Here Comes Hyperinflation
Arthur Laffer joins the chorus of economists predicting that the Fed's massive stimulus will eventually lead to hyper-inflation.
Laffer focuses on the huge expansion of the monetary base and predicts that faced with two bad choices -- inflation or crippling the economy -- Bernanke will choose inflation.
I agree. The double-digit inflation of the 1970s didn't happen because Fed Chairman Arthur Burns and the politicians were stupid. It happened because they didn't want to kill the economy by raising rates. If it comes to that, I think Bernanke will likely err on the side of inflation.
Laffer doesn't address the counter-argument, made by Paul Krugman, which is that you can't have hyper-inflation without wage increases, and we're not seeing wage increases (yet.)
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!
Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money...What's important for the overall economy... is how fast these loans are made and how rapidly the quantity of money increases. For our purposes, money is the sum total of all currency in circulation, bank demand deposits, other checkable deposits, and travelers checks (economists call this M1). When reserve constraints on banks are removed, it does take the banks time to make new loans. But given sufficient time, they will make enough new loans until they are once again reserve constrained...
At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century.
Read Laffer's whole piece here.
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Whoa! Just got those Inflation numbers and WOW. Inflation went down! Whoops, that means we still have Deflation!
Inflation in check is better than deflation. It is disingenuous to think that if inflation gets to 2-3% that it would be an issue, when in fact it means we have growth and demand.
The monetary supply has actually grown only slightly and there is no velocity whatsoever. And that is after the stimulus. These arguments continue to be ridiculous and only meant to scare people.
All those that bet against Bernanke and this administration simply because they think the government is incompetent (I know they have been trained well by Bush) will sadly miscalculate. Bernanke’s balance sheet can easily be unwound when better deals will be available in the private market. Plus there are many statements around the quant easing and buying back our own treasuries that are completely inaccurate.
To think that Bernanke does not know all of this is stupid. The real issues we have now are not to make the mistake that those that want the economy to tank and/or are betting on the re-inflation trade want us to make. That is to stop the easing too soon. Another mistake that historically is accurate, but inaccurate with this administration.
These guys are competent for a change and others that are betting for missteps may be sadly and most unprofitably disappointed.
Lastly, Hyperinflation misuses the word for rhetorical purposes alone. Hyper inflation means 100% to 1000%+.
Arthur Laffer and his eponymous curve have done more than enough damage to the US economy already.
The Laffer Curve (a neo-con cargo-cult.) gave Reaganomics it's theoretical and ideological foundation.
As someone who profited to the tune of 10's of millions of dollars working for Merril Lynch and lieing in his research, why does Mr. Blodget get the opportunity to post here. Why not have Bernie Madoff join Huffington Post and talk about the great wealth he created and have new suckers join his new ponzi scheme. Blodget was pushing the dot.bombs in 1999 and 2000 and has NO CREDABILITY. He would do best in the cell next to good old Bernie.
Yet another terrible Blodgett article.
When are we going to realize that (a) Wall Street guys know very little about economics, and (b) economists know very little about economics.
Economists are historians, not scientists. That's why you get so many contradictory opinions. If I were Art Laffer, I would probably reamin silent and be thought an idiot, at this point.
Yes, Henry, EVERYONE KNOWS WE RUN THE RISK OF INFLATION. WHERE WERE YOU WHEN ALL THIS WAS GETTING SO TOTALLY FUBARED THAT WE HAVE TO RISK INFLATION TO FIX IT?
What Aurthur Laffer has to say is, quite simply, irrelevant. At least in any serious conversation about economics. But if you're looking for laughs...
Laffler was Ronald Reagan's cheerleader. After, Reganomics (Reagan looting Social Security)
Laffler disappeared from the MSM and went to an undisclosed location.
Laffler is a has been.
