Eric Janszen on Hyperinflation vs. High Inflation

[ST]

Re: Eric Janszen on Hyperinflation vs. High Inflation

There is now an enormous literature on inflating away government debt, such as this one picked at random.

The fact that such serious treatments exist today at all is important. The idea was unthinkable recently. But it is exactly what the US did after WWII.

That is really perplexing. In '05 I came around to the deliberate debt deflation strategy after reading dozens of history books, not to mention Fischer's work. In other words, through very casual research. I don't understand why it was not given serious consideration until now. Perhaps, as you've alluded to, it's not often in the best interest of establishment economists to go against dogma.

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

But this requires that the government subscribes to Keynesian economic theory, which half of the US' congress currently does not, right? Do you expect a sea change to occur in this regard? Does the conservatives' attitude towards deficit reduction amount to economic suicide in your views, given how it halts the expansion of the monetary supply that is needed to keep output high? Do I estimate correctly that it would take either another major output gap widening "Ka" event, or the emergence of a major military threat for them to make an about face on this front?

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.

Below is the relationship between the beginning of the debt deflation in private sector credit in 2008, the brief deflation that followed as shown by falling MZM, followed by rising government credit and rising MZM.

I can show you a chart of any economy and you will see the same relationship.

The Fed is worried that a fact of how our money system works, like it or not, has become a political issue. Not extending fiscal accommodation leaves the matter of maintaining money supply growth in an output gap entirely to the Fed, and they want to keep some power dry for the next 2008 level liquidity crisis that the see coming out of Europe shortly.

I get the impression Yellen implies that yields would begin to rise only after the output gap is to a large extent closed, whereas your question was about whether it could happen while the output gap still lies wide open. Could a reconciliation of the two positions be that hysteresis (i.e. unemployed workers losing their skills over time) causes the potential output of the economy to fall over time such that the output gap gets closed at a depressed level of economic output? Is this what you're getting at?

That is such a great point. The Fed is clearly concerned about the limited scope of policy because of poor income and wealth distribution -- a minority that is benefiting from Fed policy cannot produce enough demand to get the economy moving for everyone else -- and long-term unemployment for the reasons you say.

Closing the output gap by reduction of potential output does not, however, change the policy implications for inflation based on the Taylor rule. One of the questions I had for Yellen that I didn't get to was on my theory that the Fed's deflation fighting techniques are, by long-term application in combination with long-term unemployment, shifting NAIRU upwards so that inflation and interest rates rise at a higher unemployment rate than at a similar point in the Fed rate policy cycle in previous recession recovery periods. My guess is that she'd have to respond reluctantly in the affirmative. The implication for bond yields is that we may find that they are more sensitive to inflation risk than the Fed's prospective rules-based models reflect because the gross external debt position has increased from 8% of GDP before the crisis to 38% today and foreign lenders now have a greater influence on bond yields.

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

That is really perplexing. In '05 I came around to the deliberate debt deflation strategy after reading dozens of history books, not to mention Fischer's work. In other words, through very casual research. I don't understand why it was not given serious consideration until now. Perhaps, as you've alluded to, it's not often in the best interest of establishment economists to go against dogma.

The P/C Economy can function effectively even with inflation at double digit levels. During South Korea's massive industrial expansion after the war inflation averaged 10% and reached 30% and 40% levels at times.

A FIRE Economy, on the other hand, cannot function if inflation is much above 5%.

Which inflation policy produces the highest and best distributed economic gains?

Korea's high inflation industrialization produced Real GDP growth that averaged 6% annually for the entire period. Between 1980 and today, Real GDP per hour worked increased more than four fold.

During the same period, the low inflation, pro-FIRE Economy policies of the US produced this result.

Annual Real GDP growth has averaged 3%. Between 1980 and today, Real GDP per hour worked has not even doubled.

We have talked about it here for a dozen years but the facts about the "evils of inflation" as being an argument that benefitted FIRE Economy interests is only now coming out because the blinders are coming off.

[ST]

Re: Eric Janszen on Hyperinflation vs. High Inflation

That is such a great point. The Fed is clearly concerned about the limited scope of policy because of poor income and wealth distribution -- a minority that is benefiting from Fed policy cannot produce enough demand to get the economy moving for everyone else -- and long-term unemployment for the reasons you say.

