Monday, September 22, 2014

Vincent Cate — CMMT - Cate's Modern Monetary Theory

This CMMT model is just a slight correction to MMT or Modern Monetary Theory. While they have #1,#2,#3 above they are not consistent in how they treat bonds and do not have #4,#5. They say all government spending is from new money but then also have the government spending money from bonds. They say all spending is from new money but also say new money is not spent to pay off bonds. These errors make standard MMT far more complicated and not match reality. In particular, hyperinflation really happens but in MMT there is no reason for it. They have to say that the cause of the hyperinflation of money is outside their theory of money. This is just silly. With this little fix hyperinflation is easily explained. So CMMT is a big improvement over MMT. CMMT also stands for Corrected Modern Monetary Theory. :-)
FYI

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CMMT - Cate's Modern Monetary Theory
Vincent Cate

196 comments:

Jonf said...

Quick, someone call Warren!

Unknown said...

vince cate is an idiot hyperinflation obsessive.

Tom Hickey said...

He made an attempt to state a position. I put it so that people who understand MMT can critique. That way we can all learn.

The inflation and hyperinflation concerns are not going to go away anytime soon. It's unhelpful to just wave off criticism.

There are chief three objections to "loose money."

The first big objection was insolvency and that was successfully defended at least some degree, with Paul Krugman changing his position, it seems.

The second is the inflation objection. MMT holds that inflation is indeed a constraint but that it can be dealt with using fiscal tools. Many are not yet convinced. And we know that the hyperinflation objection is an extension of the inflation objection and that it is regularly invoked.

The third is the exchange rate or devaluation issue objection, which MMT deals with by saying that floating rates result in adjustments. Some even sympathetic to MMT think that this needs to be fleshed out more.

The most helpful way to address such objections is by citing papers. Lacking that blogging by MMT economists. Lacking that, providing what one views as response that MMT economists would make.

I think that Vincent has made a good faith effort to see the truth in MMT and to criticize it where he believes it is lacking, as well as putting forward a fix.

If you think he is wrong, have a go at it. Then there will be some responses on record.

Tom Hickey said...

BTW, I recently had a more specific discussion with Vince about a short position in the yen based on the hyperinflation scenario in the comment section of John Harvey's post that I linked to here.

Vincent Cate said...

I assume that anyone who resorts to name calling can not find any flaw in my argument.

Detroit Dan said...

Cate's post is incoherent to me. Admittedly, I didn't spend much time on it.

The idea that MMT can't explain hyperinflation is ludicrous. I have read many MMT explanations of Weimar and Zimbabwe, and the explanation is that productive capacity was destroyed and/or money was owed in a foreign currency (reparations). There is nothing in MMT that precludes other types of hyperinflation, but these are preeminent examples and explanations.

If Vincent has another real life example of hyperinflation, let's hear it and why MMT can't handle it...

Vincent Cate said...

The explanations for hyperinflation are really outside of MMT. They don't use any of the ideas of MMT. There are no debits and credits showing how things happen. When MMT guys explain hyperinflation they look at the core issue that got the government into financial trouble but then stop there.

To me that is just where the backstory of how the government got into trouble. What happens next is the really interesting part that a theory of money should go into detail explaining.

Vincent Cate said...

It is like they say, "the war caused the hyperinflation" and stop there (with far more details to be sure). This is just not a full answer and really has nothing to do with MMT. Why do some wars cause hyperinflation and some not? How could we tell if a war was going to cause hyperinflation or not? How does it cause hyperinflation? Can you put any numbers on anything?

Brian Romanchuk said...

Hyperinflations almost invariably occur under conditions that MMT theorists tell governments to avoid. The German hyperinflation was the result of having foreign-denominated debt.

In a hyperinflation, the working currency of a country is not the local currency. Transactions are effectively indexed to a foeign currency. When the local currency collapses on the foreign exchange, local prices explode.

All you need to avoid this is an effective tax regime that taxes nominal transactions in the local currency. This is why you will not see a hyperinflation in a major economy, at least on any sensible time frame.

Vincent Cate said...

To get an idea of what I mean by a real explanation of hyperinflation, here is my collection of explanations. I even have a fixed one for MMT. But look at "real bills" and "equation of exchange" ones first. These are really using the theory to explain what is going on.

http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

Vincent Cate said...

"All you need to avoid this is an effective tax regime that taxes nominal transactions in the local currency."

Japan is only able to collect taxes for half their expenses. Does this mean they do not have an effective tax regime?

Vincent Cate said...

Has MMT warned Japan of the danger they are in? Can MMT recognize the danger? Many other theories make Japan look like a prime candidate.

Detroit Dan said...

"The explanations for hyperinflation are really outside of MMT." [Vincent]

Right. MMT doesn't need to have a unique explanation for everything. Sometimes, just plain common sense will do, or explanations that have been developed by others.

I clicked on the link to Vincent's lengthy post on hyperinflation, and I have little idea what the point is. (could be my fault, as is the post is lengthy and I don't want to read through the whole thing without having some idea why)

Vincent-- Do you think that Japan will slip into hyperinflation soon? What is the practical import of your difference with MMT?

Anonymous said...

An easy way to see how Vincent is not arguing in good faith is the following:

"Japan is only able to collect taxes for half their expenses. Does this mean they do not have an effective tax regime?"

He knows the central point to MMT is using taxes to regulate the heat in the economy not to try and balance the books. Yet, this is what he chooses to post instead of arguing against the actual position.

Tom Hickey said...

I don't think that is the case, DAB, considering what Vince wrote in the discussion between us that I cited above. He claims that hyperinflation can happen very quickly if holders of a currency suddenly develop currency aversion and shed the currency en masse, which would also involve selling bonds, threatening to collapse the bond market unless the cb intervenes by buying the bonds. But those selling the bonds don't want to hold the currency they receive, so they either spend it driving up prices or sell it in the fx market driving down the value of the currency.

While the cb can intervene in the fx market to support the currency by using foreign reserves to buy the currency, or by selling gold to acquire it, it is doubtful that a cb could stem a flood of currency disgorging.

The MMT response is to raise taxes to withdraw currency. But Vince objects that this would take too much time to address a sudden onset of currency aversion.

He claims that at a certain point the fiscal position of a country gets to the point that it generates sudden currency aversion that is then exacerbated by the cb monetizing the debt to support the collapsing bond market, resulting in a flood of liquidity that generates hyperinflation and a collapse of the currency.

Moreover he is quite sure that Japan is fast approaching this condition and that there is money to be made shorting the yen in anticipation of it. See the discussion between us that I cited above.

That is my understanding of his thinking, at any rate.

Ignacio said...

There is nothing fancy about hyperinflation and it's always a political choice. It's not really a monetary phenomenon, it's a socio-political phenomenon which is initially started by a deep deflationary spiral, the fall of output capacity, the exacerbation of balance of payment imbalances and capital outflows and ultimately social disruption.

If ther eis anything lackluster about MMT is the extreme simplification of international trade, floating currency exchanges, and in general anything involving several monetary zones, nations and their political interests. But this is not somethign singular about MMT, is true for pretty much every monetary theory out there, and normally so because of the complexity of the issues at hand.

Vincent Cate said...

Right. I say hyperinflation is a positive feedback loop. There are different ways to explain it, but it is a death spiral that once started goes really fast and is really hard to stop. It is like an avalanche, forest fire, or volcano. Once conditions are right, there is a chain reaction that can occur of surprising power and suddenness.

Here is how I compare it to other positive feedback things:

http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html

Trying to stop a volcano or avalanche after they start just does not work well.


Ignacio said...

BTW these international flows are very important to understand hyperinflation, as no nation can run on it's own since along time ago, and specially when it has been connected commercially with other nations for a long time (part of it's output capacity is outsourced).

When there is a severe disruption of these flows because usually political reasons and interests or the build up of severe imbalances the chance for hyperinflation happens (as well as the chance for rising autocratic regimes and the suppression of the population which is the other plausible outcome in the short term), and in general increasing inequality, poverty, political repression etc.

Hyperinflation is just a symptom of underlying social and economic problems.

Vincent Cate said...

The reason I asked if Japan had an "effective tax regime" is because Brian said that was all you needed to avoid hyperinflation. But if this "effective tax regime" is not defined, then you are not really helping. If after the fact you say, oh they got hyperinflation, they did not collect enough taxes, it is kind of too late. Can you say anything ahead of time about how much taxes you need to collect? A theory should help you understand what is happening and going to happen. If you can only provide a story afterwards, it is no much of a theory. I think it is a fine question, not in bad faith.

Vincent Cate said...

"There is nothing fancy about hyperinflation and it's always a political choice. It's not really a monetary phenomenon,[...].

This is like saying it is outside of MMT. Other theories can cleanly explain hyperinflation. The CMMT in this post, the equation of exchange theory, the real bills theory, etc all can go blow by blow in detail telling you how hyperinflation works.

Hyperinflation is something of a hobby of mine. I have never found a single case where a government held a vote saying, "all in favor of hyperinflation raise your hands". Hyperinflation is the market dumping a currency because of bad political choices, but there was never a political choice to have hyperinflation.

Vincent Cate said...

"Vincent-- Do you think that Japan will slip into hyperinflation soon? What is the practical import of your difference with MMT? "

Yes, I am sure Japan is all set for the chain reaction of hyperinflation and have some confidence that the reaction is in the early stages already. I think the Yen's fall of 8% in the last 5 weeks probably indicates the feedback loops are starting to operate.

The practical import of my difference with MMT is that I think adjusting taxes is a reasonable theory for fighting inflation but no where near able to halt hyperinflation once started. So I feel you must understand how it starts and never get into the situation where it starts. In practice this means you don't want too much debt and deficit. But MMT people don't fear debt and deficit because they think the only danger is inflation and they can fix that with taxes. I think there is also the danger of hyperinflation and you can not fix that with taxes.
Not understanding how hyperinflation works at an operational level

Unknown said...

As I said, he's an idiot hyperinflation obsessive.

Just another austrian-influenced goldbug nutter. He probably thinks Peter Schiff is a genius.

Vincent Cate said...

And "y" you can not find a single error in my post.

Unknown said...

you post reads like it was written by a child. It's pathetic. It's obvious you have no understanding of the subject and you are simply obsessed with hyperinflation.

Brian Romanchuk said...

Vincent - an effective tax regime is one that actually collects the tax its laws says that are owed, and those taxes are driven by nominal activity. It has nothing to do with the fiscal balance.

Japan has just beefed up its sales tax, which is a tax on every yen spent within the retail economy. It also has an income tax, which is on every yen earned.

If yen-denominated activity rose as the result of higher inflation, those taxes will rise proportionately. (Even more, for progressive income taxes.) Fiscal policy automatically tightens.

Since the Japanese price level isn't actually rising - other than the effect of the tax hike, which is contractionary - we do not see the rising tax take.

Brian Romanchuk said...

There's been some discussion here about the effect of currency moves on domestic economies. If you actually look at data in developed countries like Canada and Australia, you see that fairly huge currency moves transfer into very little impact on the domestic price level. Developed economies are weighted towards services, and the exchange rate has little impact.

Developing countries have a more difficult time of it. That's a real constraint, and MMT cannot magically eliminate real constraints.

Vincent Cate said...

So Brian, you think Japan is not at risk for hyperinflation anytime in the next 3 years?

Vincent Cate said...

"Vincent - an effective tax regime is one that actually collects the tax its laws says that are owed, and those taxes are driven by nominal activity."

In hyperinflation life gets really hard. They often move to barter. If one guy trades some corn he grew with another guy who got some eggs from his chicken, so you think anyone is paying VAT tax, income tax, social security tax, etc? Much of the economy becomes black market as long as the law says you have to use the failing currency. It does not matter how effective the taxes were before the hyperinflation.

Six said...

Here is an example of how Vincent's thinking goes off the rails:

"If your bank account pays 1% and the price of a can of tuna is going up at 10% then you are better off investing in canned tuna than putting your money in the bank. It would be very rational to take any extra money at the end of the month and buy canned food. After enough time that most people understand what is going on, I think we will eventually see rational behavior.

If food is going to be up over 30% in 3 years it is just not reasonable to invest in government bonds paying 0.19% per year for 5 years, or less than 1% total after 5 years. Better to buy canned food."

He doesn't seem to realize that when he buys canned tuna, his money goes into the tuna seller's bank. There is demand for the currency. Bank deposits are exchanged for tuna, not converted into tuna.

That and a lot of correlation posing as causation sums up his blog.

rsp,
six

NeilW said...

The main problem everybody has when looking at these things is that they take the wrong point of view.

Essentially they look at a single economy and abstract away the rest of the world as the 'external sector'.

That is the wrong view. What you have is a closed system called 'The World' and in that you have a set of non-convertible currency areas interacting with each other.

The missing link is the feedback loop between the currency areas. Something cannot happen in one currency area without affecting something in the other area.

The standard view treats the external sector as either a Deus Ex Machina or a vengeful Old Testament God. It is neither. It is a set of other currency areas just like yours - all currently trying to export their way to nirvana *in competition with all the other currency areas*.

For one currency area to go to zero, all others have to go to infinite. Yet *any one* of those currency areas can simply buy up the spare currency with their own new money and bury it in the central bank vaults never to see the light of day again. That stops the rot instantly and permanently.

That stabilises their exports, and actually makes them more desirable relative to other competitors. And they can do that until the cows come home at *no cost*.

So you have two forces. You have the local state that can tax away money that comes out of voluntary saving hibernation, and you have export obsessed foreign currency areas which will buy up your ex-savings via liquidity swaps and bury them in vaults to protect their export-led policies.

How strong both of those forces are depend upon the size of your economy and the particular configuration of its sectors.

As Bill Mitchell would say, hyperinflation is just inflation big time. You deal with it in the same way - tax the excess spending out of existence and reduce the amount of new money coming into being.

Easy to see if you look at financial saving as voluntary self taxation.

NeilW said...

"Bank deposits are exchanged for tuna, not converted into tuna."

You see that same problem when people discuss foreign exchange.

The majority of commentators can't see the difference.

The main innovation of the Keynes era was to see the financial circuit as inductively separate from the real circuit, and that the real circuit had to adapt to the money the financial circuit was prepared to put into circulation.

The MMT innovation is to extend that inductive separation to currency areas. So that each currency area is separate from other currency areas and closed within their own area. The areas are currency defined, not geographically defined. Separate financial circuit then operates within those areas and the real circuit is linked to those financial areas.

The inability to convert matters.