The problem is that we are in a 9 year bear cycle. The inflationary argument is based on the false premise of the fact that inflation is being cause by: (1) demand is greater than supply and this is not verified by cpi or gdp; (2) cost push inflation where salaries and wages are pushing up the cost of living index but we are experiencing higher unemployment and greater savings; (3) supplier cost push is not a factor because supplier are being cut world wide; (4) monetary inflation is illusionary because cash and coin are only 30% of money supply and balance is 70% in credit and this is why the Obama administrations has faith that they can cut the credit within minutes from general money supply. The logical argument of inflation falls apart and we are in a 9 year bear cycle greated by the shadow banking system and real estate crash. See www.shadowbanking.blogspot.com
Your definition of inflation is incorrect. I do not have enough time at this moment to really go into detail but once again inflation is the act of increasing the money suppy, not the rise in prices. That is an effect of inflation.
I must also say that your ratios on physical currency and electronically held money is actually about 3%/97% respectively.
I do agree through that there is a shadow government controlled by very powerful and wealthy banking interests.
Definition of inflation is incorrect according to the "cymandarin dictionary"... back here in the real world - you're wrong pal.
The stupid just amazes me. Inflation is not caused by printing money. Money has no value, it should not be traded as a commodity. The value comes from me creating X, getting paid, and then buying Y. Money is nothing more than a medium for the exchange of goods and services. That is a textbook definition of money. Anything to do with the interest rates on dollars loaned or an exchange value are just bunk. The reason you get higher interest rates on money is a shortage. The credit card companies
right know are raising rates because they say credit is tight.
Money is nohting more than a piece of paper I can use instead of trading my loaf of bread for my neighbors cookies when my neighbor already has bread and would like something else in exchange. Yes, its that simple.
Further, read the new HP headline in the business section. People saw $1.3 trillion in wealth wiped out. If there was enough money in circulation that wouldn't be happening. There is never enough money in circulation to pay off all debts meaning there is a shortage of dollars. If the dollar is a commodity the dollar should be more valuable, not less. As I said, the stupid just amazes, and Blodget knows better. Elites are again speculating.
After reading through more comments, I've come to the conclusion that capitalism and economics are both b.s. They are so complicated to the point that they don't make rational sense outside the uninitated circle. It is a lot easier to understand quantum mechanics than economics. Why did we (humans) create a system so complicated that even the so called experts have no clue what to do and spend all day disagreeing with each other?
Getiher will fail...no he won't...yes he will...he's not going far enough...he went to far...
It gives me a headache
Economics is actually a very uncomplicated subject but the powers that be seem to have intentionally given the appereance of complexity in economics to disguise their true intent:
To control the population of the US and now it seems the world through monterary policy that transfers wealth from all the lower societal classes to the very top echelon of the social hierarchy.
For those who are interested in learning about the truth of our monterary policy and banking system, look up "Modern Money Mechanics" which is a document created by the Federal Reserve outlining the money creation process in a Fractional Reserve Banking system.
Everything is complicated until you spend the time needed to understand it. But once you do, almost everything becomes close to trivial.
Judging from your comment you didn't spend much time trying to understand it.
I like the comparison - I'm with Feynman on this one.
Anyone who claims to understand quantum mechanics (and now economics) clearly does not understand them at all.
The thing is I could pick up a copy of the New England Journal of Medicine and follow along without anything more than a highschool science education (granted I'm good in science, but still). I may not pick up on the technical details, but I would get a lot out of it. I can not say the same thing for economics. I've a had a semester and what I've picked up in the perphery, but in the end it doesn't make sense to me because it's a system predicated on an imaginary value of money. I'm sure there will be people telling me that it makes perfect sense. I just don't see it (or maybe even don't want to).
I find economics very confusing, with too many opinions to figure out which is right (all I know is that anything predicated on the belief that people are rational isn't based in the real world).
Econ is not a science. We are making up the rules instead of making hypothesis and testing it with experiments.
The real economy is very complicated. Various simple models provide surprisingly large amounts of insight. Nothing describes it perfectly, because it contains parts where if there were a perfect description someone would find a way to use it so that it wouldn't be true any more.
Correct me if I'm wrong, but inflation is the increase in prices over wages (or something like that). We the consumer market still in a slump and unemployment still rising, who thinks inflation is going to make things better? If people are reluctant to have big purchases at todays prices, will they really be willing to make purchase the same product tomorrow at a higher one?
