is that happens between 2013 and 2015, after the next election.


For more, go to http://www.itulip.com

[mmr]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Only when the bank writes down the loan is the money withdrawn from the river.

I thought that the money would only really be withdrawn from the river if the bank fails to pay its depositors or creditors?

As long as the bank can extract enough interest income from its remaining loans or borrow enough against its remaining assets to pay its liabilities, the money supply (bank deposits and cash, simplifying somewhat) wouldn't change.

Even if so many loans default that bank liabilities exceed assets, as long as the bank can manage to fund itself (probably by borrowing against its remaining assets from the central bank), the bank will survive and can even continue to make loans. (Case study: nearly every bank in Spain.)

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

#7 has never made sense to me, partly because it's the exact same money as #8. There is virtually no difference between money from the Fed or money from the Treasury. It all spends the same, and buys 'stuff'.

Koo is also basically asserting (with zero proof that I've seen, historical or otherwise) that regardless of the size of a helicopter drop from Ben or any Central Bank, no inflation will result.


I also submit that debt deflation is a much larger factor than has been recognized by the monetary and fiscal authoritie, including sentiment effects.

The presentation is here:

What Post-2008 World Can Learn From Japan

He uses Japan as the model. Where I disagree is that after its credit bubble collapsed, Japan allowed deflation to set in before acting. The US did not.

That said, he makes a compelling argument that once interest rates hit zero, the debt refi impact of rate cuts disappears because rates can't go lower than zero. Falling interest rates not low interest rates are stimulative.

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I thought that the money would only really be withdrawn from the river if the bank fails to pay its depositors or creditors?

As long as the bank can extract enough interest income from its remaining loans or borrow enough against its remaining assets to pay its liabilities, the money supply (bank deposits and cash, simplifying somewhat) wouldn't change.

Even if so many loans default that bank liabilities exceed assets, as long as the bank can manage to fund itself (probably by borrowing against its remaining assets from the central bank), the bank will survive and can even continue to make loans. (Case study: nearly every bank in Spain.)

Simplification always distorts reality, but the simple credit-money creation and destruction as adding or subtracting from a flow model still holds up despite cutting corners on such details as you note: a higher volume of lending than repayment expands the money supply while a higher volume of repayment than lending shrinks it.

[aaron]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Thanks, Jk

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

It would be interesting to see how wages responded in each country during the same period.

Fascinating question. Yellen noted in her speech how wages have remained sticky (aka "downward nominal wage rigidity") even as the labor market has been weak and the output gap has remained wide.

She asked:

"Does the stability of inflation in the face of high unemployment mean that unemployment is structural, not cyclical?"

She answered:

• Simple Phillips curve model predicts downward pressure on inflation from labor market slack.


• But cross country evidence shows that once inflation is low, it is less responsive to slack.

• This nonlinearity may reflect downward nominal wage rigidity.

The Fed views "downward nominal wage rigidity" as a good thing because it prevents a deflation spiral from developing. It acts as an inverse process of Fed policy in the early 1980s to eliminate rising wage rates as a transmission mechanism in a high inflation environment.

I think it's a disaster.

Can you imagine how much more quickly the economy might recover if the highest input cost to business -- payroll -- could adjust to lower demand? Sure everyone would take a pay cut for a while but they'd still be employed. When demand, the economy and labor markets later recover workers will be able to demand full salaries again.

The Fed by putting a floor on salaries and other input prices for firms are dragging out the output gap. That and not allowing bad debts made during the bubble era to be written off.

Same for output gap and exchange rate depreciation.

The Japanese managed wages up as the CPI declined.

Goods and services deflate...



...as wages inflate.

In the US we have wages deflating against CPI to rescue the FIRE Economy.

Bad policy.

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

The presentation is here:

*scribd*

He uses Japan as the model. Where I disagree is that after its credit bubble collapsed, Japan allowed deflation to set in before acting. The US did not.

That said, he makes a compelling argument that once interest rates hit zero, the debt refi impact of rate cuts disappears because rates can't go lower than zero. Falling interest rates not low interest rates are stimulative.

