The Federal Reserve’s post-financial crisis policies have led a number of pundits to predict hyperinflation for the United States (see for example Is U.S. Hyperinflation Imminent?, Gold Videocast: Peter Schiff Answers Your FAQs, Central Bank Policy Will Create Inflation, warns Allan Meltzer, 2014-Crisis in Dollar Will Trigger Inflation-John Williams). They believe that the monetization of large government deficits is bound to cause prices to rise precipitously as the money supply grows larger and larger, if not today then soon (Is the Fed Monetizing Government Debt?). To many people, this seems like sound, conventional wisdom. Well, the latest CPI figures were released today and guess what? Prices actually fell in August (BLS Consumer Price Index Summary). In fact, since the start of the recession in December 2007, annual rates of growth of CPI have been 3.8%, -0.32%, 1.6%, 3.1%, 2.07%, and 1.5%–the lowest of any six-year period since 1967! How can this be? It’s simple:Forbes — Pragmatic Economist
Where's The Hyperinflation That Pundits Are Predicting?
John T. Harvey | Professor of Economics, Texas Christian University
21 comments:
The Yen has gone from 101 to the dollar to 109 to the dollar in about 5 weeks. Those guys betting on Yen hyperinflation are doing just fine.
Betting on inflation or hyperinflation doesn't make it so. So far no evidence of that being the issue.
I don't see any rationale for betting on hyperinflation. Japan is still stuck in disinflation and the recent tax hike is predictably affecting the economy adversely.
Japan Q3 GDP forecasts cut, inflation stuck below BoJ target — Friday, 19 September 2014 10:48
Analysts continue to see inflation stalling around current levels, barely halfway to the BoJ's 2 percent target, which it hopes to hit next fiscal year.
The Reuters survey tips inflation of 1.2 percent this fiscal year and next, the same as last month.
Eight of 19 analysts expect the BOJ to ease policy again this year while the other 11 said the central bank would hold policy steady until next January at least.
YEN RATE
The yen has slid to more than six-year lows this week as the dollar popped to above 109 yen on expectations the Federal Reserve is moving toward raising interest rates while the BoJ is under pressure to ease further.
For decades a strong yen has bedevilled Japan's export-reliant economy, but the current weakness is starting to push past companies' comfort zone as the pain from higher import costs outweighs the boost for exporters.
In the Reuters survey, six analysts said the optimal exchange rate for the dollar was between 100 yen and 104 yen, seven selected 105 yen and 109 yen, four said 110-114 yen and one said 115-119 yen.
The lagging economy and the inability of the BOJ to stoke some inflation to raise NDGP is a much more plausible reason for a weak yen.
The real story is the strong dollar with the US economy the only major economy that is showing signs of life and with the emerging countries turning down. The USD is rising pretty much across the board as capital heads to the US and puts selling pressure on other assets and currencies.
There are many factors that affect fx rates. If there were only one or even couple that were always reliable, it would be easy trading the fx market.
If you are right and the market is betting on hyperinflation, then the spike could be expected to go exponential. We'll see.
Hyperinflation is a positive feedback loop. It is how things go wrong when a country that prints its own money gets too much debt and deficit. So you can see that Japan has the setup for hyperinflation. It just needed a trigger. Dropping 8% in 5 weeks either means the trigger has happened or that is the trigger.
In a country with reasonable exports and imports having the value of your currency drop fast on the international markets will make inflation go up. Just a delay. But my point is to predict hyperinflation you look at other things than just prices going up.
If I am right and this is the trigger, then the dominoes keep falling. So yes, if I am right the Yen keeps falling and faster. It fell 4% in 4 weeks and then 4% in 2 weeks. So it seems faster. Will keep watching.
http://www.howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html
Can you cite anywhere this has happened without other factors that have been at least as causal as fiscal/monetary policy? Are there such factors affecting Japan?
See Hyperinflation - It's More than Just a Monetary Phenomenon
It might be argued that strong inflationary pressure can arise due to a balance of payments issue, but that is not an issue for Japan, which has a mountain of foreign reserves and doesn't borrow in currencies it does not issue.
There is always some underlying causal factor that makes the debt and deficit go up that people can point to. For Japan you could say the Tsunami and shutting down all the nuclear power plants. They used to not have a balance of payments issue but they do now. You can say the cause is that they have to import oil to generate electricity replacing the nuclear that is offline.
But while there is something you can point to as the reason for the high debt and deficit, there is always high debt and deficit. There are many different ways to get into financial trouble where they are forced to keep printing money, but they are always in a situation where they can't stop printing money if they have hyperinflation.
Nobody is buying Japan's bonds but the central bank. They are spending twice what they get in taxes. About 1/4th of their taxes go to interest on the debt even at crazy low interest rates. Given the realities of the market and politics, do you see any way that Japan could stop printing money?