Ignacio said...

"I have never found a single case where a government held a vote saying, "all in favor of hyperinflation raise your hands". Hyperinflation is the market dumping a currency because of bad political choices, but there was never a political choice to have hyperinflation."

Don't be literal, is a political chain of choices that get you into hyperinflation (the break of confidence in the system).

I don't think that hyperinflation is just very high inflation, maybe there are roughly two types of hyperinflation separated by origin: the one that comes from deep deflationary spirals, and the one that come from a high inflation build up over time. In the second case a dysfunctional state which taxation system is ineffective or not running at all can be the reason to end up in a hyperinflationary mess, in the first you end up with that failed state because a chain of decissions that get you into a long depression that erodes most of the institutions.

Bonds are cash equivalent, and issuing of bonds is more inflationary than holding cash (income stream), if anything should be clear from MMT is these two things. If people is not buying bonds (because they are not being issued) it does not mean they are going to dump all their money suddenly into other asset classes rising the general level of prices. It should also be known that hyperinflation is a dynamic started by the general population, not the big cows trading 1000's of millions in bonds daily. There is no causal relation between the two things necessary.

The reason why you cannot have a consistent "theory of hyperinflation" is the same that you cannot have a consistent "theory of inflation" or other economic theories which try (and fail) to explain reality: you are dealing with uncertainty (of the knightian type) here, complex problems relating human societies and politics.

Vincent Cate said...

The economy is really the combination of a bunch of individual decisions. It can be helpful to see what is in the best interest of individuals.

MMT people seem to take the view that there will always be buyers for government bonds because however low the interest is it is better than nothing and government bonds are safe.

But look at Japan now. The 5 year bonds pay 0.16% and 10 year pay 0.53%. A guy importing goods sees his prices have gone up 8% in the last 5 weeks. If his bond comes due next week is he better off to take the cash and buy extra import goods or roll over the bond? If the next 2 years are like the last he should buy extra stuff.

Turns out all businesses should buy extra inputs for their business if their inputs are going up faster than 0.5% per year (assuming only that they can store them). Same is true for households, which was my tuna example.

Also, someone in Japanese bonds would have been far better off in US bonds this past year an probably going forward. It is easy these days for an individual to move his savings to bonds in the USA with a few clicks in his brokerage account.

The sum total of all these individual actions is everyone getting out of bonds, the central bank buying a lot of bonds with new money, and money moving around lots faster and even more inflation. It is called a "crack up boom" and it is a real thing.

Japan seems to be at the point where really the central bank is the only net buyer of JGBs. A possibility MMT does not usually want to face. But it is real and happening now.

http://www.bloomberg.com/markets/rates-bonds/government-bonds/japan/

Vincent Cate said...

"As Bill Mitchell would say, hyperinflation is just inflation big time. You deal with it in the same way - tax the excess spending out of existence and reduce the amount of new money coming into being."

The scale of the numbers make increasing taxes enough impossible. I am making up the following numbers but the feel is right. Imagine for 20 years Japan spent twice what they got in taxes and accumulated a debt of 240% of GNP. Now imagine that taxes are 30% of GNP. Imagine the average bond is 2 years. Now imagine nobody is rolling over their bonds any more. The central bank is making money like crazy to buy up bonds. The flood of bonds coming due is more than 100% of GNP. There is no way to increase taxes enough to cover this. So they have to keep making money. But as they keep making money, nobody wants to roll over bonds. They will soon have a death spiral with big big numbers. A couple of percent tax increase recently hurt their GNP. If they tried to double taxes it would kill the economy and they would not collect anything like twice the money. And they need far more than twice the money in taxes to keep from printing. The math just does not work. Tax increases can not fix it once the panic out of bonds starts.

Unknown said...

vince cate has been warning of imminent hyperinflation, collapse of the dollar, and 'return to gold as money' since at least the beginning of the crisis/ great recession. Government has to cut spending on social security NOW! because HYPERINFLATION IS COMING!! Because Peter Schiff said so on TV!! BUY GOLD!!!

The guy is your typical ignorant, austro-sadist gold-obsessed, anti-government nutter.

These people desperately want hyperinflation to occur. It's their 'end of the world'/ Rapture scenario. Like Jehovah's Witnesses, these guys desperately want the 'end of the world' to happen... they keep praying for it and fervently predicting it no matter what.

What you are dealing with here is the crazy mind-set of a cultist, not a rational person.

Unknown said...

"It is called a "crack up boom"

yeah... this guy gets his world-view from von Mises.

Vincent Cate said...

The crack up boom is real. It has happened many times. You can think of it as a flood of demand for real things as everyone tries to get out of bonds and that currency at the same time. It happens. It will happen to Japan.

Unknown said...

You're not a sane person. Seek help.

Brian Romanchuk said...

Vincent - yes, I believe that Japan will not have a hyperinflation. It is possible, but it requires some serious change of policies.

Look at a daily chart of the yen. It moves a lot. In a crisis, it can strengthen 5 handles in a few minutes overnight. Importers are used to this and don't panic. The only people who get spooked by currency moves are those who used to currency pegs, and think that any moves in forex translate into domestic inflation. They don't, and everybody knows that.

Matt Franko said...

Vincent,

" It is easy these days for an individual to move his savings to bonds in the USA with a few clicks in his brokerage account."

You have to think this through, it is not just "a few clicks".... break down the process in the banking system that would facilitate these forex transactions....

Why would a Japanese bank provide USD balances that were rapidly appreciating vs the yen to a Japanese bondholder?

This is against the Japanese banks financial interests...

rsp,

Matt Franko said...

Brian,

"Developed economies are weighted towards services,"

A couple years ago the A/C system went down in mid-summer and I called my HVAC guys they couldnt make it for a day too busy....

so I went up and opened it up myself and found the belt on the air handler had failed... I called the local HVAC parts wholesaler and gave him the belt # (made in China btw...) and he said they had one and it was $3.87 with tax and they would hold it at the walk-in counter for me... so I went out and picked it up and installed it myself....

If my guys could have made it that day the service call would have been at least $125 plus parts which would have only been for them $3.87....

So you can see how the services component dominates the domestic prices...

rsp

Matt Franko said...

And before the crash a GM cost accounting guy testified that they pay more per car for retirees healthcare than steel....

rsp,

Vincent Cate said...

"Why would a Japanese bank provide USD balances that were rapidly appreciating vs the yen to a Japanese bondholder?

This is against the Japanese banks financial interests..."

I said brokerage account. I am sure that Japanese can invest in US bond funds from their brokerage account. The broker makes money on customers no matter what they invest in.

Vincent Cate said...

I want to point out that nobody here has explained any way that my CMMT theory conflicts with reality.

Six said...

Your CMMT theory conflicts with reality because "everyone" can't rush to get out of bonds. Every transaction has one player "rushing out" and one player "rushing in. Period.

Vincent Cate said...

"Your CMMT theory conflicts with reality because "everyone" can't rush to get out of bonds. Every transaction has one player "rushing out" and one player "rushing in. Period."

If they are short term bonds they can just wait till they mature. If the central bank is trying to peg interest rates (normal case these days) then they can sell to the central bank. Either way there are a lot of people getting out of bonds over a year. The dollar value in Japan over the next year can easily be more than the total taxes.

Thanks for at least trying to find a problem with CMMT.

Detroit Dan said...

This was a good discussion. I especially liked the comments by Brian.

However, I tend to agree with Y that Vincent's point of view is too far from MMT to make productive discussion possible. Thus, I don't see Japan going into hyperinflation in the near future as even remotely possible. Will. Not. Happen.

But perhaps we could spend our time more productively by looking at past hyperinflations. I appreciate when Vincent says "Hyperinflation is something of a hobby of mine." Nothing wrong with that.

Vincent, as a student of hyperinflation, what historical situation would you see is most similar to that of Japan today?

Six said...

"If they are short term bonds they can just wait till they mature. If the central bank is trying to peg interest rates (normal case these days) then they can sell to the central bank. Either way there are a lot of people getting out of bonds over a year."

The new bonds will be sold to primary dealers who sell them to banks. The banks have the option of holding excess reserves that return nothing (or .0025 in these unusual times) or buying bonds that pay whatever the government chooses to pay. That is how U.S. monetary operations work. Thanks for at least trying to find a problem with my critique of CMMT.

Here is how a hyperinflation could happen in the US or Japan or Canada or Australia or Norway or England:

They could lose a war and be forced to pay reparations in another currency or commodity. Or their productive capacity could magically disappear.

Vincent Cate said...

Dan, the backstory of how a government got to spending much more than they got in taxes is different in each case. As far as how the hyperinflation works, it really does not matter why they spent far more than they had in taxes. In most cases they just have a huge amount of bonds and then people get out of the bonds and the central bank buys them all. Sometimes it is a central bank losing all its reserves for some reason (trying to keep a peg when they had been printing too much money to do so or the government just stealing the reserves) and you can get hyperinflation without a bond panic. But most of the time it is just people getting out of bonds in a hurry. Japan will be the standard type.

Vincent Cate said...

Dan, have you ever seen anything else as close to MMT as CMMT is?

Tom Hickey said...

What happens when government bonds are sold is that a non-zero maturity net financial asset is exchanged for a zero maturity one in the same unit of account. This liquifies formerly desired saving in a "safe asset." That can be used for spending on real goods or assets, or saved in another financial instrument.

Presumably in the event of sudden currency aversion, sellers of a currency are fleeing the currency but still wish to save in a comparably safe asset. If they stay in the currency zone, that would require purchasing real assets like real estate, or precious metals or other valuable items, which drives up prices in those asset classes. The other option is selling the currency in the fx market for another currency to save or invest in another currency zone. Some of it may also go to the purchase of luxury goods in the currency zone.

There are two possible sources of buying when sellers dominate in the bond market, the cb and others. Same with the fx market for the currency.

If bond holders desire to shed bonds at the current interest rate, then the price of bonds will drop and yields will increase. If there is even a remote possibility that the bonds will be money good at some point in the future there will be a market at some yield. In the case of developed countries, the presumption is that the nation will eventually honor its obligations.

Central banks know this, and they also know that their own buying supports the price and therefore the yield. Therefore, a competent central bank will manage the drop in price to prevent a run and find the place where the increasing yield attracts buying.

Government bonds are also dependent on the condition of the country, and not only economically. This is a reason that high inflations and hyperinflations generally affect countries that are weak in many respects, such as underdeveloped countries, and countries devastated by war.

Similarly, countries with a lot of foreign reserves, especially in USD, can also support their currencies in currency markets and continue with necessary imports like USD-denominated oil. In addition, as Neil notes, central banks do currency swaps, and the Fed is quite liberal about doing this to come to the assistance of "partners" of the US.

Therefore, formulating a theory of hyperinflation just looking at monetary factors will fare as badly as the now discredited quantity theory of money as a predictive indicator of inflation. There are just too many other relevant factors, and it's also not a matter of events being controlled completely by markets. Governments can and do influence market behavior.

This seems especially obvious in the case of Japan, where the country is one of the most developed in the world, has a huge foreign exchange reserve being the second largest holder of USD externally, and is a net exporter whose economy gains financially from a drop in the exchange rate. It also has a government and cb willing to undertake innovative fiscal and monetary policy, and the country has strong institutional and a nationalistic people that tend to cooperate toward achieving national goals. So pressure is likely to come mostly from foreigners and foreigners are not large holders of Japanese debt, the Japanese being savers themselves.

In addition, a modern cb has many tools it can use to support currency and bonds (as Neil has noted). The EZ nations are in a much more precarious position than Japan, since they are dependent on the ECB. When the bonds of peripheral countries started tanking and rates rose sharply, the ECB simply announced that it would do what it takes to stabilize the market, and that was all it took to stem the flow out of bonds deemed at risk of default.

While anything not logically contradictory is possible, not everything that is possible is plausible, and what is plausible may not be probable enough to be useful as information about what is is likely to happen in the future, especially when a time frame is attached to it.

Vincent Cate said...


"and is a net exporter whose economy gains financially from a drop in the exchange rate. "

Japan used to be a net exporter but buying all this oil to generate electricity while the nuclear plants are offline has hurt that. Now when the price of oil in Yen goes up 8% over the last 5 weeks they do not gain financially.

http://www.tradingeconomics.com/japan/balance-of-trade

Tom Hickey said...

Why would a Japanese bank provide USD balances that were rapidly appreciating vs the yen to a Japanese bondholder?

This is against the Japanese banks financial interests...


Isn't it more likely that the government would impose capital controls at this point?

Vincent Cate said...

"Therefore, a competent central bank will manage the drop in price to prevent a run and find the place where the increasing yield attracts buying."

The government of Japan spends about 1/4th of their taxes on interest on the debt with interest rates around 1/4%. If the central bank lets interest rates go up to 1% to try to attract buyers, then all the taxes just cover the interest on the debt. This does not give bond buyers a warm feeling and get them to dive in. So if they let it go up to 2% the interest will be twice the taxes. Still not encouraging bond buyers. Then 3% they are 3 times taxes. Nope. It won't turn out well. They will keep printing till the Yen is worthless.

JK said...

Not sure why the hostility here. VC's piece seems like a good faith effort to make a point….

VC, the first line that stood out to be as confusing is this: "If people get worried that in the future the value of money will be less then they don't want to hold bonds."

So are you basically assuming hyperinflation - i.e. a revolt from the currency - and then saying "Look, hyperinflation can occur!" ….?

You ought to be much more clear here about 1) who "people" are; domestic consumers? domestic investors? international investors? etc. 2) when you say future value of the money, are you referring to it's domestic purchasing power, it's exchange rate, or a combination of both? 3) not wanting to hold bonds isn't necessarily a sign of imminent hyperinflation; it can be a liquidity trap where investors perceive that interest rates can only increase (bond prices can only decrease) and therefore want to remain mostly in cash so as to not inevitably suffer a capital loss.

Continuing from that point, you said: "However, the faster people get out of bonds the faster the government makes new money to pay off bonds, so once this process starts it feeds on itself and gets out of control. If over a year or two people get out of bonds then the money supply will increase very rapidly and you get hyperinflation."

No. Hyperinflation is not inevitable here. Again this could just be a liquidity trap. Why isn't a economic Boom a possibility, especially when we're talking about a highly industrialized country with a lot of technological capital / productive capacity?

