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How Hyperinflation Happens

September 8, 2013 Leave a comment

scandalousmuffin:

How hyperinflation really happens.

Yeah, we are so not Syria.

Originally posted on The Dish:

Syria Inflation

Matthew O’Brien highlights Syria’s hyperinflation:

It turns out you can’t have much of an economy when your country is a war zone, and the regime is attacking civilians. But functioning economy or not, the government still has to pay its bills. So what does it do when there’s nothing to run or tax? Easy: It prints what it needs. That’s what the pariah Assad regime has done to cover the difference between what it has to pay, and what its few remaining patrons have paid it. The predictable result of all this new money chasing fewer goods has been massive inflation.

This is in keeping with the history of hyperinflation:

Hyperinflations tend to happen following wars or revolutions. Now, Weimar Germany and Zimbabwe look like exceptions to this rule, but they’re not really – the former’s resistance to reparations, and the latter’s botched land reform halted economic activity as much as any conflict.

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Ezra Klein: Core Inflation Rises at a Whopping 0.1% for July

Via Ezra Klein’s Wonkblog:

Today, the Bureau of Labor Statistics released the latest Consumer Product Index (CPI) numbers, giving the most recent estimate of the rate of inflation. The short version: There isn’t any. The inflation rate for all products grew by a whopping 0.0 percent. When you exclude food and energy prices, as economists frequently do to get the “core” rate of inflation, inflation in July was just 0.1 percent. Indeed, inflation for the past 12 months was only 1.4 percent, well below the Federal Reserve’s target of 2 percent, and core inflation was only 2.1 percent.

My first post that ever got significant attention on the internet was “Fact Checking The National Inflation Association And its Hyperinflation Fear-Mongering.”

I actually wrote it as a response to the NIA video that I originally saw on my former boss’s Facebook wall. In hindsight, it’s probably not a good idea to post sarcastic blog posts on your former boss’s Facebook wall.

My style is more analysis-oriented than sarcasm-based these days, which is more boring, but more along the lines of the stuff I like to read. Hey, I was still right after two years. And Peter Schiff is still crazy.

NIA Article Comment Reax

I did not anticipate my National Inflation Association article garnering as  much attention as it did.  I’ve had a busy winter.  Apologies for the delay.  There are a lot of comments, mostly poorly thought out and incendiary, so let me try to highlight some of the more interesting ones and clarify my own commentary.

Prof Dave writes:

“In all my years studying economics I have yet to meet a female that understands the basic fundamentals of economics.”

That’s terribly depressing.  Especially for a professor.  He then goes onto to call me a Keynesian, because obviously all I talked about in my post was my desire for the Fed to recklessly print mad cheddar and then take a dump on Milton Friedman’s head.

“Inflation is an increase in money supply leading to a direct devaluation of the currency which in turn leads to an increase in prices and costs. Simply stated the more of a currency that is in circulation the more that is available to speculate in stocks/commodities thus driving prices up, not down as ignorance would have us believe nor is it a supply/demand issue.”

So what is inflation?  Is it the increase in money supply, as Prof Dave suggests?  Is it the devaluation of currency?  Or is it the increase in prices and costs?

In a comment, directed at another member. I cited two macroeconomics textbooks that inflation is the increase in prices and costs.  I’m going to stand by the academic standard and not use the fringe definitions of the Austrian school so popular among my commenters.  Rewriting the definition conflates definition with causation.   (Increase in money supply is the main cause of inflation, most economists believe, but it is not the only cause.)

Printing bills, increasing the money supply, drives long-term inflation.  I get that.  That’s not the point of the post.  I didn’t write a criticism of the NIA as comprehensive defense of the US government’s fiscal and monetary policies.  I wrote it to point out the youtube video’s conclusion of apocalyptic economic disaster was not supported by any thorough data in the video and that the NIA’s interest in the hype was rooted not in a humanitarian effort of spreading knowledge and presenting alternative economic policy but rather in their motive of pimping precious metal stock.