Closing the output gap by reduction of potential output does not, however, change the policy implications for inflation based on the Taylor rule. One of the questions I had for Yellen that I didn't get to was on my theory that the Fed's deflation fighting techniques are, by long-term application in combination with long-term unemployment, shifting NAIRU upwards so that inflation and interest rates rise at a higher unemployment rate than at a similar point in the Fed rate policy cycle in previous recession recovery periods. My guess is that she'd have to respond reluctantly in the affirmative. The implication for bond yields is that we may find that they are more sensitive to inflation risk than the Fed's prospective rules-based models reflect because the gross external debt position has increased from 8% of GDP before the crisis to 38% today and foreign lenders now have a greater influence on bond yields.

Do you get the impression that the policy makers think that higher NAIRU is due to lack of demand rather than structural weakness that simply cannot be fixed by the Fed?

Is employment mobility impaired now, too? by the fact that many job seekers might have to cut a big check to the bank when selling their house in order to move for a job across the country?

[think365]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Which inflation policy produces the highest and best distributed economic gains?

Korea's high inflation industrialization produced Real GDP growth that averaged 6% annually for the entire period. Between 1980 and today, Real GDP per hour worked increased more than four fold.

During the same period, the low inflation, pro-FIRE Economy policies of the US produced this result. Annual Real GDP growth has averaged 3%.

Between 1980 and today, Real GDP per hour worked has not even doubled.

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

Same for output gap and exchange rate depreciation.

[DRumsfeld2000]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Concerning the money supply script, EJ wrote the following:- "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.''

You state consumers not lending, I do not get this and wonder if this should be ''banks'' or should it be consumers not ''borrowing''?

Also, what is NAIRU please?

I am enjoying reading this thread with its questions and answers.

[EasternBelle]

Re: Eric Janszen on Hyperinflation vs. High Inflation

EJ,

I love your pictorial description of the river of money. Credit creation could be yearly rainfall, that might be higher or lower at times. And then geography can make for bubbles. While a swelling river flowing quickly through one part of the country that has a steep gradient (productive economy) will not necessarily cause a flood (inflation), it might once it hits a plateau or plain (FIRE interests, stock market, housing). It certainly floods in the flood plains before reaching into the ocean (world economy?). While the flow in these plains generally becomes slow as a river enters into an ocean and the plains widen, the runoff might still cause problems.

In the depicted chart of MZM it seems almost as if there are phases of different gradients in the growth of MZM (yearly rainfalls increasing over time). It seems to me that part of your argument is that by now the US 'windsock' economy is not only dependent on money supply growth, but on money supply growing at least at the same rate than before. The chart somehow supports that idea as the growth rate seems to pick up in 2009 just at the same gradient as before. Why was it not possible to decrease the 'yearly rainfall', but still have enough of it to keep MZM growing albeit at lower rates? Does the windsock economy need ever increasing rainfall?

Thank you,
EasternBelle

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Concerning the money supply script, EJ wrote the following:- "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.''

You state consumers not lending, I do not get this and wonder if this should be ''banks'' or should it be consumers not ''borrowing''?

I should add the word "draft" to the description of the script. "Lending" should be "borrowing."

Also, what is NAIRU please?

It's an economics policy concept, not to be confused with real life.

I am enjoying reading this thread with its questions and answers.

Great. It's what we do now between publishing major articles.

[charliebrown]

Re: Eric Janszen on Hyperinflation vs. High Inflation

In our example of the grocery store, what happens when I default on my credit card bill.

The hot money still exits right? That is the money paid by the bank to the grocer. That money is used by the grocer to pay the food wholesaler, utilities, salaries etc. It's in cirucluation. My debit goes away and the bank is left holding an impaired or worse asset, my now uncollectable credit card payment stream.

Now if this was a major amount of the bank's loans, this is now a zombie bank, unable to make any new loans, because it does not have enough assets to back them up right? The money making machine is broken.

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

EJ,

I love your pictorial description of the river of money. Credit creation could be yearly rainfall, that might be higher or lower at times. And then geography can make for bubbles. While a swelling river flowing quickly through one part of the country that has a steep gradient (productive economy) will not necessarily cause a flood (inflation), it might once it hits a plateau or plain (FIRE interests, stock market, housing). It certainly floods in the flood plains before reaching into the ocean (world economy?). While the flow in these plains generally becomes slow as a river enters into an ocean and the plains widen, the runoff might still cause problems.