Yes I read it around the time it came out and as I recall questioned it and its conclusions, given that neither highly stimulative monetary nor fiscal policy existed for any substantial length of time after 1990.

I even posted a number of charts showing that the minor monetary and credit aggregates did have, as expected, very minor effects. Perhaps I should repost a few of them.


I find nothing in the presentation to support his contention that regardless of the size of a helicopter drop (or very stimulative/substantial monetary policy) from Ben or any Central Bank, no inflation will result, and I can find no historical parallel to support Koo's assertion. Printing enough money, whether via monetary or fiscal causes, always results in substantial inflation.

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

U.S. wages as a percent of U.S. GDP since 1947, showing FIRE progression.

[unlucky]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Yes, I've seen that side too. That's partly why I used the helicopter drop analogy.

The new money gets ito everyone very quickly and at roughly the same time, in other words with zero lag and with no 'interference' from banks or any other intermediary.

Fiscal stimulus would be way slower than a helo drop. Before someone brings up how long it takes to print cash, The Fed already has almost $200 billion of cash that is in vaults and unissued - about $600 for every man, woman & child in the US... one helluva start.

But my real point is that it makes zero sense to me that, regardless of the amount or form of monetary stimulus, Koo asserts that it won't or can't work to produce inflation.

I've always thought of it like this: suppose you are the owner of a business whose function is to dig holes in the ground and then fill them back in again. Of course your business is entirely unproductive and generates continuous losses. If the Fed or a bank offers you a cheap loan to go dig lots of holes (monetary stimulus), you are likely to refuse - because how will you pay back the loans? (of course if you are a smart-ass business exec you might take the money, pay yourself a big bonus and put the business into chapter 11 but that's getting harder to do apparently)

On the other hand if the government offers to pay you to dig holes and fill them in again (fiscal stimulus), you will accept. Great business! The money is still being borrowed but it is the government that has to pay it back, not you.

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I've always thought of it like this: suppose you are the owner of a business whose function is to dig holes in the ground and then fill them back in again. Of course your business is entirely unproductive and generates continuous losses. If the Fed or a bank offers you a cheap loan to go dig lots of holes (monetary stimulus), you are likely to refuse - because how will you pay back the loans? (of course if you are a smart-ass business exec you might take the money, pay yourself a big bonus and put the business into chapter 11 but that's getting harder to do apparently)

On the other hand if the government offers to pay you to dig holes and fill them in again (fiscal stimulus), you will accept. Great business! The money is still being borrowed but it is the government that has to pay it back, not you.

No huge disagreement there, except that government borrowing is always paid back, one way or another, usually via inflation. The classic helicopter drop analogy from Ben also mentioned no need to pay it back, but that's off my point.

Where I primarily disagree is when, regardless of the amount or form of monetary stimulus, Koo asserts that it won't or can't work to produce inflation.

After all, the most basic and well accepted definition of inflation is "more money than goods" (in its simplest form). People will pick up and spend or use money "dropped from helicopters". If a Central Bank wants inflation, historically it always happens.

[vinoveri]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I'm not describing a Keynesian theoretical idea. I'm describing a fact of how our money system operates.

Below is an excerpt from a script for a video we are working on, one in a series that explains a number of key concepts that the iTulip reader needs to know in order to understand who our forecasts have been as good as they have and why we think they will continue to be accurate.

Under our hybrid fiat credit and private credit based money system, all money is created by the act of borrowing. It is literally lent into existence.

When you borrow and the bank lends you $100 through a credit card company to buy groceries, you and the bank have in that transaction created $100 and added it to the total money supply.

That $100 enters the economy and circulates forever.

When you repay that $100 to a bank through a credit card company, you withdraw $100 from the money supply.

When consumers collectively borrow more in new loans than they are repaying in old loans, the money supply grows.

When consumers collectively borrow less in new loans than they are repaying in old loans, the money supply shrinks.

Think of a river of money. Trillions of dollars flow through this river. Billions flow in and out of it every day, as billions are added and removed.

When you borrow, you are adding money to the river. When you repay debt you are withdrawing money from the river.

When consumers collectively borrow more in new loans than they are repaying in old loans, the river of money rises and flows more quickly.

