How hyperinflation really happens.
Yeah, we are so not Syria.
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.
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.
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.