In the depicted chart of MZM it seems almost as if there are phases of different gradients in the growth of MZM (yearly rainfalls increasing over time). It seems to me that part of your argument is that by now the US 'windsock' economy is not only dependent on money supply growth, but on money supply growing at least at the same rate than before. The chart somehow supports that idea as the growth rate seems to pick up in 2009 just at the same gradient as before. Why was it not possible to decrease the 'yearly rainfall', but still have enough of it to keep MZM growing albeit at lower rates? Does the windsock economy need ever increasing rainfall?

Thank you,
EasternBelle

Richard Koo warned in 2008 that once the US hits the zero bound that only fiscal policy will prevent the economy from slipping into a deflationary depression.

The steps of the process are:

1) Acute liquidity crisis
2) Deflation
3) Emergency monetary stimulus
4) Emergency fiscal stimulus
5) Reflation
6) Rates cut to zero and Zero Interest Rate Policy (ZIRP) begins
7) Monetary stimulus becomes ineffective at producing inflation (reflation)
8) Ongoing fiscal stimulus is required to maintain inflation (money growth) and prevent deflation
9) Budget deficit grows (in the case of Japan from 60% of GDP to 200%)
10) If still under sovereign credit limit, go to 8, else goto 11
11) Ka-Poom

[EJ]

Re: Eric Janszen on Hyperinflation vs. High Inflation

In our example of the grocery store, what happens when I default on my credit card bill.

The hot money still exits right? That is the money paid by the bank to the grocer. That money is used by the grocer to pay the food wholesaler, utilities, salaries etc. It's in cirucluation.

Correct. Like a cup of water thrown into a river of water, it dissolves into the flow.

My debit goes away and the bank is left holding an impaired or worse asset, my now uncollectable credit card payment stream.

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

Now if this was a major amount of the bank's loans, this is now a zombie bank, unable to make any new loans, because it does not have enough assets to back them up right? The money making machine is broken.

Options include nationalizing the bank or the government injecting fresh capital into the bank, otherwise consumers cannot lend new money into existence via that bank.

[Chomsky]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Richard Koo warned in 2008 that once the US hits the zero bound that only fiscal policy will prevent the economy from slipping into a deflationary depression.

The steps of the process are:

1) Acute liquidity crisis
2) Deflation
3) Emergency monetary stimulus
4) Emergency fiscal stimulus
5) Reflation
6) Rates cut to zero and Zero Interest Rate Policy (ZIRP) begins
7) Monetary stimulus becomes ineffective at producing inflation (reflation)
8) Ongoing fiscal stimulus is required to maintain inflation (money growth) and prevent deflation
9) Budget deficit grows (in the case of Japan from 60% of GDP to 200%)
10) If still under sovereign credit limit, go to 8, else goto 11
11) Ka-Poom

And ah, but sussing out the parameters of #10 -- there's an entire career being made on that one!

[porter]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Richard Koo warned in 2008 that once the US hits the zero bound that only fiscal policy will prevent the economy from slipping into a deflationary depression.

The steps of the process are:

1) Acute liquidity crisis
2) Deflation
3) Emergency monetary stimulus
4) Emergency fiscal stimulus
5) Reflation
6) Rates cut to zero and Zero Interest Rate Policy (ZIRP) begins
7) Monetary stimulus becomes ineffective at producing inflation (reflation)
8) Ongoing fiscal stimulus is required to maintain inflation (money growth) and prevent deflation
9) Budget deficit grows (in the case of Japan from 60% of GDP to 200%)
10) If still under sovereign credit limit, go to 8, else goto 11
11) Ka-Poom

I love the programatic explanation. Excellent!

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Richard Koo warned in 2008 that once the US hits the zero bound that only fiscal policy will prevent the economy from slipping into a deflationary depression.

The steps of the process are:

1) Acute liquidity crisis
2) Deflation
3) Emergency monetary stimulus
4) Emergency fiscal stimulus
5) Reflation
6) Rates cut to zero and Zero Interest Rate Policy (ZIRP) begins
7) Monetary stimulus becomes ineffective at producing inflation (reflation)
8) Ongoing fiscal stimulus is required to maintain inflation (money growth) and prevent deflation
9) Budget deficit grows (in the case of Japan from 60% of GDP to 200%)
10) If still under sovereign credit limit, go to 8, else goto 11
11) Ka-Poom

#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.

[WDCRob]

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'.

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?