Tuesday, September 23, 2014

Brian Romanchuk — A MMT View On The Theory Of Hyperinflations

The post "CMMT - Cate's Modern Monetary Theory" (on Seeking Alpha; free registration required) by Vincent Cate attracted a fair number of comments on the Mike Norman Economics web site. In that post, he presents what he calls CMMT - Corrected Modern Monetary Theory - and he argues that this correction allows MMT to explain hyperinflation. One could probably argue that MMT - as well as mainstream economic theory - do not have standard models that deal with hyperinflation. But that is for the same reason that those bodies of thought do not have standard models to estimate the impact of barbarian incursions along the frontier. It is not to say that foreign incursions do not matter - as the Western Roman Empire can attest - but that such an event is not a serious concern for the industrial economies at present.

I will not attempt to deal with the mechanics of Vincent Cate's model. It appears to based on the quantity theory of money, and it is easy for the reader to validate that the quantity theory has little empirical support. Instead, I want to discuss the theory of hyperinflations.
Bond Economics
A MMT View On The Theory Of Hyperinflations
Brian Romanchuk


Matt Franko said...
This comment has been removed by the author.
Matt Franko said...

"assume that I was invited to induce a rapid hyperinflation in Canada for some reason or another..."

All you would have to do is have the Treasury start bidding $75k in January for what were $50k mobile homes in December, then $112.5k for the same mobile home in February...

Or 150 for a barrel of petroleum in January, and then raise the bid to 225 in February....

Or if you didnt want the civil servants to get their hands dirty, just allow your fiscal agents to lend against these same items at the same increasing rate....

Rinse and repeat... instant 50% per month hyper "inflation" (moron metaphor alert!!!!)


Jonf said...

As I understand hyperinflation is a collapse of the money and therefore the economy. What Brian says at the outset is true. Hyperinflation can be caused by natural disasters, wars, the HUNS and the like. It occurs, that is, due to a lack of productive capacity or debts in a foreign currency. It seems obvious that if there is nothing or very little to buy in conditions such as a war or famine, prices will rise exponentially. The same can occur if you need to buy a foreign currency to pay your debts.

Japan has a very high debt to GDP ratio that often has the analysts clutching their pearls. But they have had such a thing for years CNBC says and they have tried to increase inflation within the economy with not satisfactory results to date.

There is one circumstance which can lead to unbounded debt that Scott Fullwiler has written extensively about. This occurs when the interest on the debt exceeds the growth rate, as I recall. At ZIRP we don't face that problem.

QE has not resulted in inflation and is unlikely to do so since the reserves stay within the system.

Yes, you can come up with scenarios that will cause inflation even hyperinflation. But there are tools to deal with that, what Brian calls normal controls. If you want to hyperventilate about something, think what happens when the environment results in severe food shortages or oil or other resources are depleted.

And I would add that food shortages and Saudi increases in the price of oil cause inflation. Thus far the increases here have been contained.

Not being an economist myself, somebody ought to ask Warren his thoughts about this.