Another point to nitpick at… you talk about bond sales reducing the money supply. That's probably not the best way to view bond sales. A better way to view them is that they change the composition of financial assets held by the non-government sectors. Bonds *are* part of the "money supply". They are just savings accounts that earn interest. If I move my money from a commercial bank checking account to a commercial bank savings account, I still count that money as part of my financial wealth. Likewise, holders of U.S. bonds still count those bonds as part of their financial wealth. Therefore they are part of the money supply… especially so when you consider how super liquid the bond market is. Anyone can turn there bonds into checking deposits very quickly.

That's enough for now.

JK said...

Just now read Tom Hickey's most recent comment. Yeah, what he said :)

Detroit Dan said...

Well said, Tom and JK.

Vincent-- I have twice asked you, as a self-identified hyperinflation hobbyist, to provide some historical examples which support your position with regard to Japan. I'm still waiting for your response, as I feel that historical examples will provide a grounding in reality that will help us to understand each other better.

With regard to "CMMT", I can't say that I have studied it and therefore can't say how close it is to MMT...

Tom Hickey said...

want to point out that nobody here has explained any way that my CMMT theory conflicts with reality.

Your theory is a simple model that is too simple to handle the complexity. The size of the public debt is the independent variable, and inflation/hyperinflation is the dependent variable. But there is no function specified. At least QTM and IS-LM specify functions. But both too simplistic to be useful as a predictive model or policy tool.

You delineate a general case that is so general it doesn't have any specifics that warrant it empirically wrt to money monetary systems and different economies. It's a tool that cannot be gainfully applied. It simply says that whenever confidence erodes in a currency to the point of currency aversion, then there is financial collapse that happens so suddenly that government can not control it. There is no specification of the point at which this occurs, nor any information allowing prediction of the turning point in confidence, that is, sudden reversal of expectations.

Moreover, I don't think you have the operations right wrt to bonds. You say:

If the total value of the bonds is multiples of the money supply, and government spending is twice taxes, then it will be forced to make lots of money if people stop buying bonds. The money supply will increase because spending is twice taxes, so creation is twice destruction, and because money is created to pay off bonds.

If bond demand falls, so does the price and yields rise. The cb may decide to support the interest rate by creating reserves to purchase bonds. This "new money" doesn't add to the amount of existing wealth, only to the liquidity (deposit accounts can be converted to currency) and spendable money supply (M1). So the question is about the effects of this.

This in itself doesn't lead to increase in domestic spending, as shown by QE in the US, for instance. QE was predicted to lead to inflation and even hyperinflation in the US base on QTM and it did not happen, although proponents continue to say, "Any day now."

Presumably, sudden bond selling comes from a belief that formerly safe assets were no longer safe. The chief motivation would seem to be to seek a stable store of value rather than to consume. So no substantial inflationary pressure resulting from increased demand for goods would be predicted.

Indeed the principal private holders of government securities includes banks, corporations, pension funds, the money market, and hedge funds. They are not going to use increased liquidity to buy consumption items but transfer it to other safe assets as an alternative.

There could be a flight into real assets domestically or capital flight. Increases in the prices of real assets might distort some markets but that is not economically debilitating, not does it necessarily lead to price inflation.

Capital flight can be addressed with capital controls imposed immediately, and if a country has exports, the fx rate will be supported by foreign importers taking advantage of a good deal to stock up.

A sudden fall in the fx rate could generate some price rises, e.g., in energy for energy importers, but only very weak economies are subject to large currency swings that result in domestic inflations, so that doesn't apply across the board to all countries.

So I don't see how this is a general theory to replace MMT that actually works.

Tom Hickey said...

They will keep printing till the Yen is worthless.

This is where MMT differs from CTM, Zero Hedge, and Austrian economics. Neither the USD or the yen are going to become "worthless." That's just nonsense.

Unknown said...

the fact is that vince cate has been educated on this subject by many people over the years but he has no desire to listen because what he wants is to reach the conclusion that hyperinflation is imminent. Then his warped austro-sadist gold-obsessed anti-government world-view will be vindicated.

Cate is as bonkers as bob roddis, he just appears to be more reasonable. He does not care what you write here because all he wants to do is reach the conclusion that hyperinflation is coming. Regardless of facts, logic, evidence. None of this matters to the obsessed ideologue.

He's like any number of other crazy goldbugs yapping incessantly about their pet obsessions.

There is no reasoning with someone like that.

Just as there is no reasoning with a Jehovah's Witness who ardently hopes and prays and believes that the end of the world is nigh. The obsessive hyperinflationist is not a rational creature.

Cate has had the same discussions over and over but he still makes the same basic errors and the same nonsensiccal arguments that have no logical structure but that inevitably always end with the conclusion that hyperinflation is coming. That is the only conclusion that will do.

Unknown said...

and yes I know I'm being nasty, but I just can't be bothered with these people any more. The 'austrian' ideology is mental disease that thrives on ignorance and deceit.

Joe said...

OK, I just read the entire thread. And as others have pointed out, I see no indication that Vincent understands how the sectoral balances work. As others have pointed out
"Bank deposits are exchanged for tuna, not converted into tuna. "
"Every transaction has one player "rushing out" and one player "rushing in."

Every transaction nets to zero. My bank account goes up $1, someone else's had to have gone by $1.

Vincent also seems worried that Govt's spend more than they collect in taxes. A growing economy with a growing population will need a growing supply of money. Over time, a population as a whole will want to earn more money than they spend, which is usually referred to as being "fiscally responsible" or "living within one's means". So in order to keep an economy humming along at full capacity the govt will need to, on average, run a deficit, precisely because everyone can't simultaneously run a surplus. This is exactly what we saw in 2008/2009, everyone in the private sector tried to suddenly run a surplus, because times were tough. We saw reduced economic activity, and thankfully the govt ran a large deficit to accommodate prvt sector's desire to net save. And we see the eurozone debacle, where no one seems to understand arithmetic there either, if germany has a surplus, well there must be a deficit somewhere else.

I see no indication at all that the austrian-types have any understanding at all of basic addition/subtraction applied to economic transactions, ie the sectoral balances, ie every surplus must be matched by a deficit somewhere else, ie all transactions net to zero.

Can someone who has studied it answer that for me? Cause the impression I get from austrian/libertarian commentary is that if we all just dig deep inside ourselves, work hard, and live within our means, we'll all become rich. As if arithmetic would no longer apply and every agent in the economy could run a surplus.

Tom Hickey said...

In fairness, that view has been dubbed "vulgar Austrianism," and there are Austrian-leaning economists and finance people who understand MMT and are basically in agreement with the MMT view on monetary operations and sectoral balances although they may differ on some other things like the effect of interest rates on investment, the role of credit extension in malinvestment. I am thin king of Ed Harrison and John Carney, for instance.

Similarly, MMT economists are moving closer to those Austrians wrt the role of credit creation in financial instability that leads to economic instability through Minsky, who was a student of Schumpeter. So it is not like there is nothing to talk about and debate for lack of common ground.

As Vincent points out, CMMT shares some agreement on monetary operations with MMT. Where I think he diverges is in accepting a revised version of the QTM with M being spendable money (M1) rather than reserve balance, more accurate called payment balances in this monetary system.

MMT economists agree with the identity MV=PQ, since it is an identity. The causal interpretation is where differences arise.

MMT can agree with Vince that if M taken as M1 instead of the monetary base increases as an independent variable, and cet. par., then this will affect the other variables, which are dependent wrt to M1. But how this will take place is not shown by the identity, and some theory has to be added.

Here is where MMT and CTTM differ. Vince argues that a sufficient increase in M1 exogenously through cb open market operations crediting deposit accounts will necessarily result in an increase in the price level, assuming Q and V constant. This is another version of the old QTM, which took M to be the monetary base and which has been discredited.

But what Vince seems to be arguing is not that the increase in M1 actually leading to inflation through a greatly increased spending desire, but rather knowledge of the potential for this will provoke sufficiently strong expectation of that eventuality. At some (unspecified) point this will result in currency aversion, including aversion to holding bonds, that will feed back on itself leading to spiraling growth in M1 that will reinforce inflationary expectations.

VC then propose this dilemma: On one horn, if the cb doesn't purchase the unwanted bonds then the price will fall and government borrowing costs will skyrocket to an unsustainable level, sparking currency aversion. On the other, if the cb monetizes bonds through open market operations to set the rate, then M1 will skyrocket, creating inflationary expectations that will result in currency aversion.

MMT would say that this could be a possibility in some contexts but that they are sufficiently unusual contexts to make the theory insufficient as a general case description since there are many contexts in which this will not take place owing to factors that assumed away through cet. par. There are however, many factors that the theory doesn't take into consideration that affect outcomes.

So it seems that the model is an oversimplification that ignores relevant variables and also presumes broad expectation that an increasing M1 necessarily leads to exceptionally strong inflationary expectation at some point. Vince suggests that this takes place when the ratio of bonds to tax receipts reaches a certain point implying that government has lost control of its finances. That would require further specification and substantiation as a "general law of money," as he seems to think it is.

Ignacio said...

"As if arithmetic would no longer apply and every agent in the economy could run a surplus."

Well, if you think that money comes from trees or digging in the ground it's logic. They think that "money comes from work" in the same way most of the population equates money with work too, ie. money is manufactured by work instead of pressing some keys in a computer (created ex-nihilo).


They can't cope with the reality of how monetary systems work and that money is an human fabrication, not something that you have to work to manufacture. that's why some people is such a sucker for gold standard.

Brian Romanchuk said...

I'm just starting to write a post on the theory of hyperinflation. I can't cover every conceivable tangent Vincent raised, but I explain what the theory should look like.

Tom Hickey said...

Great. I'll post a link.

Tom Hickey said...

What is generally overlooked that bank credit extension is chiefly about liquifying collateral and that a loan agreement is essentially a legal claim on borrowers’ property that is pledged as collateral in a secured loan and on the totality of a borrowers assets in the case of unsecured credit.

So it not exactly like bank credit is money created out of nothing. It is created based ability to repay and a legal claim on assets that liquifies assets temporarily until the loan obligation is satisfied in full and the loan is discharged.

Tom Hickey said...

Oops. Should be "or" the loan is discharged rather than "and."

Matt Franko said...

Right Tom the actual construction is funded with trade credit... laborers dont get paid for 3 weeks delay and the vendors are net 30 (at best!)....

Then progress payments and/or mortgages come after the property is completed... rsp,

Greg said...

Been out of town and missed most of this one! DAMN!!

I have to first confess I haven't read Vinces latest piece, but I have plenty of experience with Vince and his arguments.
I have a little bit of Y's response in me......... but I also think Vince is an earnest guy trying to figure things out. He just thinks he's found it.

I think he has become enamored with his theory and therefore only finds the evidence which supports it.... even when that evidence may support something else as well. I haven't done the research but it might be interesting to see how many times in the past that Japan has had an 8% or more fall in the Yen over a five week period. That might be just one example of his eagerness to find disaster in fairly mundane data.

He has obviously been somewhat persuaded by MMT. He would not have written this article 3 years ago. He has had to alter his thinking some based on some of the insights MMT offers.


Matt commented;

"If my guys could have made it that day the service call would have been at least $125 plus parts which would have only been for them $3.87....
So you can see how the services component dominates the domestic prices..."

I actually think that it is a good thing to have a service economy..... its all about the price of the services however. If the average guy is priced out that shrinks a service economy.

I like concentrating on what I do and let others do what they do well. Id much rather pay someone to mow my grass than mow it myself after a day of my work. AND I think it is better overall if we have more people who pay others to do things they used to do them selves. It gets more people involved in the economy and that is gooooood

Brian Romanchuk said...

My post is up... phew.

Tom Hickey said...

I already posted a link.

Vincent Cate said...

"Vincent also seems worried that Govt's spend more than they collect in taxes. A growing economy with a growing population will need a growing supply of money."

The numbers matter. If a government is growing the money supply by 3% per year things are probably fine. If it is growing the money supply by 50% per year, there is a real risk of things spiralling out of control.

Vincent Cate said...

"Neither the USD or the yen are going to become "worthless." That's just nonsense."

Japan's currency became worthless after WW2.

In the revolutionary war the US currency, the "Continental" became worthless.

In the South during the civil war the currency became worthless.

One of my readers sent me an email some time back pointing out that Ukraine was at risk of hyperinflation. This was before the revolution and fighting. I think that when countries are at risk of hyperinflation they are weak and at more risk for revolution and war. Japan may be at war with China in the near future. The currency may end up worthless.

Vincent Cate said...

"This in itself doesn't lead to increase in domestic spending, as shown by QE in the US, for instance. QE was predicted to lead to inflation and even hyperinflation in the US base on QTM and it did not happen, although proponents continue to say, "Any day now.""

The CMMT model with the central bank and the government in one black box means that excess reserves and government bonds look the same outside the black box. So in this model they are not part of the money supply and do not cause inflation. CMMT handles what QE did just fine.

Vincent Cate said...

"Another point to nitpick at… you talk about bond sales reducing the money supply. That's probably not the best way to view bond sales. A better way to view them is that they change the composition of financial assets held by the non-government sectors. Bonds *are* part of the "money supply". "

I know the standard MMT view. But in that view monetization is "just an asset swap" and does not matter. In the real world when the central bank monetizes a huge national debt, you get hyperinflation. So MMT does not match reality when it comes to monetization. So I fixed it in CMMT.

Vincent Cate said...

"VC then propose this dilemma: On one horn, if the cb doesn't purchase the unwanted bonds then the price will fall and government borrowing costs will skyrocket to an unsustainable level, sparking currency aversion. On the other, if the cb monetizes bonds through open market operations to set the rate, then M1 will skyrocket, creating inflationary expectations that will result in currency aversion."

This is the big problem that MMT, Krugman, Monetarists, etc don't face up to. How can Japan get out of the situation it has gotten itself into without hyperinflation? If it cuts its budget in half the economy tanks, and there is just no way the politicians would do that. There is no feasible good solution to the bad situation it has gotten itself into.

Tom Hickey said...

All the result of war. War can be very inflationary, especially is institutions like tax collection are impaired. The Confederacy was unable to collect taxes, for example, while the Union was. Japan, of course, was defeated and occupied.

It's possible that if the US were hit with a massive pre-emptive nuclear strike, the currency could collapse along with the nation. Or a massive eruption of the Yellowstone subterranean volcano. It's not going to happen due to either fiscal or monetary policy, and it isn't going to happen in Japan either.

The notion that Japan and the US are facing eventual high inflation or hyperinflation as these government desperately try to ignite their economies and stoke a bit of inflation to provide a margin of safety against deflation is necessarily going to end in galloping inflation or hyperinflation is implausible for the many reason already mentioned.