In retail right now, it's all about the discounts, it seems to me we have deflation and it's going to be around for a bit right now. I just don't understand how raising prices is going to help anyone.
Inflation can not happen until there is a significant increase in money supply OR there is a significant shortage of something. Neither is the case. We have plenty of everything and we have not given people more money to spend. So all that leaves the fear of inflation when in reality there is none.
We are actually going through a phase of strong deflation if you factor housing in. That's only valid for the new home buyers, of course, everybody else has locked their housing cost in for a decade or more.
You are wrong. True inflation is the increase in the money supply (which is natural under the Fractional Banking System where banks create money out of thin air) but what the article is talking about is Hyperinflation where that increase gets out of control and dilutes the value of the money faster than you can spend it.
Fractional Banking System explanation:
Banks are required to keep 10% of the money they have loans out for in reserve.
So you deposit 100 dollars in the bank. You would expect that they could then lend out 90 of those dollars and keep 10 dollars as reserve...this is wrong. They put the whole 100 in reserve and then loan out 1000 THAT NEVER EXISTED BEFORE YOU DEPOSITED YOUR 100. They create it out of thin air. That is inflation. Your 100 dollars created 1000 new dollars when you deposited it in the bank. If the person who was loaned the 1000 dollars then puts that in the bank, the bank can then put that 1000 dollars in reserve and loan out 10,000 dollars and the cycle repeats.
This is why Mortgages are a total fraud. You typically put down 20% of the purchase price to get a Mortgage. The bank uses half of that to create the money they are lending you (which didn't exist before you gave them your money) and the other half to create an equal amount to loan to whomever they want.
In normal usage, "inflation" means a decrease in the value of money relative to goods prices, wages, and financial-asset values -- or equivalently, an increase in the nominal prices of goods, labor, and assets. A very vocal minority wants to insist that the word be used to refer to expansion of the money supply. The proper response is to temporarily abandon the use of the word in favor of two new terms, "inflation(n.u.)" and "inflation(v.v.m.)", and then note that there's no reason for anyone to care about inflation(v.v.m.) except insofar as it tends to cause inflation(n.u.) -- and then ignore the screams of rage from the v.v.m. while you go back to using the word for what it actually means.
We are going to have inflation without wage increases.
People will just get squeezed at the grocery store and the gas station.
We should be taxing gasoline anyway, but rising grocery prices and stagnant wages are soon going to start to really pissing people off.
How are you going to have inflation without wage increases? You can not spend more than you have and you have already spent more than you had in the past... by taking on debt. That route is gone now. So there is no way you can have significant inflation. Money does not grow on trees, you know.
Here is the conceptual: The dollar crashes...say 50%. Farmers can now export nearly all of their small grain produce (beans wheat barley oats) and this leaves 1/2 of what otherwise would exist in the domestic market. The demand function remains the supply is cut in half and depending on the respective elasticities, the price domestically doubles. Maybe even worse. Now the entire population is in a rage. Cut exports, increase wages, increase ss and welfare payments. And the cycle ignites.
Benny is walking a tightrope and the Chinese have his cell number.
Doesn't grow on trees, but banks create it from nothing. See Fractional Banking System.
"How are you going to have inflation without wage increases?"
The prediction is that real wages will fall, while increases in the real prices of commodities and imported goods drive inflation, or while loose monetary policy drives inflation, or both.
Basically, oil gets more expensive and it takes oil to make everything, so people can't get as much for their work. Producers have to raise prices to cover their energy costs, but then the oil sellers raise their prices again so that they're once again getting as much stuff for their oil as the market will bear. So then producers of stuff have to raise their prices again. And around it goes until the companies have given their employees a hidden pay cut. Monetary authorities accommodate it, because giving workers an overt pay cut is difficult and firing them would cause real damage to the economy.
How are you going to have inflation without wage increases?
Ask the people of Zimbabwe.
Inflation: Inflation is the act of increasing the money supply.
There are numerous ways this can be accomplished but the three most common methods by the Federal Reserve are by purchasing government bonds, by literally creating money out of thin air, and by controlling interest rates.
