Hyperinflation Not on the Agenda

Doing ourselves a huge favour and honouring the great minds who have given us the superb toolkit of Austrian economics, in using the instrument we should be as critical of it as we possibly can.

Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion? [...]

Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists. [...]

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is "Hyperinflation Would End The Game"

• Hyperinflation by definition would destroy the currency and thus the banks
• Hyperinflation would destroy the wealthy and all their corporate bond holding
• Hyperinflation would destroy the Fed
• Hyperinflation would destroy the wealthy political class

To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend.

[...]

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

In the 20th Century there were quite a number of hyperinflationary events. I used the Wikipedia list of modern hyperinflations (Since WWI) and researched the political circumstances of each country. The circumstances can be put into three rough categories: post-war disruption, post-Soviet collapse, and socialist-populist regimes. [...]

These hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. I understand that the circumstances of each country were different and that it is perhaps unfair to say, lump Israel in with Argentina. But each country faced political factors that created instability or a national crisis; the government spent heavily to gain popular support, and resorted to the printing presses to pay for their spending.

Therefore, Mish concludes

Those calling for hyperinflation are extremely misguided. It is not going to happen in any timeframe worth discussing.

Make sure to read the entire argument at the source.

Comments

[Eric Parks]

I couldn't get the link to work.

A few points, however:

All arguments above that "it couldn't happen here" could be made for the countries that had hyperinflation. I'm sure they didn't want their oligarchical system to crash and burn but they ruined themselves and their countries by inevitably printing money.

Off the top of my head, I don't recall all Austrians predicting hyperinflation. Their predictions vary and hinge on the political decisions going forward. Some do believe that the hyperinflation scenario will happen. Others call for high rates of inflation if/when the banks lend. Some call for defaults instead. There seems to be a consensus within the Austrian community that A.) There is no strategy for taking the new money out of the system so, at some point, it will enter the economy and effect prices. B.) To stop higher/hyper rates of inflation would result in a heavy hand from government, business bankruptcies, and a loss of revenue for the state when it needs ever greater amounts to pay growing debt levels. Inflation seems the expedient most likely to occur.

"the decision to inflate was a political one, not an economic one"

As if the Fed isn't political? As if this economy isn't run by a political class? Please.

Most Austrians avoid time frames but their arguments for high/hyper inflation seem sound due to the political nature of the phenomenon. Also, people sided with Keynes when Hayek said that we could have higher rates of inflation and an economic downturn at the same time. Hayek didn't name the phenomenon, stagflation, but he was right in predicting its occurrence.

[Georg Thomas]

Excellent points, Eric. Thanks for the "thinking food". That's the kind of critical exchange I like. I'm off with Lucky for a longish walk, enough time to ponder your thoughtful input.

Also, I'll see if I can get the link fixed.