When consumers collectively borrow less in new loans than they are repaying in old loans, the level of money in the river falls and the river flows more slowly.

If the credit supply is greater than the flow of goods and services in the economy and consumers collectively borrow more in new loans than they are repaying in old loans, the river of money may rise to overflow its banks, causing a flood or inflation.

Conversely, of the credit supply is less than the flow of goods and services in the economy and consumers collectively borrow less in new loans than they are repaying in old loans, the river of money may fall to a trickle, causing a drought or deflation.

If consumers are not lending enough new money into existence to prevent a drought, the government can and will lend new money into existence instead. If it does not, the money supply will shrink.

Great summary.
My understanding of how the gov borrows is through debt issuance with the primary dealers as intermediaries. Because the gov must borrow and spend new money to prevent deflation and because they must borrow, if the private markets will not lend them enough, they turn to their banking system, and in order to keep the cost of the new debt from increasing Debt/GDP quicly they need to borrow at low rates and they can only sell low yielding debt to the banking system b/c the FED maintains ZIRP
providing a mechanism for banks to earn a risk free spread while funding the gov at low rates.

How do you think Ms Yellen would repond to the observation that ZIRP is a transfer tax/transfer on/of wealth from the private market to government and banking system? $7Trillion in savings deposits earning a traditional CD rate of 4-5% is $280-350B per year. Does the calculus of "hey I'm not getting any yield on my savings so I have to save more and not spend" figure into any of the thinking?

Say a person has $100 grand in savings, a CD at 5% since DEc 2008 when ZIRP began would have yielded ~$17,500+ by this point, by the end of 2014 when ZIRP is supposed to end that would be $35,000 of lost yield. Aside from the moral injustice of this (IMO), is there not an economic impact?

After writing that, perhaps the dems should highlight this as part of their platform, to wit "ZIRP is taxing the "rich" to fund the valuable social programs"

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

How do you think Ms Yellen would repond to the observation that ZIRP is a transfer tax/transfer on/of wealth from the private market to government and banking system? $7Trillion in savings deposits earning a traditional CD rate of 4-5% is $280-350B per year. Does the calculus of "hey I'm not getting any yield on my savings so I have to save more and not spend" figure into any of the thinking?

Another member of our group asked precisely this question. Her answer was that "the situation is unfortunate," but what is the Fed supposed to do? Allow a deflation spiral to develop and preside over a second Great Depression?

The Fed's original sin was allowing the credit bubble to develop in the first place.

[NCR85]

Re: Eric Janszen on Hyperinflation vs. High Inflation

#7 has never made sense to me, partly because it's the exact same money as #8. There is virtually no difference between money from the Fed or money from the Treasury. It all spends the same, and buys 'stuff'.

Koo is also basically asserting (with zero proof that I've seen, historical or otherwise) that regardless of the size of a helicopter drop from Ben or any Central Bank, no inflation will result.


I also submit that debt deflation is a much larger factor than has been recognized by the monetary and fiscal authoritie, including sentiment effects.

It seems to me that the idea that any money that the Fed creates by buying treasuries could be leveraged up by the banking system (even though under ZIRP this empirically hasn't happened yet either in Japan nor in the US) freaks people out to the extent that not enough of it can realistically be engaged in before a political backlash occurs. Whether this "freak out effect" is stronger than the extent to which people are freaked out by government deficit spending is debatable, though. My guess is both have their limits. Which does make me think that the potential for more disinflation in the current stage should not be underestimated.

Let's keep in mind that people were calling Bernanke "clueless" from every direction at QE2. What adjective will be used to describe QE3? What about QE4? Etc.

[Thailandnotes]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Does the calculus of "hey I'm not getting any yield on my savings so I have to save more and not spend" figure into any of the thinking?

Went on a long bike ride today with a guy (French) who claimed quite the opposite. He said savings earning nothing and losing value is pushing his friends to trade it for things they think will be worth more sooner or later. He wasn't talking gold.

Meanwhile, here in Thailand, my bank is offering 3.8 % on a CD. The term has dropped steadily from 12 months to 11 to 10 to 9 to 8 and is now 7. All in one year.