The US imposed rationing and wage & price controls during WWII, as well as encouraging saving as a patriotic duty using "war bonds," which acts like a tax. It worked fine and there was no post-war explosion of inflation. Instead there was a long period of prosperity and relative price stability.

Weak countries are at risk for a lot of things and high inflation and even hyperinflation are possibilities. But this is not primarily a result of monetary or fiscal policy. Since independence from Russia and the rule of oligarchs, Ukraine has been a kleptocracy bleed by corruption, incompetent government, and weak institutions.

The Underachiever: Ukraine's Economy Since 1991

These are special cases that don't fit well into a general theory of inflation or hyperinflation based on monetary and fiscal changes.

Tom Hickey said...

The CMMT model with the central bank and the government in one black box means that excess reserves and government bonds look the same outside the black box. So in this model they are not part of the money supply and do not cause inflation. CMMT handles what QE did just fine.

QE was accompanied by a significant increase in M1. At least some of the increase in bank deposits was a result of the Fed buying bonds held by the non-bank private sector. No increased consumption or investment, and no inflation.

Vincent Cate said...


"QE was accompanied by a significant increase in M1. At least some of the increase in bank deposits was a result of the Fed buying bonds held by the non-bank private sector. No increased consumption or investment, and no inflation."

The velocity of money also goes down when interest rates go down. Hussman.
This can compensate for the increased quantity of money for some time.

Tom Hickey said...

In the real world when the central bank monetizes a huge national debt

Example?

QE can be seen as debt monetization. When the government was running a large deficit for stimulus, the Fed was buying a massive amount bonds that in aggregate amounted to "monetizing the debt." While the Treasury was issuing bonds, the Fed was taking them off the table, resulting in an increase not only in the monetary base but also M1. With it the notion of bond issuance sterilizing currency issuance collapsed. The Treasury might as well have been issuing currency directly.

This greatly chagrined the inflationistas. Just today, I was perusing another explanation that there really is a huge inflation happening but government is fudging the reporting to cover it up, and the cbs are bidding down gold to cover up that angle, too. It's all conspiracy theory.

QE was supposed to do increase M1 both by converting bonds into deposit accounts and also increasing liquidity and low rates for lending in order to induce firm investment and support asset markets that would be affected by deleveraging. Keeping long term rate low would also support the housing market, which of course was a major concern. Well, it seems to have driven equities higher than they would have been otherwise, but corporate profits also account for that. The housing market didn't collapse because big investors bought up bundled real estate.

Corporate investment has increased somewhat but not what one would expect in a recovery, and consumer spending is also weak for a recovery.

So there is no evidence that run up in M1 has done much. One could argue that all the spendable money sitting in deposit accounts will either rush into consumption spending and drive up the price level, or else be used to purchase foreign exchange, depressing the dollar. Those are possibilities but there doesn't seem to be any good reason to think that of all the possible options these are very likely.

Tom Hickey said...

"VC then propose this dilemma: On one horn, if the cb doesn't purchase the unwanted bonds then the price will fall and government borrowing costs will skyrocket to an unsustainable level, sparking currency aversion. On the other, if the cb monetizes bonds through open market operations to set the rate, then M1 will skyrocket, creating inflationary expectations that will result in currency aversion."

This is the big problem that MMT, Krugman, Monetarists, etc don't face up to. How can Japan get out of the situation it has gotten itself into without hyperinflation? If it cuts its budget in half the economy tanks, and there is just no way the politicians would do that. There is no feasible good solution to the bad situation it has gotten itself into.


There is also V and Q in the equation in addition to P and M. V can be looked as the ratio between saving and spending desire. If saving desire remains high, as it has been, then no problem.

Again, if Q expands, which means the economy begins to grow, then that indicates the private sector has achieved its saving goal is beginning to spend, sending a signal to firms to invest. At this point interest rates will rise making bonds more attractive and taxes will increase automatically as recovery kicks in. Then the need for deficit spending decreases as the private domestic sector begins using bank credit again to finance growth.

There are a whole lot of possible scenarios based on changing sectoral balances. The question is which are more plausible than others, along with how to know this. What the balance between risk and uncertainty? This is not a theoretical question either, since it involves the context of Japanese culture, institutions, and characteristic behaviors, making this context quite different from, say, the American context.

Tom Hickey said...

The velocity of money also goes down when interest rates go down. Hussman.
This can compensate for the increased quantity of money for some time.


Means saving/deleveraging predominates over spending (consumption and investment) desire. As that saving desire is satisfied, then increasing consumption desire sends a signal to firms to increase investment to bring out an adjustment in saving and saving desire.

While V is volatile, that doesn't necessarily imply that a high saving desire resulting in a build up in savings will result in a sudden spending spree that accelerates the price level drastically.

The consensus on Japan, for example, is that deleveraging is not yet complete after the big credit binge, with the banks still not in good shape, as well the increased saving desire is also due to the aging demographic.

Anonymous said...

"All the result of war. War can be very inflationary, especially is institutions like tax collection are impaired."

As was the case in Weimar, where there was a loose coalition of nations, but no central fiscal authority.

Brian Romanchuk said...

"This is the big problem that MMT, Krugman, Monetarists, etc don't face up to. How can Japan get out of the situation it has gotten itself into without hyperinflation? If it cuts its budget in half the economy tanks, and there is just no way the politicians would do that. There is no feasible good solution to the bad situation it has gotten itself into."

Why is the situation "bad"? This assessment is based on a metric (the debt-GDP ratio) that has limited theoretical usefulness. Japan's macro performance has been fairly good over the past few decades, if you keep in mind that the working population is shrinking.

In any event, the high debt-GDP ratio just tells us that the Japanese private sector has saved a lot of yen. When the private sector wants to save less, the debt-GDP ratio will fall. This can happen in any number of ways, not all of which are negative.

Vincent Cate said...

"In the real world when the central bank monetizes a huge national debt

Example?"

In almost all cases of hyperinflation what is going on is the central bank is monetizing debt. There are a few where the central bank has lost their reserves. In MMT this monetization is "just an asset swap" and does not matter. But in the real world huge monetizations come with huge inflation (I think the experiments of last 6 years can't be counted as concluded yet, so please set them aside for now).

Vincent Cate said...

""This is the big problem that MMT, Krugman, Monetarists, etc don't face up to. How can Japan get out of the situation it has gotten itself into without hyperinflation? If it cuts its budget in half the economy tanks, and there is just no way the politicians would do that. There is no feasible good solution to the bad situation it has gotten itself into."

Why is the situation "bad"?"

Here is the situation facing Japan:
1) 1/4th of their taxes goes to
paying interest when debt is at only 1/4% interest rate
2) Spending is twice taxes
3) The debt is equal to something
like 10 years worth of taxes.
4) Only the central bank is a net buyer of government bonds
5) Much of the debt is short term

Now here is the problem. If the investors stop rolling over bonds, a bunch of bonds come due. If inflation picks up then want to reduce the growth in the money supply.

So the choices they have:
1) Raise interest rates. If rates are 1% then all the taxes go to paying interest on debt. Will not attract bond buyers so they would have to keep printing money. If they try 2% or 3% then interest is 2 or 3 times taxes. Still does not attract bond buyers.

2) Cut the budget. They are spending twice taxes so they would have to cut half of expenses just to balance the budget. Still does not cover the bonds not being rolled over, and the economy crashes.

3) Increase taxes. If 1/4 of the debt is due this year and not rolled over, then it is 2.5 times this years taxes. There is no way they can increase taxes enough.

How can Japan control M1, M2 if inflation picks up and people stop wanting to buy/hold/roll-over their bonds? It seems a very bad situation to me.

It is like they have lost control of the amount of money that will be created and there is no way they can get in control again. If so, they get hyperinflation. This is bad.

Can you see any way they can control things?

Vincent Cate said...

"Your theory is a simple model that is too simple to handle the complexity."

It explains hyperinflation. It is a death spiral as people get out of bonds and the government makes more money to pay them off. I am sure that hyperinflation is a death spiral or positive feedback loop and you can't use standard MMT to get one. This is why it was invented, so an MMT sort of view can explain hyperinflation. Mission accomplished. :-)

http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html

Vincent Cate said...

"Your theory is a simple model that is too simple to handle the complexity."

I would argue that MMT is too simple to handle the complexity of hyperinflation because it lumps transactional money and government bonds into their definition of money. While CMMT, which separates these two, has enough complexity to handle hyperinflation. Since hyperinflation is usually how fiat money dies, a good theory of money should handle this case.

Anonymous said...

For some reason I seem to be unable to comment on Cates's site, so let me say something here. In explaining hyperinflation by the equation of exchange, MV = PY, he talks about the government imposing price controls, which leads to a reduction in GDP (i.e., Y), which only makes hyperinflation worse. I don't follow that.

Cates starts with accelerating inflation, with increasing M, V, and P. Then he says that the government imposes price controls, so that P remains constant. And then he says that that result is lower GDP, so that Y declines. That means that PY declines, and that means that MV declines. But he also assumes that MV continues to accelerate. That's a contradiction.

Anonymous said...

Vincent Cate:

"Here is the situation facing Japan:
1) 1/4th of their taxes goes to
paying interest when debt is at only 1/4% interest rate
2) Spending is twice taxes
3) The debt is equal to something
like 10 years worth of taxes."

Does not compute. If 1/4 of their taxes equals 1/4% of their debt, then 100% of their taxes equals 1% of their debt, and their debt is equal to 100 years worth of taxes.

Vincent Cate said...

" Then he says that the government imposes price controls, so that P remains constant. And then he says that that result is lower GDP, so that Y declines. That means that PY declines, and that means that MV declines. But he also assumes that MV continues to accelerate. That's a contradiction."

If Y declines and PY declines it does not follow that MV declines. What really happens is that P goes up even more.

When your real GNP is goes down, and quantity and velocity of money are not changing or increasing, then price level must go up.

As for your "does not compute", you did find a problem. Will try to find out what the numbers really should be.

Vincent Cate said...

Really I mean if Y declines does not mean PY declines. It can be that P goes up enough to keep PY constant.

Tom Hickey said...

Vince, I think that argument is summed up in your comment on Matias Vernengo's post on inflation and hyperinflation at Naked Keynesianism.

MV: "In other words, causality runs from the exchange rate to the price level. That means that the rise in the price level cannot be related to the increase in the money supply. "

VC: This is not correct. The increase in the money supply can cause the exchange rate change, and that in turn the inflation.


The difference between monetarism and PKE is disagreement over causality.

In your view, expectation of an exploding M1 that government cannot avoid can result in a sudden hyperinflation even in a developed country like Japan.

PKE and MMT disagree.

You've walked your talk and placed your bet in the market. We'll see if hyperinflation ensues as your theory predicts it will.

Vincent Cate said...

I guess Japan's average interest must be more like 1% since some of the debt was from some time back. Still, the point is that increasing interest rates makes the government look bankrupt and which does not make bond buyers want to jump in. If the interest on the debt is more than the taxes you can be sure they must print lots of money and bond buyers do not do well when there is lots of money being printed, so they won't want to buy.

Vincent Cate said...

"In your view, expectation of an exploding M1 that government cannot avoid can result in a sudden hyperinflation even in a developed country like Japan."

Not exactly. It is not that I think people understand what is going on and so expect exploding M1. It is that this death spiral starts which includes exploding M1 and the government can not stop it.

Yes, we will see. I think it is less than a year for Japan's FX market to crash and prices to go up with only a small delay after that (less than half a year).

Vincent Cate said...


It amuses me a bit that we have both:

MV: "In other words, causality runs from the exchange rate to the price level. That means that the rise in the price level cannot be related to the increase in the money supply. "

And also Brian:
"There's been some discussion here about the effect of currency moves on domestic economies. If you actually look at data in developed countries like Canada and Australia, you see that fairly huge currency moves transfer into very little impact on the domestic price level. Developed economies are weighted towards services, and the exchange rate has little impact."

Of course really it works a bit both ways.

Tom Hickey said...

When your real GNP is goes down, and quantity and velocity of money are not changing or increasing, then price level must go up.

When Y declines so do domestic income household and firm incomes of which Y is an aggregate estimate. This implies several thing that obviate P (estimated price level) continually increasing.

First, many prices in a modern monetary production economy are fixed/administered rather than flexible because economic calculation by firms necessitates stability so firms contract forward costs and .

The neoclassical and Austrian views of immediate adjustment of flexible prices in market is based on stylized assumption that are not representational of the way the economy actual works . It's not the way business is done and this is legal rather an economic in that it involves contract. Planning requires locking in forward costs and prices among firms. Moreover, competition entails adjusting quantity rather than price through inventory, and it also involves adjusting profit share.

Secondly, a falling Y means a contracting economy and less spending. Spending by one party is another party's income. With incomes falling, debt obligations become more difficult to meet since the principle and interest are fixed legally. The result is disinflation and if there is a sufficient level of private debt, then debt deflation and depression can ensue.

Third, MV=PY is an identity that says nothing about causality. Imputing causality entails theory, which entails a conceptual model, which implies assumptions. We are arguing over the assumptions of a theory, not the identity. Monetarism in general imputes causality differently than Post Keynesianism broadly speaking. It doesn't matter whether M is taken to be the monetary base, M1, M1 plus short-term tsys, M1 plus all government securities, etc.

According to PKE and MMT, demand-induced inflation happens when demand exceeds the capacity of an economy to expand quickly enough to supply it. Then it can be addressed by lowering demand, presuming that all available resources are in use. Supply-induced inflation is different in that supply contracts, such as an oil shortage, while demand remains the same, so the issue becomes alternative sourcing, substitution or rationing since increasing fuel efficiency is not a short term solution.

But now we are repeating an argument that has already been had many times.

Tom Hickey said...

Still, the point is that increasing interest rates makes the government look bankrupt and which does not make bond buyers want to jump in.

Recently in the EZ we had a test of this when peripheral debt yields climbed very high owing to rising buyer resistance. This cost these governments more but people were still willing to buy the bonds at those rates, clearly expecting that TPTB would sustain the system, which they did.

Granted that this may not have been the case is a weak country, but bone buyers did not consider these countries actually weak since they were members of the EZ and they were betting that the ECB would intervene, which it did.

There is always a price for just about anything. When it comes to bonds or currency of a developed country, there is never a question of either its bonds or currency becoming worthless short of political insanity or the destruction of the producing power of the nation.