I said that I didn’t know whether gold is a good long term investment or not.  I presented an alternative opinion that existed.  There, of course, was no shortage on the ad hominem bandwagon.  “Using the biased Huffington post as a source? The authors motives are as suspect as the NIA.”  Ew, Huffpo.  Icky liberals are incapable of ever having a meaningful thought.

But you don’t need to the investment expertise of <insert media mogul here> to know that precious metals are not immune to speculation and the entailing consequences.  Silver stocks recently took a fall, something that the National Inflation Association had to admit:

“We never expected silver to rise to almost $50 per ounce so quickly.  Silver simply rose too far too fast and was due for a correction.”

On an interesting sidenote for the all Schiff-heads, as brought to my attention from  rtorre02, Peter Schiff recently called the NIA a “Penny Stock Pump and Dump.

—–

Economics is a difficult science in which a litany of variables exist in constantly evolving system that make it hard for empirical testing to produce consistent models.  Any talk of it can elicit a plethora of everlastings debates about the relationship and extent of government.   These are issues where a single blog post about a youtube video makes a poor discussion forum.

I never stated directly but it’s fairly obviously that I’m of the opinion that the United States is not going to have a Zimbabwe-level hyperinflation crisis.  Not within the next 10 years and certainly not for the sole reason of expansionary monetary policy.  It’s possible, but it would take some severe policy mismanagement that I don’t think is currently occurring or is likely to occur.  (There’s obviously dissent here, but no one thus far has commented on it in the form of a well-researched, cited argument.)

There’s also the logical thinking involved with parsing the argument insinuated by so many that, “Well, Peter Schiff was right about the 2008 financial crisis and the mainstream ‘experts’ were wrong, so Peter Schiff has to be right here.”   There is so much wrong with that line of thinking, for sanity’s sake I’ll leave it at that.

There will always be doom-sayers.  In economics, religion, whatever.  Some will sincerely believe what they preach.  Some will ride the wave of psychosis for monetary gain.  And there will always be those who will fail to question, who give into their own precognitive biases, who dismiss the conventional in lieu of the sensational even when the conventional makes sense.  It may sound hypocritical from a blogger with the intent on stirring the kettle, but really, have some humility sometimes.

Fact Checking The National Inflation Association And its Hyperinflation Fear-Mongering.

This is a response to this youtube video with over a half million hits, posted by the mysterious The National Inflation Association:

http://www.youtube.com/watch?v=eb1n1X0Oqdw

First off, it’s always good to ask who is funding the organization and the video production.   From their website http://inflation.us/ (Ooh,  dot us. Flashy domain name. Very patriotic.) I can’t say for sure.

But here’s a good guess:

“One of our missions at the National Inflation Association is to discover and profile companies that we believe will prosper in an inflationary environment. Typically we will bring to you producing, profitable, Gold and Silver companies with strong balance sheets. We believe these stocks have a chance of becoming some of the best performers of the next decade.”  Most of their 22 companies on their stocks page are gold or silver companies.

Now I’m not going to bash Gold and Silver as a means to hedge long-term financial risk, because I’m not an economist.  But here’s an article that does:  http://www.huffingtonpost.com/alan-schram/is-gold-a-good-inflation_b_443927.html “Gold does not generate cash flow (indeed it has a carrying cost for storage, insurance etc.) and does not have any intrinsic value, and therefore it is of dubious value as a long term investment.”  The same thing that gives gold its value, faith, is the same thing that gives money its value.  Makes sense to me.

Onward to the youtube video.

Commentary:

I’m not going to fact check all the numbers, but a lot of the statistics in the video seem to be reasonable.  The video also cites some legitimate facts about the financial crisis and legitimate concerns about the US’s ability to pay for impending SS and Medicare.  But there are a lot of interpretations of these statistics and facts that are misleading, fear-mongering, and just plain wrong.

9:45  “The average American might have to eat less and stop air conditioning and heating their home just to afford gas for their car.”