From what I can see of the history, hyperinflations don't start with fiscal-monetary excess. That is a consequence of trying to deal with other factors that disrupt the economy.
The tsunami had the potential to severely disrupt Japan but did not.
I don't get the argument that Japan is "printing too much money" when the monetary authority has been trying to increase the inflation rate and has been unable to do so. Neither does the bond market judging from yields.
Therefore I attribute the rise of the yen relative to the dollar as dollar strength more than yen weakness. Without other indicators falling in line, it seems unreasonable to interpret yen weakness relative to a dollar that is strengthening across the board to inflationary pressure.
"From what I can see of the history, hyperinflations don't start with fiscal-monetary excess. That is a consequence of trying to deal with other factors that disrupt the economy."
Hyperinflation is where a country that prints money is really bankrupt. Of course there were factors causing this. Always. They don't go bankrupt without some reason.
However, have you ever seen a country with hyperinflation that was not spending far more than they got in taxes?
"I don't get the argument that Japan is "printing too much money" when the monetary authority has been trying to increase the inflation rate and has been unable to do so. Neither does the bond market judging from yields."
Excess reserves don't count as part of M1 or M2. They are not part of the money supply. They don't seem to cause inflation. However, they are like government debt as they can be converted to money by the central bank. So you can have all this build up without any inflation and then once the snowball starts rolling things can just go quickly.
Nobody is buying Japan's bonds but the central bank. They are spending twice what they get in taxes. About 1/4th of their taxes go to interest on the debt even at crazy low interest rates. Given the realities of the market and politics, do you see any way that Japan could stop printing money?
The issue is saving/demand. An aging population results in increased propensity to save and decreased propensity to spend. This is a tough economic/demographic problem to solve and the primary threat is slipping into deflation rather than inflation spiraling out of control.
The Japanese government hasn't figured out now to do that yet. QE isn't likely to be anymore successful in this than it's been in the US. It doesn't add anything to the net financial assets of the economy. It just changes composition and results in portfolio shifts rather than to household consumption or firm investment.
Moreover, the interest that is paid on the bonds that the cb buys reduces the amount of spendable funds in the economy, as does the fiscal policy of increasing taxes. Abenomics is disinflationary rather than inflationary.
It seems to me that your argument is that at some point the world is going to lose confidence in the yen due to the size of the public debt and monetary base, and hyperinflation will then quickly result. I find this farfetched at this point.
"Abenomics is disinflationary rather than inflationary."
I think you are forgetting that the government is spending twice what they get in taxes. This is adding new net financial assets. It is inflationary.
Have you looked at my "hyperinflation explained many different ways"? You get a positive feedback loop. So things can happen very quickly once they start.
have you ever seen a country with hyperinflation that was not spending far more than they got in taxes?
There have been plenty of examples of countries that run persistent deficits without provoking excessive inflation, let alone hyperinflation. The size of the fiscal depends on the sectoral balances.
A deficit can be a large as it needs to be to offset demand leakage to non-government saving.
It can even be larger than that in emergencies although then extraordinary measures must be imposed to prevent inflation, as was done in the US during WWII when the fiscal balance exploded to fund the war and constraints were imposed to prevent excessive domestic demand that would have resulted in inflation. The deficit took care of itself in the aftermath of the war, which was a period of high prosperity historically. But US policymakers then knew what they were doing.
Insufficient taxation is one of the possible causes of demand side inflation, but the fiscal balance itself is not indicative of anything independently of the sectoral balances and demand. Once an economy cannot expand more quickly than demand is increasing, then a continuous increase in the price level, including wages, is the likely result. This is demand side inflation.
Another reason for inflation is inability of the economy to expand to meet increasing demand. That could be due to supply shortage such as an oil crisis, destruction of capital in war, and the like. Here the best solution is to increase productive capacity if possible. This is supply side inflation.
In any case, if demand outpaces supply will result in inflation as a general price increase and this will result in wage pressure. The problem is excess demand relative to supply and there are various reasons and ways to address this. Demand side inflation needs to be addressed differently than supply side.
None of this is happening in Japan, although Japan did have a narrow escape with the tsunami and consequent nuclear disaster, which could have seriously undermined its productive capacity.
Only looking at the Treasury or central bank's balance sheet is insufficient. Other factors have to be present and that's not happening in Japan.
If Japan could engineer a strong recovery, then the deficit and debt would take care of themselves. Loose monetary policy and tightening fiscal policy is not going to do it.
Japan is still stuck in slow growth and low inflation, which is not so bad for a country with an aging demographic. The question is really what to do about that demographic. Japan needs to open up to immigration or hugely increase productivity through innovation and investment if its birthrate doesn't increase.
So just to clarify, you have never seen a case of hyperinflation where the government was not spending much more than they got in taxes?