Of course, it is possible that Greece could have left the EZ, repudiated its euro debts and converted them to drachma debt. That was the chance to take there.

Anonymous said...

Vincent Cate (Sorry about misspelling your name before. :( ) wrote:

"If Y declines and PY declines it does not follow that MV declines"

Of course it does. Using subscripts, we have:

M0V0 = PY0 ; (No subscript for P because it remains constant.)

M1V1 = PY1;

Y0 > Y1 ; GDP declines

PY0 > PY1

M0V0 > M1V1 ; Substitution

Thus MV declines. QED.

Anonymous said...

Vincent Cate: "Really I mean if Y declines does not mean PY declines. It can be that P goes up enough to keep PY constant."

Except that you are positing price controls.

Tom Hickey said...

Not exactly. It is not that I think people understand what is going on and so expect exploding M1. It is that this death spiral starts which includes exploding M1 and the government can not stop it.

OK. That for the clarification.

Vincent Cate said...

"Vincent Cate: "Really I mean if Y declines does not mean PY declines. It can be that P goes up enough to keep PY constant."

Except that you are positing price controls."

Ah, I see. Well, price controls don't really work except that they really do hurt the real GNP. What happens is people are told you can only sell X for $Y and so they just hold onto X till either they can sell it black market or till the government changes $Y to some higher and more reasonable number. When the government sees that the market is not sullying any of some good at some price they eventually have to agree to raise that price. The sellers figure this out early on.

Vincent Cate said...

The Eurozone is a different thing than a normal country. If the European central bank bails out a small country it does not mean the currency will be devalued much or at all. If the central bank of Japan funds the Japanese deficit, the currency will go down eventually. So what worked for Greece may not work for Japan.

The Eurozone is also hard to figure out in terms of hyperinflation. A normal government will always get its central bank to buy its bonds if it gets into trouble. So far the European countries have gotten the central bank to buy their bonds, but they don't have the kind of power over the central bank that Japan has over their central bank. If inflation gets high in the Eurozone the central bank might have the ability to stop buying government bonds. I would not expect the Japanese central bank to be able to stop buying Japanese bonds unless others were buying them, which I no longer expect.

On the other hand if Germany left the Eurozone it could get hyperinflation right away.

In any case, the Euro is not like my standard hyperinflation case of forced monetization of a huge debt.

Vincent Cate said...

"Secondly, a falling Y means a contracting economy and less spending."

In hyperinflation the real economy always does poorly. Remember, Y is "real GNP", so even if in nominal terms there is much more spending, the real value of good can be down. A country with hyperinflation is a poorly functioning economy. It is hard to do business when the government is raising taxes left and right and prices are changing fast. Many times you are best off just to leave a country with hyperinflation and come back when it is over. I believe real GNP always drops.

Tom Hickey said...

If the central bank of Japan funds the Japanese deficit, the currency will go down eventually.

That's the Zero Hedge Austrian view. The rest of the world is still waiting for "any day now."

In fairness this is similar to the PKE view of growing private debt that ultimately resulted in the bursting of a bubble that went on a lot longer than many on the PKE side expected.

Similarly there is disagreement in the PKE-MMT set over trade balance and balance of payment issues.

In all cases there is no model that puts a time frame on the prediction, which from the POV of the mainstream is no improvement over attribution of sudden changes not predicted by the model to a shock.

So there is a lot of uncertainty involved and little basis for assigning probability other than "in the long run." Here the issue is long run sustainability and as Keynes observed the market can remain irrational longer than participants can remain solvent. Which is why many prefer trading short terms in contexts that more predictable.

Again, the question is between logical necessity-impossibility and degrees of probability. Regarding logical necessity-impossibility, identities demarcate the boundaries, but interpreting what identities may entail in context requires theoretical interpretation over which there is often little agreement. Even where this is agreement, there is often insufficient information to make models predictive with any degree of accuracy.

That's why it’s a casino, folks. Place your bets.

Vincent Cate said...


There is understanding in general terms and there is knowing the timing. Knowing the timing is far harder.

However, you can get bets pay off 100x if Japan has hyperinflation in the next year. You could keep placing bets like this every year and still come out ahead if they get it in less than 99 years. (ya, interest, opportunity cost, etc but I am thinking at most a couple more years) The point is you can probably do well even if you can't get the timing exactly right.

Vincent Cate said...

PS I think the probability of Japan getting hyperinflation in the next year is over 50%, so a 100x bet seems like a fine gamble to me.

Anonymous said...

Vincent Cate: "Really I mean if Y declines does not mean PY declines. It can be that P goes up enough to keep PY constant."

Bill: "Except that you are positing price controls."

Vincent Cate: "Ah, I see. Well, price controls don't really work except that they really do hurt the real GNP. What happens is people are told you can only sell X for $Y and so they just hold onto X till either they can sell it black market or till the government changes $Y to some higher and more reasonable number. When the government sees that the market is not sullying any of some good at some price they eventually have to agree to raise that price. The sellers figure this out early on."

Assuming that to be the case, you still have a period in which MV is declining or has declined. Just to say that the government eventually raises prices does not make an argument for hyperinflation.

It really sounds like you are assuming hyperinflation, and coming up with scenarios that make it so.

Vincent Cate said...

"He has obviously been somewhat persuaded by MMT. He would not have written this article 3 years ago. He has had to alter his thinking some based on some of the insights MMT offers."

Yes. All true. But I think there is more than one good way of explaining our complex economic things, as long as they all match reality. There was clearly some truth to MMT but it just did not seem like MMT matched the reality of hyperinflation, so I had to fix it a bit. In the end, I think CMMT is elegantly simple and very accurate way of thinking of things.

Vincent Cate said...

"Assuming that to be the case, you still have a period in which MV is declining or has declined. Just to say that the government eventually raises prices does not make an argument for hyperinflation.

It really sounds like you are assuming hyperinflation, and coming up with scenarios that make it so."

I look at hyperinflation as the tripple wammy of inflation, using the equation of exchange. It is when the quantity of money has out of control growth (the government/bank can't stop), the velocity of money is going up fast, and the GNP is going down. You always get all 3 of these. However, the GNP going down is a much smaller effect. Maybe you get a factor of 2 here. The quantity of money and the velocity of money have changes far greater than a factor of 2.

The GNP going down is not the core cause of hyperinflation.

Tom Hickey said...

If real GDP declines the price level does not rise unless MV is constant. However, if M = M1, the chief component of M1 is bank deposits created by bank credit according to endogenous money theory. The government deficit contributes relatively little in comparison to private credit extension in a modern economy.

If real GPD contracts, then incomes fall and credit creation also falls owing to reduce ability to repay unless, of course, banks ignore prudent lending practice. This is tantamount to a reduction in MV.

So if Y falls and incomes are reduced, reducing MV, then the conclusion that P necessarily increases owing to the identity fails. Bill provides the algebra above.

Say the public debt is monetized. If this simply results in other saving instruments being used instead, there is no increase in spending. This is precisely what happened in the case of QE in the US.

Even if the government adds more net financial assets instead of swapping bond for rb, some of which increases M1 due to crediting deposit accounts for non-bank bond sales, no change in spending occurs that drives up the price level if this injection is also saved.

This is what has been happening in Japan, for example, where saving desire is not yet satisfied.There is no evidence to suggest that this behavior is changing. Eventually that saving desire will be satisfied and people will start spending and the economy will grow again. There is no good reason to expect that when saving desire is satisfied or even before, the Japanese will begin to get concerned that the govern is doing too much to influence the economy and shed run into buying other currencies or spending to shed bank deposits.

It takes a special circumstances for increased M1 to result in a rising price level. First, an economy that can't respond to increased spending desire, which means an economy using its available resources to achieve maximum output and imports cannot soak up the rest of the spending desire, or that productive capacity has been diminished. Secondly, there is no increased interest in saving in the currency other vehicles than governments. For example, the Japanese are notorious savers in art and collectibles.

Another possibility is currency aversion for whatever reason, again a set of special cases, that drive sale of the currency in the fx market to the degree that the cb does not have the ability to stem. This depresses the exchange rate to the degree that it results in domestic inflation. Again a very special case. This can also result from balance of payment issues that provoke domestic inflation that leads to very high inflation, but his generally affects smaller, weaker and emerging nations.

Vincent Cate said...

"If real GDP declines the price level does not rise unless MV is constant."

Or if MV is increasing. In hyperinflation MV is increasing almost every day.

Tom Hickey said...

The prediction assumes that saving desire to spending desire in the yen will shift suddenly enough for government to be able to deal with it and the result will be galloping inflation culminating in hyperinflation or that currency aversion will lead to a a collapse in the exchange rate.

No evidence provided other than an expectation that this MUST happen owing to the dynamics of MV=PY given the Japanese context.

My view is that is much more likely that at some point a recovery will begin when the context shifts in Japan away from high saving desire. The obstacles seem to be the aging demographic, bank balance sheets still impaired, and a global economy that is rolling over. The risk for Japan is deflation, as it is also for the EZ.

The fall in the yen against the dollar is deceptive. For example, the yen is down wrt the dollar but up wrt to pound and euro. This shows more dollar strength than yen weakness as the US seems to be recovering modestly and interest rates are expected to rise while other economies languish.

Vincent Cate said...

"The fall in the yen against the dollar is deceptive. For example, the yen is down wrt the dollar but up wrt to pound and euro. "

In about 5 weeks it has gone from 171 yen/pound to 178 yen/pound. The Yen is down.

http://www.x-rates.com/graph/?from=GBP&to=JPY&amount=1

About 136 yen/euro to 139 yen/euro. Again, the yen is less valuable.

http://www.x-rates.com/graph/?from=EUR&to=JPY&amount=1

Vincent Cate said...

"The prediction assumes that saving desire to spending desire in the yen will shift suddenly enough for government to be able to deal with it and the result will be galloping inflation culminating in hyperinflation or that currency aversion will lead to a a collapse in the exchange rate. "

The Japanese 10 year bond pays 0.5% per year and the Yen is down 8% in the last 5 weeks. It is not the generic "savings desire" that has to change, just the "desire to hold Japanese government bonds paying crazy low interest rates given the risk of the Yen losing value". There are other ways of saving than buying JGBs.

And it is not just some sudden change. At first a few people change, but that hurts the value of the Yen. Then a few more change. Then it becomes a positive feedback loop and there is a stampede out of Yen. Any small think could get it started, then it feeds on itself. My guess is that this 8% drop is enough for people to realize, "only complete fools lock their money up in Yen for the next 10 years at 0.5% interest rate".

Tom Hickey said...

"If real GDP declines the price level does not rise unless MV is constant."

Or if MV is increasing. In hyperinflation MV is increasing almost every day.


Yes, or "rising was implied."

This implies that demand is increasing while supply is decreasing.

P = MV/Y

P increases if either the numerator increases or the denominator decreases, or some combination. MV increasing with Y decreasing leads to rapidly increasing P

So one is arguing that.

The issue is the conditions that can result in this.

If M is increasing cet par then P is also increasing. This can be exacerbated or offset by V and Y.

Inflation is predicted if M is increasing then P is also increasing if Y is falling whether or not V constant or increasing, but a decreasing V will act similarly to an increasing Y in maintaining price stability.

So if M1 is increasing either exogenously from government or endogenously from credit then the economy must expand or saving increase to avoid an increase in P.

So I don't think there is any disagreement about his. The disagreement is about how the variable actually behave in different contexts and no theoretical model has developed that is general enough to cover all the cases. So we have analysis of specific cases and have to choose which model is appropriate to various contexts. The question than becomes criteria for making this choice.

This what we are arguing about.

Vincent Cate said...

"The issue is the conditions that can result in this."

Right. In forest fires, volcanoes, avalanches there are experts that know how to tell if a chain reaction could happen. In these cases it is natural science. They know what to measure and test for. With hyperinflation nobody has really this well quantified. Also, it is dealing with different humans, institutions, governments, central banks, press, etc in each case. We know conditions like Japan in a South American country would have already resulted in hyperinflation. But we don't know exactly how much further Japan can go. And it may not really be knowable. Even the best of experts can not say exactly when an earthquake chain reaction will start. Hyperinflation could well be much harder to predict than earthquakes (people being more complicated than dirt).

Jose Guilherme said...

If inflation gets high in the Eurozone the central bank might have the ability to stop buying government bonds

This statement is simply not correct - the ECB isn´t buying any government bonds.

Vincent Cate said...

"This statement is simply not correct - the ECB isn´t buying any government bonds."

As I understand it the ECB said they would "do whatever it takes" and then said they would take government bonds as collateral for loans at full face value. So a bank can buy some discounted Italian bonds and then give these to the ECB and get more money than they are worth.

So the ECB makes money out of thin air, pays it out, and then has the bonds.

If the bank does not pay them back the ECB ends up with the bonds. So while you are right, there is not really much difference from what I said.

Greg said...

"
Here is the situation facing Japan:
1) 1/4th of their taxes goes to
paying interest when debt is at only 1/4% interest rate
2) Spending is twice taxes
3) The debt is equal to something
like 10 years worth of taxes.
4) Only the central bank is a net buyer of government bonds
5) Much of the debt is short term

Now here is the problem. If the investors stop rolling over bonds, a bunch of bonds come due. If inflation picks up then want to reduce the growth in the money supply.

So the choices they have:
1) Raise interest rates. If rates are 1% then all the taxes go to paying interest on debt. Will not attract bond buyers so they would have to keep printing money. If they try 2% or 3% then interest is 2 or 3 times taxes. Still does not attract bond buyers.

2) Cut the budget. They are spending twice taxes so they would have to cut half of expenses just to balance the budget. Still does not cover the bonds not being rolled over, and the economy crashes.

3) Increase taxes. If 1/4 of the debt is due this year and not rolled over, then it is 2.5 times this years taxes. There is no way they can increase taxes enough"
----------------------

This is a very good exposition of the issues surrounding government budget constraints, at least as they are described within the neoliberal/supply side framework, but I think you miss a few other options of response.