Now that we know what inflation is and how it is achieved let's look at what the effects of inflation are.
Now, a currency (like the US dollar) is like any commodity; it is subject to the laws of supply and demand. When the Federal Reserve increases the supply of money irrespected to demands for goods and services you have a larger pool of money chasing the same amount of goods and services.
At first this does not cause a negative effect. The problem with inflating a currency comes in to play once the market finds equiliburium and demand starts catching up with supply.
Now what actually happens when this is occurs is not so much that prices are actually rising as much as it means that the purchasing power of each individual dollar is dimished. This is the hidden tax of inflation.
If you want proof of inflation look at the value of the dollar in 1913 when the Federal Reserve was first concieved and the value of the dollar today. $1 in 1913 took $21.60 in 2007 to match value which is a 96% devaluation since the Federal Reserve came into existance. I'm sure that percentage is even worse today.
Thankfully the value of the US has increased over twentyfold since 1913, too. Something you forgot to mention.
:-)
That graph says it all it's pretty clear you can't pour that much money into the system without dilution of value regardless of what was lost in the meltdown.
You can print any amount of money but if you don't hand it to the people there will be no inflation. Which happens to be exactly what we are doing right now.
Bingo. An increase in M0 without any increase in M1, M2, or M3 has negligible to no effect on prices.
Hellooooooo. Is there an echo chamber here?
The United States has never, ever, experienced hyperinflation, not under Reagan, when really, it reached into the teens, not in the 1740's, when it reached into the 30's, and not ever at all. Never, never, never, have I made myself clear?
Those on HP who think that the republican echo chamber is not working, this idea that the United States experienced hyperinflation ever or will in the near future is a bald faced lie, that admit it, you have never, ever heard before this year, it is a made up definition of hyperinflation that dumbs down the debate in a way that torpedoes understanding of inflation and deflation and the crimes we've just seen committed, and the chances of the United States to recover from the Republican Administration funny money policies.
M1 has risen, because M3 has crashed, and if you don't understand the relationship, you've been led astray by echoes of madness like this one.
Without pumping up M1 we would have hit a deflationary spiral that would have destroyed every economy in the free world.
M1 rising is not a disaster, it saved the economy.
Like I always say, when we can just worry about inflation again, we should all just sigh a big sigh of relief.
Graham, thanks for the breath of Sanity...I am afraid that too many of these people are sabatoging Obama....
Wise up Graham.....its the liberals with the funny money policies. This becomes totally obvious when you listen to the double talk of most of this administration's economic advisers!
How long before the penney is no longer used?
http://www.usdebtclock.org/
Approximately until this.
http://www.flickr.com/photos/billmurray/113830985/
Unless by "used" you mean that it's actually functioning as a unit of currency. People have been dumping them for years in dishes labeled "Got a penny, leave a penny. Need a penny, take a penny."
If you have an interest in exposing Laffer take a look at the fed balance sheet at this fed link:
http://www.federalreserve.gov/releases/h41/Current/
The balance sheet is at number section 9. You can see that the deposits of depository institutions have increased $828.9 billion since June 2008. The reason tht this M-0 (as the english call it) is the liquidity requirement for the fed to increase its assets by greater than $1 trillion. Did he mention the fed had increased reserve requirements? (therefore the money base m-0 up 20 fold, eh?)
There will be no consumer price inflation in the hyper sense unless wages follow. That is not likely. Inflation will hit (an possibly like thunderbolt) when and if the dollar crashes. There is another issue and that is this: who wants to be holding the greater than $10 trillion in treasuries when interest rates begin their upward correction? (and that is already beginning to happen) The safe haven here is insured deposits that will not suffer value reduction as rates increase(like bonds) ergo the increase to savings.
I agree that we won't see hyperinflation of consumer prices without wage inflation first, and meanwhile the monetary inflation will blow another asset bubble instead.
The wage inflation won't start here, though. It will start in the developing world, and that will cause consumer price inflation here.
If the global race to the bottom of the labor market is superseded by a global race to the bottom of the currency market (i.e. competitive devaluation), Wal-Mart's low low prices go up up and away.
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