So you can have all this build up without any inflation and then once the snowball starts rolling things can just go quickly
If many people began selling bonds and the cb felt it had to buy them to support the market and if people holding money in bank accounts, and the Japanese have lots of savings in bank accounts, demanded cash, and this went into spending rather than say into other forms of saving or productive investment, then domestic inflation due to excessive demand might could result if the economy could not expand fast enough to meet it. If this were perceived as currency aversion the fx rate could plummet and the central bank might be hard pressed to break the fall.
What is the likelihood of that happening quickly enough to make it a trade? I'd say small. It's not a position I would take.
Not that I think that the yen could weaken a bit further. The name of the game now in the currency war is to beggar thy neighbor, as most countries seek to expand exports to address their lagging economies.
And I think that the euro potentially has more problems than the yen owing to inherent EZ instability arising from it institutional structure that makes it far less than an optimal currency zone. If I were betting on currency failure in the developed world, that's where I would be looking. It's entirely possible that the euro will disappear into history in the not too distant future. But I don't regard the likelihood of that as very hight at the moment either.
So just to clarify, you have never seen a case of hyperinflation where the government was not spending much more than they got in taxes?
I am not an expert in the history of hyperinflation, but as a general principle it is true if the government deficit is larger than the full employment budget so that demand rises above the capacity to supply it. A basic principle of Lerner's functional finance is that fiscal policy can be used to control excessive demand that threatens to become inflationary.
What has sometimes happened is that government is not able to do so. Lincoln realized this, for example, when he decided to fund the Civil War with currency issuance rather than debt issuance, for instance. He was clear on controlling wartime inflation using taxation and he was in a position to do so. The Confederates were not and hyperinflation ensued.
Japan, of course, has the ability to use fiscal policy as well as monetary policy to control inflation in the event that would become necessary. If inflation were to increase more than desired, taxes could be increased quickly through the VAT, for example. It's not like Japan is without tools to handle the inflation constraint and, being sovereign in its currency, it has no solvency constraint
Again, it is not persistent deficits, or the size of the deficit or amount of public debt, or public debt/GDP ratio. It is whether demand outpaces supply when the economy is near capacity and cannot address the demand quickly enough. Then monetary or fiscal policy could be a causal factor. However this almost never applies to modern economies in which production facilities are built to accommodate increased production and increasing demand fuels investment in increasing productivity through technological innovation.
Most contemporary inflations in developed countries have been due to supply constraints affecting energy cost. Japan is subject to this as an energy importer.
In emerging countries, it's been running a currency board or borrowing in a foreign currency that opens the country to insolvency, hot money, and balance of payments issues. This doesn't apply to Japan.
"Japan, of course, has the ability to use fiscal policy as well as monetary policy to control inflation in the event that would become necessary. If inflation were to increase more than desired, taxes could be increased quickly through the VAT, for example. It's not like Japan is without tools to handle the inflation constraint and, being sovereign in its currency, it has no solvency constraint"
My theory is that hyperinflation is a positive feedback loop that once started happens faster than normal tools like increasing taxes can cope with. As people get out of bond, the central bank has to buy more so the government can have cash to operate, but the more new cash they make the less people want to hold bonds. If there are lots of short term bonds you can get a lot of new cash very suddenly with this feedback loop. The Japanese government is spending about twice what they get in taxes. When they increased taxes a couple percent the GNP went down noticeably. It is very doubtful they could balance the budget, let alone compensate for all the bonds not being rolled over with higher taxes. After 6 months or a year of people fleeing bonds the money supply is several times what it was. So effectively their tools are not enough to control the money supply.
They have built up the debt over 20 years and then in a very short time it is all monetized if there is a panic out of bonds. There is just no way that this year they can fight problem so big that it took 20 years to make it. It is the positive feedback nature of the thing. It is like a dam breaking or a bonfire getting lit.
Normal tools work for normal inflation. Hyperinflation is not normal inflation. It is far more powerful, more sudden, and more out of control. Normal tools just don't cut it.
Using Bernholz book which looked at many historical cases of hyperinflation we can say that there is more than a 50% chance of hyperinflation in the next 5 years for a country with debt over 80% of GNP and spending over 1.5 times taxes. So we can quantify things.
I don't think you have any real ability to quantify the risks of hyperinflation or even really predict it. Normal MMT theory is just not good for this. Now CMMT theory works much better for this:
http://seekingalpha.com/article/2451535-cmmt-cates-modern-monetary-theory
There is no limit to stupidity on the part of governments. Japan has failed to solve its economic problems over the course of several decades, so this would indicate that either they don't have the chops to do it, or there are political obstacles to doing so. Therefore, your analysis is possible.
What I am questioning the likelihood of it coming to pass in the time frame to make it a viable trade. I'd rank it as long shot. But long shot can pay off big. As I said, good luck with it.
I posted a link to your Seeking Alpha post.
Thanks for the post! Be interesting to see if there is any reaction.
And thanks again for the good luck.
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