I take issue with your idea that a stoppage of bond rollovers and bonds becoming "due" is a problem. All that means is the holders of these bonds now have cash....... so what? If the stoppage is voluntary on the part of the bondholders (which is what I think you are implying) then they now have cash which they will spend on some other savings vehicle. Your fear is that they will now want to consume with this flood of money. Where is your evidence that this is the type of behavior that will result? Why do savers suddenly become spenders if supplies of real goods and services hasn't changed. I think its much more likely that these savers will continue to save in some way other than Japanese govt bonds. You really mean to tell me that you think losing .25 cents worth of interest on a dollar would cause you to do something extreme and just forgo saving altogether and just start consuming? Doubtful

As far as your choices go you left out; Stop paying any interest on savings in govt bonds. If the super wealthy stop getting a free lunch from the govt then they have to go to the private sector to earn their keep, which means they actually have to invest (spend) and not just sit on piles of money. If you are worried about them revolting and just driving up prices with consumption spending, I think you need to explain why they would act so irrationally. I also think you need to then reconsider what you believe to be the source of hyperinflations. In this instance the source of the hyperinflation is the petulance of the super wealthy, who are miffed at not being able to get free interest from the govt so they decide to take their ball and go home.

To view govt interest as an inducement to the wealthy to not spend themselves and instead let the govt spend while the govt pays them interest, leads us to the previous potential scenario. But its not the govt spending perse that leads to the hyperinflation. Its the spending of those with enough money to shake up the supply and demand curve...... the super wealthy.

Its interesting to me that low interest rate environments, low govt rates on bonds, are considered loose money environments while high interest rate s are called tight money environments, when in fact it is low interest rate environments that reduce the amount of money going to the bondholders...... much to their chagrin.

I think Mosler has it right.... permanent near zero rates and only short term bonds.

JK said...

Good points Greg.

"In this instance the source of the hyperinflation is the petulance of the super wealthy, who are miffed at not being able to get free interest from the govt so they decide to take their ball and go home."

Atlas Shrugged.

Greg said...

The more I really think about hyperinflation and Vinces work on it, it occurs to me that there is a spectrum of hyperinflations and that maybe somethings should not be called hyperinflations.

Everyone thinks of Weimar, Zimbabwe and even the Confederacy as the most prominent examples. Clearly these are political and mostly the result of war torn areas becoming bereft of supplies while money supply stays constant or rises. It really shouldn't even be controversial what "THE" trigger is in the three above examples. Collapses in production due to stupid political decisions/war.

These hyperinflations (Ill call type A hyperinflations) simply reflected the sudden scarcity thrust upon these nations and the fearful responses of citizens and authorities. None of these had anything to do with fully functioning countries having debate about where and how much public money should be spent. These weren't entitlement programs gone wild or anything of the sort.

It seems when Vince is talking about these bond vigilantes these should be put in another category altogether and called something like Type B hyperinflations. I have no doubt that if they wanted to act as a group, Americas billionaires could all cash out their positions in bonds (or threaten to) or stocks etc. and cause a huuuuuge disruption and a dollar crisis, but at present this would be mostly the action of petulant brats and not good stewards of our resources, which is something these people most definitely want to be viewed as.

Are there petulant brats amongst the super wealthy? For certain. Are there enough countervailing sane guys who see the self inflicted damage of such behavior? I think so.

One way I think about the difference between the two types of hyperinflatiuons is that no one really wanted Zimbabwe, Germany or the Confederacy to end as it did. They were victims of history. The other type of hyperinflation will be a decision and it will be a decision made by a group of people who think they will be better off after the hyperinflation. Ill also say it will NOT be a decision by the govt but a decision by private sector actors as a way to usurp the govt and cause chaos and a new currency regime.

So we must ask , who might (or thinks they might) profit from a Type B hyperinflation.

Vincent Cate said...

"I take issue with your idea that a stoppage of bond rollovers and bonds becoming "due" is a problem. All that means is the holders of these bonds now have cash....... so what?"

I understand that in MMT you define money to include bonds, so monetization is "just an asset swap", and it makes no difference by your theory. I am telling you that in the real world it makes a difference and that is why I made CMMT. Your theory does not match reality.

If the government sells bonds to private investors, probably not much inflation. If the central bank is funding the deficit by buying the bonds, probably you get inflation. Now if you are just swapping bonds for excess reserves then even in CMMT that is "just an asset swap". This is just the way the world really works.

Do you think anyone has ever shown the equation of exchange to not match reality?

Vincent Cate said...

"As far as your choices go you left out; Stop paying any interest on savings in govt bonds. If the super wealthy stop getting a free lunch from the govt then they have to go to the private sector to earn their keep, which means they actually have to invest (spend) and not just sit on piles of money."

Most of the JGBs seem to be owned as part of regular middle class retirement funds. The super wealthy are just not stupid enough to invest in 10-year Yen denominated bonds paying 0.5%. Remember, a fool and his money are soon parted. You just don't hold onto billions if you are a fool.

If they did that nobody would buy bonds from Japan again, except the central bank. Since they are spending twice what they get in taxes, the central bank would be making lots of new money, and could not stop. The currency would crash, at some point, probably very soon. If the government defaults on their debt it is just not a good omen for the currency, so people would not want the Yen.

Vincent Cate said...

Also, in Japan the bond holders are retirement funds. If those funds don't earn interest because the government defaults there will be a bunch of voters that demand financial support from the government. So it is doubtful that defaulting on the debt would even really help the government. And some heads might roll.

Greg said...

Vince

You seem to think that whats on the balance sheet of the fed really matters. Its the peoples balance sheets that matter. The CB is not a consumer, it buys nothing real. It simply makes exchanges with the sole purpose of affecting some price one way or another. The CBs balance sheet is a useful fiction for the most part.

The notion of a bond holder suddenly becoming just a cash holder in the absence of bonds should not be subject to debate. That is in fact what would happen. The question then becomes what behavior might result from such a change of position financially?

You seem to be convinced that this is an end of the world scenario. Somehow these people who were perfectly fine "putting aside" 100,000$ for 1% interest are now going to behave extremely differently when they no longer get their 1000$ a year. Suddenly all that money they didn't need for consumption is now going to be used for consumption only and cause price spikes and supply problems. WHY would they do that?

You do have to admit that if they didn't change their consumption habits at all and simply changed their savings vehicle choices to something in the corporate sector that none of your hyperinflation fears would materialize right? Your entire theory does depend on a flipping of consumption/saving habits by a large portion of the users of the currency does it not? Spend your time explaining that and try a little less of the "playing with lots of scary zeros on a govt balance sheet" approach and you might find more traction here.

You certainly are aware that I can go back and graph a lot of correlations between a lot of things to try and support a story I might have about damn near anything, so I don't think all your additional graphs are working except on the already believing.

Anonymous said...

Bill: 'It really sounds like you are assuming hyperinflation, and coming up with scenarios that make it so."

Vincent Cate: "I look at hyperinflation as the tripple wammy of inflation, using the equation of exchange. It is when the quantity of money has out of control growth (the government/bank can't stop), the velocity of money is going up fast, and the GNP is going down."

OK, but then when you consider price controls and say that they cause a drop in GDP, you have to say that MV decreases, as well. You have not addressed the question of why it increases again. Just to say that hyperinflation resumes is not an argument.

Tom Hickey said...

Vincent, as you know, many MMT proponents advocate no bonds. Warren Mosler's proposal is zero interest policy rate and no bond other than 3 mo. T-bills max.

So we fundamentally disagree.

Vincent Cate said...

"Vincent, as you know, many MMT proponents advocate no bonds. Warren Mosler's proposal is zero interest policy rate and no bond other than 3 mo. T-bills max.

So we fundamentally disagree. "

I also advocate no bonds. Not even 3 month ones. If there were no bonds you would be much safer from sudden floods of money. If there were no bonds, then the MMT plan to "increase taxes if inflation gets too high" would work.

We may not be in such fundamental disagreement.

Vincent Cate said...

I also don't thin the central bank should be paying interest on reserves. It takes some money off the street but at the risk that it comes back suddenly.

Jeff65 said...

Vincent,

Japan does X for nearly thirty years without hyperinflation.

Japan does Y and suffers hyperinflation soon after.

It follows that Y and not X is the direct cause.

A viable theory of inflation must include thing Y. You are discussing as causes only thing(s) X.

If you were to posit a thing Y, it allows refutation of your entire argument: Japan should refrain from doing thing Y. It can continue to do thing(s) X indefinitely.

Greg said...

I actually think your point about the real owners of JGB being average pensioners lends more strength to my argument.

An average Joe in japan who wants to save now and is accepting 0.25% on his saving is very unlikely to see a cash position as an extreme loss. If they are net saving at .25% why would they become net consumers at 0%? I could actually believe more that some rich guys might try to prove their control over govt finances by over reacting to a 25 basis point change in interest return.

Where is the flood of consumption spending going to originate and why?

Your reference to default is silly. Japan will NEVER have to default on the bonds. It will always be a choice. The bondholders cannot make them do anything. If they (bondholders)were going to force something they would have done long before the rates fell to ZERO point twenty five percent..... don't ya think?

Vincent Cate said...

Greg: "As far as your choices go you left out; Stop paying any interest on savings in govt bonds."

Greg: "Your reference to default is silly. Japan will NEVER have to default on the bonds."

Normally when a government stops paying interest on bonds it is called a default. Do you mean to sell new bonds wit no interest? If so, why would anyone buy those?

Vincent Cate said...

" If they (bondholders)were going to force something they would have done long before the rates fell to ZERO point twenty five percent..... don't ya think?"

The Yen was growing in value relative to a number of other currencies, so even at low interest rates people did well by investing in JGBs. Also, as interest rates went down the value of the bonds went up. Now we get the other direction. The Yen is going down relative to other currencies. The interest rates can't really go down any more and my go up, which would lower the value of the bonds.

Greg said...

Yes I meant issue no new bonds which means there is never the question of who will buy your bonds.... there aint any.

Vincent Cate said...

"Where is the flood of consumption spending going to originate and why?"

There have been many many cases of spiralling inflation before. It is like you don't think it is possible. I recommend reading some history on the topic like "This time is different, 8 centuries of financial folly" or Bernholz:
http://www.goldonomic.com/Monetary_regimes_and_inflation.pdf

Vincent Cate said...

"Yes I meant issue no new bonds which means there is never the question of who will buy your bonds.... there aint any."

Oh. If Japan had never sold any bonds they would not be in trouble. I agree.

Vincent Cate said...

" Japan should refrain from doing thing Y. It can continue to do thing(s) X indefinitely."

I am saying hyperinflation is like a forest fire, avalanche, or earthquake. The conditions for a chain reaction build up over a long time, then the chain reaction goes. In the case of a forest fire you can say, "no human fires when there is a high risk of forest fire". But for earthquake or avalanche there is no similar thing. I think for hyperinflation there is no fixed trigger that can be avoided. The conditions for the chain reaction are high debt and deficit. But how high depends on the country and many things which probably make the exact limit unknowable.

Jeff65 said...

Vincent,

"I am saying hyperinflation is like a forest fire, avalanche, or earthquake."

This is demonstrably false.

Billion dollar notes don't print themselves.

There must be a will to sustain even small amounts of inflation. That will may be against the the interests of the affected people, but it still must exist.

One answer would be to remove or not support regimes sustaining hyperinflationary policies.

Vincent Cate said...

"One answer would be to remove or not support regimes sustaining hyperinflationary policies."

I think that would be about all regimes. The history of paper money seems to be printing more and more and faster and faster till you finally get to the hyperinflation feedback loops.

Vincent Cate said...

""I am saying hyperinflation is like a forest fire, avalanche, or earthquake."

This is demonstrably false.

Billion dollar notes don't print themselves. "

I mean like them in that it is a powerful chain reaction after things have built up over a long time, not that it is an act of nature. Here is what I mean:

http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html

Jeff65 said...

There is no chain reaction.

There is always an opportunity to stop.

Someone must sign the order to add a zero to the next batch of notes.

Or to add a zero to the troops' paychecks.

Jeff65 said...

Vincent,

I think this is the issue: the Austrian argument is exactly that hyperinflation is a force of nature.

It will happen.

We can't predict when.

No one can control it.

As fiat money is a completely artificial construct, a tendency toward hyperinflation cannot be a force of nature. It's happened in the past because it was perceived to be in some groups interest and they had sufficient control to sustain it. Period.

Vincent Cate said...

"As fiat money is a completely artificial construct, a tendency toward hyperinflation cannot be a force of nature. It's happened in the past because it was perceived to be in some groups interest and they had sufficient control to sustain it. Period."

No, this is not right. There has never been a case where the government or central bank decided they wanted hyperinflation (like a vote in favor of hyperinflation). It is the market response to a government with so much debt and deficit that they can not help but keep printing money.

Now why do governments tend toward more and more debt and deficit is another question. In a democracy the guy who promises the most tends to get the votes. That may be enough to explain it.

Anonymous said...

"Do you mean to sell new bonds wit no interest? If so, why would anyone buy those?"

Djic.Same appeal to US bonds, besides interest, a guaranteed instrument. Which is why Warren M. says insure all deposits 100%. And if you don't dig that, then leave it with the guys that thought Adelphia was pretty cool.

Anonymous said...

Sorry, that should have been DICJ

Vincent Cate said...

Jeff65, look at the Japan situation as explained above and try to come up with a set of choices the government could really do so it could avoid M1 and M2 growing really fast over the next year or two. It does not seem like there is any way out at this point. It is like they have painted themselves into this corner.

Greg said...

So you agree if they didn't issue any bonds there wouldn't be any trouble but since they issue a bond that pays .25% disaster is imminent.

If the US paid .25% that would be $2.50 on each 1000 dollars which is essentially the same as burying your money in the ground. I fail to see how this will cause disaster. I know you are talking about japan but my illustration holds

Vincent Cate said...

"So you agree if they didn't issue any bonds there wouldn't be any trouble but since they issue a bond that pays .25% disaster is imminent."

Yup. Japan has bonds equal to 240% of GNP. The interest on these takes 1/4th of their taxes. If people stop rolling over they are forced to print a huge amount of money. If they never sold any bonds they would not be in this trouble. Now that they are in this situation there does not seem to be any good way out.


Vincent Cate said...

"If the US paid .25% that would be $2.50 on each 1000 dollars which is essentially the same as burying your money in the ground. I fail to see how this will cause disaster."

It is not the same as putting it in the ground. The bonds are heavily weighted toward short term ones. I forget the number, but something like half the debt is due in the next 2 or 3 years. So if people stop rolling over bonds the only option the US has is to print like $8 trillion new dollars. I know you think "this is just an asset swap", and if it all went to excess reserves I would even agree with you, but historically this is how hyperinflation happens.

Vincent Cate said...

