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Right, we've got to start with Twitter/Square's Jack Dorsey and this 👇
We had a good chat about it this morning here 👇
And I wanted to expand further.
Predictions of hyperinflation are nothing new (the jury's still out on whether this was more of a disingenuous take designed to promote Bitcoin...)
Let's not worry too much about what Jack may (or may not) actually think.
Let's start by defining hyperinflation properly
In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, such as the US dollar.
Hyperinflation —usually 1,000 percent or more a year— occurs only under very special circumstances: in a disorderly breakup of a currency zone; after wars or revolutions, when monetary or fiscal authorities lack control; and when wild populism prevails.
Is the US really on the verge of any of those?
OK, now we're going to reference this excellent article from The Atlantic (written in 2012 btw, debunking many of the same arguments we see today) 👇
How are the United States' historic budget deficits, money-printing and depressed economy any different from the countries that have experienced hyper-inflation? The three-part answer is:
(1) we don't have any problems selling our debt;
(2) we aren't actually printing money;and
(3) the United States is a highly productive economy that is nothing like bombed-out Budapest.
Let me unpack these one by one.
Right now getting the markets to buy our debt isn't the problem. Getting enough debt for the markets to buy is the problem. Investors are so crazy to load up on Treasuries that they're actually paying us to borrow, taking inflation into account.
(Exactly the same thing is happening right now in 2021)
But while we're currently getting free money from investors, Hungary circa 1945 was getting no money. It was an investment pariah. If Hungary wanted to rebuild its economy, its only recourse was the printing press.
The US is far from an investment pariah right now. One look at US equity inflows vs ROW tells you all you need to know. 👇
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Full Hyperinflation article is summarised here 👇
Many conflate an increase in the money supply with an increase in inflation.
The argument is basically:
- If you increase the supply of 'something' you devalue it.
- Therefore, increasing the supply of money devalues said money.
- Everything is priced in money and prices will now increase purely because the value of money relative to 'things' has decreased.
Don't worry if it doesn't. No-one's actually 'printing money'.
QE is just an asset swap.
When the Fed buys bonds from a bank they simply swap reserves for t-bonds. The bank has the same net worth (roughly, depending on any capital gains and as mentioned previously QE1, 2 and 3 have had diminishing returns here) and the reserves sit in the interbank market (and no, they don’t get “lent out”, that’s not how banking works).
Great read on this here 👇
Now, I don’t think it should be controversial to say that spending is a function of income relative to desired saving. Inflation is an extension of spending.
And if producers have pricing power due to high aggregate demand or aggregate supply shortages then prices will generally rise (I’m oversimplifying, but for the purposes of this discussion that’s sufficient).
So you generally need the spending if you’re ever going to have the inflation. It’s that old demand thing. If you’ve ever run a business you know that revenues and pricing power don’t exist without customers walking in the door.
The problem with QE is that it doesn’t have a transmission mechanism to substantially increase aggregate demand.
That last point is so important.
Perhaps the biggest difference with this round of economic stimulus is that QE did have a transmission mechanism.
The US government.
I'm stretching the definition a lot there.
QE helped finance the US government stimulus. That money was sent directly into private bank accounts/the economy, and increased aggregate demand.
Just at the time when supply chains had shut down...
And if producers have pricing power due to high aggregate demand or aggregate supply shortages then prices will generally rise
Which is largely why we've seen this recent spike in inflation.
The US government has stopped sending that money out now...
Which means the US now faces fiscal headwinds instead of tailwinds...
This chart is a pretty simple debunking of the USD hyperinflation narrative.
In short, the govt printed tons of money during covid and that caused some uncomfortable inflation in 2020/1.
But the fiscal headwind in 2022/3 is huge. 👇
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The approach is built on the work of Knut Wicksell, a late 19th century Swedish economist whose key insight was that at any given time, there are two interest rates: the “natural” or optimum rate (which we can only infer) and the actual or market rate (which we can see).
When the market rate is set too low, capital misallocation emerges, leading to an inflationary boom and inevitable subsequent bust. When the market rate is set materially above the natural rate, the economy quickly tanks. Good policy means keeping rates within the Wicksellian “optimum range”.
At any point, I have no idea what the natural should be, but I can roughly estimate when market rates are either clearly too low, or far too high. It will, by necessity, be an inexact judgement, but as John Maynard Keynes sagely noted, it is better to be approximately right than precisely wrong.
Here's the basic framework:
Arguably, we've done the inflationary bit (top right). Where next...?
Summing up, QE is not inflationary. The big driver of aggregate demand (US fiscal spending tap) is now reduced to a trickle and hyperinflation is more likely to be caused by societal collapse than anything else.
Let's end on that cheery note!
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