I like the word ‘might’.  And aren’t we obese and energy-hungry anyway?   Doesn’t a third to a half of our food go into the garbage and not into our mouths and out our ass?   Maybe we shouldn’t have killed the electric car, before the lithium ion battery took off.

10:40  Peter “Dr. Doom” Schiff calls Social Security a Ponzi scheme.

While there are parallels between the concepts, it’s not fundamentally true, because technological advancements have exponentially increased economic output over the last century.   According to Michael Mandel of Business Week:   “The U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times… Assuming that technological progress continues over the next 70 years, and output productivity growth continues over the next 70 years, the finances of Social Security are relatively easy to fix. A fairly minor cut in benefits, combined with a relatively small increase in taxes, will bring the system back into balance again. (the latest Social Security report projects a 75-year deficit of $4.3 trillion. That sounds like a lot of money, but over 75 years it’s roughly $60 billion a year…not chicken feed, but not overwhelming).“

13:18  “The only way our economy can truly recover [from the crisis caused by trillion dollar deficit] is for the government to dramatically slash spending across the board and eliminate unnecessary departments like the Department of Energy… and the Department of Education.”

The video tries to link the rise in private tuition costs to the rise in Dept of Ed. Spending.  I don’t get it.  It also fails to mention that the Dept. of Ed only has 5,000 employees and that most of the increase in spending was because of Bush’s No Child Left Behind.  And Dept of Energy?  Um, isn’t the one that deals with our nuclear waste?

15:42  They try to bash breastfeeding protection laws.  Fail.

16:55  They claim a Republican administration would have supported the health care bill.  Um, no?  From what I remember, the health care bill had to go through extensive Senate reconciliation after the Dems lost their supermajority with Massachusetts.

24:15 “We conservatively believe the real rate of inflation to be 3-4% higher than what is indicated by the CPI.”  Thanks for giving us the formula for how you calculated that.

25:34 Suggestion for fed funds rate to increase to 5.31%  Again, no math evidence.

25:05:  FIRST GOLD PITCH HERE

I skimmed through the next 10 minutes. It was Gold Gold Gold Gold Gold.

37:45  Selective statistics about debt.  You can see the full debt story in chart form here: http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms

Post-WWII our deficit was briefly over 100% relative to GDP.   In the last 30 years, it went up with Reagan and HW Bush and lowered with Clinton.  Obama inherited an 83.4% rate from Bush and it is currently rising.

42:10  The video suggests we “go back to our roots” to fix our economy.  I love 12 hour work days, child labor, sub-minimum wage, and sweatshops.

The rest of the movie was more OMG DEFICIT and Gold Gold Gold Gold Gold.

50:15  I love how the movie links inflation to the “destruction of family values.”  Inflation will soon make a $20 bill worth more as an implement to snort coke out of a hookers ass than its value!

50:38  Somehow the government is “transferring money to Wall Street through inflation.”  Really? I thought it was the deregulation (by the ironically Democratic senate) in the late 90s and early 2000s causing Wall Street to systematically restructure itself into unsustainable pyramid schemes.

The entire movie seems to forget a basic Econ lesson:  Businesses don’t look at national debt and think, “Let’s raise prices!”  Growing economies and demand make prices go up.  A recession—like what’s happening now—makes selling stuff harder, so prices go down.  That’s why inflation is down.

The deficit needs to take a backseat right now to the higher goal of economic growth.  And it’s noteworthy that we borrow from China because they have relatively low lending rates.  Really, what’s China going to do; invade us if we default?  The US and China are economically co-dependent, which is not a great place to be, but safe for the moment.  Right now the Obama administration is attempting to do what it needs to do, focusing on unemployment and GDP growth.  Whether it’s succeeding or not is another post for another day.

[edit]: I wrote a Follow Up Post in response to some of the comments on this page.  Less Sarcasm.  More go suck it, Austrian school of economics:  http://scandalousmuffin.wordpress.com/2011/05/25/nia-article-comment-reax/

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