Greg, the problem is that when they first sold all the debt it was a reasonable deal. If the currency is getting more valuable by 1% each year and paying 2% then things are ok. But now the currency is getting less valuable (like 30% over the last 2 years) and it pays like 0.25%. So rolling over just does not make sense any more. But they had to keep dropping the interest rate to keep the total debt affordable as they got more and more debt. At some point this just does not work.

JK said...

VC: "If people stop rolling over they are forced to print a huge amount of money"

"Printing" all that money would just be a financial asset swap. It is simply moving money from savings accounts into checking accounts. The market for savings accounts - a.k.a. the bond market - is already super liquid. It's basically cash because it's so easy it is to turn bonds into spendable dollars.

As Greg said a few coments ago, you're assuming that this "money printing" a.k.a asset swap would cause propensity to consume to increase dramatically. That's your argument. Right?

Vincent Cate said...

"As Greg said a few coments ago, you're assuming that this "money printing" a.k.a asset swap would cause propensity to consume to increase dramatically. That's your argument. Right?"

My argument really is in all other cases that a government/central-bank were forced to monetize a large portion of their debt and fund the deficit with new money, they got high inflation. In MMT it is "just an asset swap" because they define bonds to be part of the money supply. But this does not match reality. So in CMMT I separate money and bonds and when you monetize a large fraction of the debt you get an increase in the money supply and inflation.


Vincent Cate said...

Note that all other economic schools I am aware of do not include bonds in their definition of the money supply. So CMMT is much more inline with normal economic thought.

I don't know why MMT wants to count bonds as part of the money supply. They don't count gold and if you walk into a mall with gold you have more chance of buying something than if you walk in with a 30 year bond. Most malls these days seem to have a "cash for gold" place.

Vincent Cate said...

Can anyone explain why my definition of money supply, not including bonds, is not correct?

Vincent Cate said...

By "not correct" I mean that it does not match reality in some way. Are there experimental results (history) where the standard MMT definition of money matches the results but the CMMT type definition would not?

Because in hyperinflation I think CMMT type definition of money is far more accurate.

JK said...

VC,

Let me take a shot…

There is good reasoning behind why MMT views bonds as money…

1) They are essentially savings accounts, which differ from checking accounts in minor ways. Yes you can't 'draw checks' on them, but…
2) The bond market is so liquid, that if at any point you want to turn them into cash, you can. So there is really nothing preventing bond holders spending this bond-money if they want to. Either the banking system will absorb the sale, or if the banking system doesn't wnt them, then the Fed will aborb them.

So bonds are essentially money because anyone looking to spend there bonds can quickly and costlessly turn them into cash.

To me this makes sense. It's good reason behind why it makes sense to consider bonds part of the money supply.

You have no provided reasoning for why bonds should not be considered money. If your argument for why they are not money is simply that they can't be spent, then I direct you back to my comment that any bondholder that wants to spend that bond-money can easily sell their bond in the market and receive cash.

Right?

I've yet to hear *reasoning* from you about why bond shouldn't be considered money.

Tom Hickey said...

The basic difference between neoclassical/Austrian economics, which is grounded in monetarism of one sort or another, and Keynesianisms of different sorts is that the former see a causal relationship between money and price and the latter see price as a function of demand.

For the former, increase in spendable money leads to increased prices owing to expectations, whereas in the latter, price increases, and therefore the price level, are the result of demand exceeding supply.

Hence the former expect higher inflation as M1 increases, whereas the latter hold that if the increase is saved, then there is no price pressure.

There is also the possibility of capital flight due to currency aversion, which devalues the currency and can result in domestic inflationary pressure, but it also increase export demand.

As far as I can see historically, hyperinflation is the last stage in a process that was ultimately exacerbated by money printing. The mechanics of this is now well-enough understood that a government of any sophistication is not going to fall into that trap without first using all available tools.

In the case of Japan, the saving propensity is very high, there are ample foreign reserves to support the currency and much of the debt is held by citizens who tend to be very patriot and not likely to abandon the currency, and the economy has plenty of room to expand to address increased demand.

So the likelihood of M1 increasing substantially with debt monetization provoking either high inflation or currency aversion seem low. The government has tools for addressing it conventionally such as ratcheting up the VAT to decrease consumption demand. There are also emergency measures like capital controls in the unlikely event of capital flight.

So we have different views of economics and finance here. They are perhaps best seen today in the differences between Austrians at Zero Hedge and Post Keynesians.

Vince has incorporated some of the MMT monetary analysis and given it an Austrian spin. He has correctly observed that the difference is in the attitude toward the effect of bonds.

This is not new. Many have predicted that a no-bonds policy would be inflationary. Vince rejects that but thinks that if there are a lot of bonds, then monetizing them will become inflationary. MMT would say that this happening would be a special case and it is necessary to examine the context.

But it comes down to how people react in developing circumstances and that is not predictable probabilistically in this case since it is somewhat unique for a developed country. So we are in the realm of subjectively estimating probability in the face of uncertainty. The above are two rationales for doing so. What we do know is that Japan is a test case.

Tom Hickey said...

I don't know why MMT wants to count bonds as part of the money supply

Warren Mosler includes bonds in the monetary base, not in M1.

The monetary base is not spendable money. M1 (demand deposits and cash in circulation) is spendable money.

MMT is not concerned with the amount of spendable money or even spending power. An increasing amount of transaction are now through credit cards, for example. Is credit available on the cards spendable money?

According to PKE and MMT it's not ability to spend that counts but rather propensity to consume rather than save or invest.

Excessive capital investment may lead to malinvestment that that is generally not inflationary unless resulting income streams affect consumption desire, e.g., through a "wealth effect." And excessive saving can lead to a run up in asset prices, also creating a wealth effect that could lead to increased consumption, or asset bubbles.

There is a whole range here.

Tom Hickey said...

BTW, T-bills are often classified as cash, as in corporate cash reserves. Firms don't hold either currency or funds as uninsured deposits. This is what T-bills are used for. There is always a demand for them because this is how firms deal with large sums for short periods. They are also used for repo as are other longer maturities. As far as banks and non-bank firms are concerned there is no substantial difference between highly liquid government securities and currency or deposit accounts. It's a matter of a phone call, or now some keystrokes, to transfer funds around accounts as need arises. When funds are not being employed, even a small interest advantage is worthwhile given the sums. This is true for banks, other financial institutions and corporations. This is why Mosler would either keep issuing T-bills up to 90 days, or else, better, just provide a no-interest deposit guarantee on deposit accounts of any size.

Debt monetization is essentially the same as direct issuance and no bonds in this view. It's just a klunky way of doing it in order to get around political restraints. Better to just remove the voluntarily imposed restraints that not only unnecessary but stupid once operations are understood.

Vincent Cate said...

"This is not new. Many have predicted that a no-bonds policy would be inflationary. Vince rejects that but thinks that if there are a lot of bonds, then monetizing them will become inflationary. "

If the government just printed money and spent it (no-bonds) I do think that would be inflationary.

I look at bonds as delaying the inflation.

Imagine there was only one time that they issued 30 year bonds. While people could trade from person to person, the total amount they had withdrawn from the economy/demand would stay withdrawn. So if one person was released from his obligation to not demand for 30 years, it is only because someone else took on that obligation. But trading does not change the demand. When the bond is paid off it does increase the money-supply/demand.

Tom Hickey said...

"If the government just printed money and spent it (no-bonds) I do think that would be inflationary.

I look at bonds as delaying the inflation.

Imagine there was only one time that they issued 30 year bonds. While people could trade from person to person, the total amount they had withdrawn from the economy/demand would stay withdrawn. So if one person was released from his obligation to not demand for 30 years, it is only because someone else took on that obligation. But trading does not change the demand. When the bond is paid off it does increase the money-supply/demand.


MMT disagrees. With the highly liquidity of contemporary bond markets and other markets like equities, commodities, currencies, etc, there is near immediate convertibility. In a global economy there are always bidders on the other side of a trade, market makers to ensure stability, and traders that arbitrage small price differences. This doesn't obviate high volatility, but it reduces it and also results in corrections that modulate upside and downside breakouts.

Where there is actual saving is in non-negotiable instruments like US EE/E bonds that must be either redeemed or held to maturity. These were called "war bonds" in WWII, and it was considered patriotic to hold them to do one's part in financing the war. The underlying purpose, however, was to encourage saving to quell inflation during wartime and huge deficits in the face of curtailed production for domestic sale.

Vincent Cate said...

"Vince has incorporated some of the MMT monetary analysis and given it an Austrian spin. He has correctly observed that the difference is in the attitude toward the effect of bonds."

Yes. The MMT way of looking at things is not why you get a different answer than the Austrians, it is just that you count bonds as part of the money supply. CMMT using a normal definition of money gets the same results as Austrians.

Dan said...

Wouldn't it be meaningfull to study what circumstances ends hyperinflation? Neither QTM or MMT (as far as I know) have much to say about this. Hyperinflations can end even when printing continues and productive capacity can not be turned on fast. Only the backing theory seems to give a good answer why that would happen. Hyperinflations can end when the goverment implements a new policy creating trust in the currency or a new currency. But why according to MMT thinking would this end hyperinflation when it is the result of so many exogenous shocks and diminished productive capacity?

Jose Guilherme said...

Wouldn't it be meaningfull to study what circumstances ends hyperinflation?

This paper provides a brief overview of the Brazilian case:

http://www.econ.umn.edu/~schwe227/teaching.s12/files/slides/13-Real.pdf

Tom Hickey said...

Dan, I don't think there is "an" MMT answer. MMT economists would say, I believe, that it depends on context. Every case is different. But if it comes to hyperinflation, the fix is always socially, economically and political painful, which a reason it gets to that in the first place. TPTB don't want to bite the bullet.

Remember the Seventies in the US when high inflation became a social, economic and political issue and then-President Nixon acted decisively:

On the afternoon of Friday, August 13, 1971, these officials along with 12 other high-ranking White House and Treasury advisors met secretly with Nixon at Camp David. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by suspending the convertibility of the dollar into gold; freezing wages and prices for 90 days to combat potential inflationary effects; and impose an import surcharge of 10 percent.[8]

To prevent a run on the dollar, stabilize the US economy, and decrease US unemployment and inflation rates, on August 15, 1971:[9][10]
Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.

Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government enacted wage and price controls outside of wartime. [This was during the "Vietnamese Conflict," which wasn't technically a "war.']

An import surcharge of 10 percent was set to ensure that American products would not be at a disadvantage because of the expected fluctuation in exchange rates.…

The American public felt the government was rescuing them from price gougers and from a foreign-caused exchange crisis.[12][13] Politically, Nixon's actions were a massive success. The Dow rose 33 points the next day, its biggest daily gain ever at that point, and the New York Times editorial read, "We unhesitatingly applaud the boldness with which the President has moved."
Wikipedia

Tom Hickey said...

The MMT way of looking at things is not why you get a different answer than the Austrians, it is just that you count bonds as part of the money supply. CMMT using a normal definition of money gets the same results as Austrians.

Not just Austrians. A whole lot of people think that going to no bond would be highly inflationary.

The other critique is wrt the MMT approach to the IGBC. According to MMT, the central bank can keep the policy rate under the growth rate to prevent an increase in the primary surplus due to rising interest cost.

But many economists doubt the efficacy of that, holding that 1) the yield curve would steepen sharply anyway as other long term rates rose and, 2) due to circumstance beyond their control the cb would be forced to raise the policy rate to catch up.

There's a lot of debate yet to be had. MMT is pretty radical for most and on many fronts, as we see with the JG.

JK said...

VC,

You need to provide a better explanation than just convention as to why bonds shouldn't be considered money.

At least MMT provides some reasoning for why it makes sense to consider bonds as money. You should either explain why you disagree with the reasoning, or you should provide reasoning to the contrary.

Vincent Cate said...

"You need to provide a better explanation than just convention as to why bonds shouldn't be considered money."

In hyperinflation there are lots of bonds being bought with new money. If you think bonds are money then your intuition is this is "just an asset swap". You may be able to get the right answer if you think of velocity increasing. But in hyperinflation this is and velocity going up is the meat of what is going on. It is much easier to understand and get the right answer if you don't think of bonds as money.

Vincent Cate said...

"MMT is pretty radical for most and on many fronts, as we see with the JG."

Yes, really there are other differences. But I do like the view of "imagine they burned all tax money and just printed all the money they spent" but this view is not why MMT differs from Austrian, as my CMMT shows. I think all Austrians should move to CMMT. :-)

Tom Hickey said...

Domestic private balance (spending power times propensity to consume and invest) plus government balance plus the current account balance = NGDP = PY.

Changes in the amount of domestic private consumption are just one factor affecting flow in an income and expenditure model, and what happens wrt to the all factors interacting dynamically is determinative of changes in NGDP and price level.

Swapping bonds for funds in banks' rb and customer deposit accounts doesn't increase income and doesn't increase spending power over what it was previously. In fact, it reduces interest income that would have been paid. So in this sense it is deflationary.

Holding other factors constant by assuming cet par implies that increasing consumption will increase prices, but all factors don't remain equal. So there are many possible scenarios that have to be taken into consideration.

The MMT position remains strong.

Vincent Cate said...

"The MMT position remains strong."

I am really a single issue guy. I am just fascinated by hyperinflation. I don't really argue other issues so won't try to even weigh in on how MMT does on other issues. However, on hyperinflation I think CMMT is an improvement over MMT. But I might be biased. :-)

Greg said...

So would the absence of hyperinflation in Japan within the next twelve months be a a huge strike against CMMT Vince?

Tell us what would disprove CMMT.

Vincent Cate said...

Greg, understanding the chain reaction of a volcano or other positive feedback loop thing is not too hard (see link below for many). Predicting the timing is a much harder thing if possible at all. On its own, CMMT just helps you understand what is going on. This is similar to the descriptions of the other positive feedback loop phenomenon in the link. But CMMT does this much better than MMT in the case of hyperinflation.

http://www.howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html

Vincent Cate said...

As for what would disprove it. I am saying it is a positive feedback loop, that feeds on itself and grows. If the Japanese start getting out of bonds, and then suddenly stop when they are still holding them, that would go against my theory.

What could Japan's inflation or hyperinflation do that would disprove MMT?

Vincent Cate said...

Greg, another way to look at it.

If you put an open can of gas next to a fire we can tell there is a risk of a dangerous chain reaction without being able to tell you exactly which spark will set it off. It is still good to understand this and explain it to your kids.

Vincent Cate said...

Greg, if there is a panic out of Japanese bonds and it did not cause inflation or change the value of the Yen, that would contradict my theory. If there is lots of this "just an asset swap" and the value of the Yen goes down and they get high inflation, would that contradict MMT or will people just find some other explanation for once again the currency dropping and inflation as a big debt is monetized? I am assuming here it does not just end up as excess reserves, because CMMT agrees that excess reserves are just like bonds so that would be "just an asset swap". The interesting case is where MMT and CMMT differ. I bet that is what Japan gets.

Tom Hickey said...

When bonds are sold in the market and bought by the cb, banks' reserve accounts are marked up in the payments system. In quantity this generates excess reserves that will drop the policy rate unless the cb pays interest on excess reserves to set the policy rate.

The distribution of sellers determines which accounts the banks receiving the reserve balances. Bonds owned by banks increase the reserve balances of the banks and are not credited to deposit account that count toward M1. Bonds owned by non-bank sellers increase the deposit accounts of these sellers and add to M1.

Non-bank owners of bonds include pension funds, hedge funds, money market funds, corporations and private individuals. All but some private individuals can be expected to seek other savings vehicles, presumably "safe assets." This would increase the price of other non-Japanese government securities. However, if inflation where perceived as increasing the value of equities the Nikkei would also benefit, as would real assets like real estate.

There is reason to assume that either firm investment or private domestic consumption would balloon, resulting in a continuous rise in the price level. That would require a shift in the propensities to save/spend.

So what could be expected is a shift from saving in Japanese government bonds to other assets in Japan or the rest of the world. Capital flight from Japan would devalue the yen, making imports more expensive, which in an energy importing country could translate into a rise in the price level from the supply side.

If there were a flight from the yen, the the value of the currency would fall relatively to other strong currencies in the fx market, such as the USD and euro. This would give Japan an export advantage so the Fed and ECB would defend their currencies from rising too rapidly by supporting the yen. Japan also has large foreign exchange reserves to do the same.

If a sudden panic developed that threatened to destabilize Japan, then the other developed countries with a stake in global stability would likely arrange currency swaps and other stabilizing measures to counter market forces.

Vincent Cate said...

"If a sudden panic developed that threatened to destabilize Japan, then the other developed countries with a stake in global stability would likely arrange currency swaps and other stabilizing measures to counter market forces."

If the other developed countries print money and buy up yen the quantities needed are so large that they risk destabilizing their own currencies. Imagine the US, UK, and EuroZone start printing money and buying yen. A smart macro investor then shorts those currencies and buys real things or gold and silver. The more they do this, the more those 3 currencies will also go down. And if there is a rush to get out of bonds in those 3 countries then they get hyperinflation too.

Tom Hickey said...

Oh, the global collapse scenario due to fiat money. Right.

JK said...

VC,

Do you ignore productive capacity?

Something I've often heard about the various hyperinflations is that they all occurred in regions where either productive capacity was destroyed, or it was appropriated to people who weren't skilled to utilize it, or political uncertainty lead to a lack of trust in the governing institutions, etc. or combinations of these and other things.

The money printing correlation to hyperinflation ends up being a "monetary" reaction to a "real" situation. Money printing exacerbates hyperinflation, but does cause of it.

What too much money printing can do - so long as the these dangerous "real" factors are not present (so no hyperinflation) - is higher price level inflations either from too much aggregate demand, or price level inflation from exchange rate devaluations.

Vincent Cate said...

"Oh, the global collapse scenario due to fiat money. Right. "

It seems like you can sort of see how the Yen may collapse but you find it ridiculous that the Dollar, Euro, and Pound could collapse if these are printed to try to prop up the Yen? Domino things like this happen. I hope they are not so foolish as to risk their currencies to try to make up for Japan's deficit spending. We will see.

Vincent Cate said...

"Do you ignore productive capacity?"

No, productive capacity going down is always part of the cycle. You can see it in my description with the equation of exchange and in my simulation. Government's increase taxes (like Japan has done) and it hurts the economy. They put in price controls when inflation gets high and it hurts the economy. But it does not work as a general explanation for hyperinflation for several reasons. First, hyperinflation needs a government spending much more than it gets in taxes but this is often not because taxes have gone down. Second, there is clearly a death spiral to hyperinflation. You get factors of 10, 100, and 1000 in prices. Even if the real economy were to cut in half that only justifies a factor of 2 change in price, not an ongoing spiral. Also, the same shock that can tip one country into hyperinflation would not tip another. So the real explanation of what is going on is in the spending far more than taxes and being forced to print money when nobody is buying the bonds. This is the key.

http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html
http://howfiatdies.blogspot.com/2013/03/simulating-hyperinflation.html

Greg said...

"Greg, if there is a panic out of Japanese bonds and it did not cause inflation or change the value of the Yen, that would contradict my theory"


How about if there isn't ever a panic? Hyperinflations as you describe them, require a panic. Seems to me that people will panic ONLY if they sense a supply problem, not just because there are "too many" bonds out there. If people are scared they won't be able to get the food they need, or some other necessity, there will be a panic. Seems to me panics are in response to real factors not financial ones.

You do some great math to show how these factors could in theory work together and result in a currency crash. I think you underestimate what other factors can work to keep it from happening. Lots of people have great interest in keeping things relatively stable and banks can and will do a lot of things to keep your scenarios from happening.

There can be small panics that can get out of control for short periods in relatively small currency areas but I think cooler heads would prevail in the event of some world crashing event you describe. Too many people stand to lose too much.

Any hyperinfaltion in a large and important currency area will be because someone is trying to profit not just because some govt is providing too much health care or transfers to its citizens. It will be a choice not an accident.... in my view.
And the larger the area they try to bring down the more resistance there will be.

Vincent Cate said...

"How about if there isn't ever a panic? "

Yes, if Japan keeps running a high deficit and people never get out of bonds that would also contradict my theory.

What sorts of things happening in Japan would contradict MMT?

Vincent Cate said...

If over the next year the Japanese central bank monetizes bonds at a faster rate as people get out of Bonds and Japan has inflation spiralling out of control, would that contradict MMT and "it is just an asset swap"?

Assume there are no new natural disasters or "supply shocks" or wars. Would hyperinflation in Japan prove MMT wrong?

Tom Hickey said...

No, that scenario doesn't contradict MMT. It would simply show that markets and people don/t understand monetary operations. Like widespread misinterpretation of the effects of QE resulting in inflation in the US because the Fed was "printing money" and the monetary base was rising. Ignorance is also a factor in behavior, and irrationality induced by fear in a panic.

Vincent Cate said...

"No, that scenario doesn't contradict MMT. It would simply show that markets and people don/t understand monetary operations."

Tom, if nothing contradicts MMT then it is not acting like a scientific theory. It also is not making predictions if nothing that happens can go against it.

Maybe it is MMT that does not understand monetary operations?

Vincent Cate said...

"Ignorance is also a factor in behavior, and irrationality induced by fear in a panic."

In CMMT hyperinflation is not due to ignorance and irrationality. In mine it makes sense.

Tom Hickey said...

Vince, theories are neither true nor false, confirmable or falsifiable. Hypotheses generate as theorems from the axioms/postulates are, and in economic modeling the starting points are assumptions, which may not be inductive (empirically based) but rather based on a formal system like accounting, institutional arrangements, or taken as self-evident.

It's not always simple to state hypotheses and check them rigorously, as medical research shows for example.

I have given a reason why the Japan bond situation is not a hypothesis that actually test MMT claims about monetary operations, since there are expectations and behavioral factors that are more causal than the operations themselves, that is, people misconstruing causality because they subscribe to a wrong theory.

It's very difficult formulating testable hypotheses in social science, including economic because there are so many subjective factors involved. If it were simple, social science and psychology would have evolved theories as normal paradigms defining research and identifying the boundary conditions at the cutting edge that need further investigation. Instead, the social sciences lack normal paradigms and there is a lot debate over foundations, assumptions, and modeling, in addition to issue with data collection and handling.

The issue over whether MMT operational description of bonds and reserves as asset swaps is a matter of how the accounting is interpreted.

The other issue, which involves causality, is the interpretation of the identity MV = PY, as I have already said. Specifically, M in this identity is the money spent times the turnover must equal NGDP. The money that is used for spending is the money available for spending less the amount unspent, that is, saved. This varies with the changing ratio of saving/spending desire.

If funds available for spending increase and the saving/spending ratio shifts and so does velocity then NGDP can increase or decrease quickly. Saving/spending desire is influenced strongly by expectations and expectations are influenced by subjective and objective factors. Subjective factors can be and often are wrong, that is, deviate from the actual implications of changing objective factors due to a misapprehension of causality.

Where MMT could be called into question as a theory is regarding its major imputations of causality, which involve SFC modeling based on sectoral balances, as well as consequences of applying functional finance. But macro situations are often so complex as to make rigorous hypothesis formulation and testing difficult. If this were not the case, economic would undisputedly be science similar to the natural sciences, and there would no longer be clashes of different POV's.

There would also be less polarity in finance, where parties take different sides of trades. If outcomes were highly predictable based on a single dominant theory that always generated positive results, who would take the other side?

Tom Hickey said...

In CMMT hyperinflation is not due to ignorance and irrationality. In mine it makes sense.

Yes, and that is a problem with it from a Keynesian POV. Social sciences, including econ, are not natural sciences. And in finance, bubbles and panics are generally characterized by irrational behavior, either irrational confidence driven by expectation of gain and irrational Angst driven by fear of loss.

Could events in Japan lead to a loss of confidence that result in sudden extreme yen aversion? Whatever is not logically impossible is possible. But then the question is one of probability and risk. What is the probability function? Or is uncertainty to great to formulate one? Then it is just guessing at likelihood subjectively.

Greg said...

"In CMMT hyperinflation is not due to ignorance and irrationality. In mine it makes sense."

You say that but earlier you admitted that if the Japaneses never panic there won't be hyperinflation.

Hyperinflation IS a panic. Its too many people wanting to be on one side of a trade for fear they will lose everything if they don't get rid of what they have.

I in no way shape or form can speak for MMT but in my understanding about what it teaches I think I can address this;

"If over the next year the Japanese central bank monetizes bonds at a faster rate as people get out of Bonds and Japan has inflation spiralling out of control, would that contradict MMT and "it is just an asset swap"?

Short answer.... No!

Its kind of a weird question to be honest. When MMT says the CB buying bonds is "just an asset swap".... that shouldn't be at all controversial. They take one type of asset (a bond) and swap it for cash.... another type of asset. Actually cash is the wrong word since that implies paper money but I think you know what the MMT argument about the assets are.

Now you and many many others believe that somehow these people who had bonds and now have cash are suddenly going to become consumers instead of savers (They were obviously saving with bonds no?). That is a necessary step in your theory is it not? Certainly you would concede that if all the bond holders just decided to save in a 0% interest vehicle instead of a 1% interest vehicle that nothing of note would change, except interest income to the private sector.

So what I think you must explain is how your theory can incorporate two necessary conditions

1) Savers suddenly decide to be consumers

2) Sovereign CBs give up interest rate control

Your scenario also implicitly assumes that the bond holders rule and if they demand higher interest rates they will be accommodated.

What about monetizing their bonds at a faster and faster rate in and of itself, leads to inflation? Someone still has to decide to spend the fruits of the monetization. A real person has to decide to take money and go buy a consumption good and be willing AND able to pay higher and higher prices. Money doesn't spend itself.

MMT has never said hyperinflations aren't possible but it does suggest that when you are truly in control of your currency and you have a productive economy (with room to increase production) the odds are extremely low. It will unlikely be the result of spending too much money on healthcare or transferring the equivalent of 1% of GDP to poor people.


Vincent Cate said...

"It's very difficult formulating testable hypotheses in social science, including economic because there are so many subjective factors involved."

Do you agree that CMMT makes a testable hypothesis for hyperinflation?

Vincent Cate said...

" When MMT says the CB buying bonds is "just an asset swap".... that shouldn't be at all controversial. "

When MMT people say this they mean it is not inflationary. In CMMT if it does not end up as excess reserves, it is inflationary. The reality of hyperinflation matches with CMMT.

"Your scenario also implicitly assumes that the bond holders rule and if they demand higher interest rates they will be accommodated."

I don't think so. In Japan I think bond holders are not happy with the interest rates and so are not rolling over their bonds. The central bank is able to buy bonds fast enough to keep interest rates down so far.

"1) Savers suddenly decide to be consumers"

When someone sells a JGB they don't have to become a consumer, they could just invest in something else. However, if they are investing in assets in Japan they are inflating those prices. If they invest outside of Japan they will tend to lower the value of the Yen, which over time will be inflationary. So even if they don't consume they extra money made to buy their JGB ends up contributing to inflation.

Tom Hickey said...

Do you agree that CMMT makes a testable hypothesis for hyperinflation?

No, because it overlooks significant causal factors.

It may be a necessary condition in that hyperinflation can't occur without government increasing the amount of currency but it may not in that turnover of the existing supply could greatly increase, or the amount of credit credit could vastly increase, since deposit accounts include deposit entries created by loans.

It is certainly not a sufficient reason, since other factors need to be present as well, e.g., Y cannot rise commensurably with the increasing product of M and V.

The fiscal position of a country can affect, as well as its monetary policy can affect the relative value of the currency and it is possible that currency aversion could take place because of the fiscal aspect. But a currency would have to become relatively worthless to provoke hyperinflation.

I understand CMMT to be saying that if MV increases faster than Y then P will increase, which being an identity is simply a description of flow, and that if MV accelerates without Y also accelerating, it will lead to hyperinflation at some point. That is obvious and no one denies it. But how to interpret that is at issue, as I and others have been saying in this thread.

The fact is that there is plenty of financial wealth easily convertible into spendable funds already in existence to create high inflation if the propensity to consume suddenly shifted relative to the propensity to save. And there are people who are concerned about this, too. Who wants to be holding financial assets denominated in a currency if high inflation looms. This leads to capital flight, high inflation, balance of payments issues and in weak nations can even lead to hyperinflation.

But all this involves many factors and coming up with risk analysis based on probability functions is difficult to impossible.

Of course, one can take a Bayesian approach and plug in subjective estimates and change them as conditions change. This is in essence what most people do heuristically and intuitively, if not formally.

At a certain point the estimates shift upward in a shorter and shorter time frame and people head for the doors, setting off a stampede.

But that is a general description that needs to be applied in context and context shapes the estimates (expectations), which are subjective.

Most sophisticated participants, the big money, look at market behavior as the indication of the best available indication, presuming it to be rational and efficient. But booms and busts, and bubbles contradict that.