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Thursday, August 30, 2012

Mish on Hyperinflation



As opposed to his views on deflation, for the most part I agree with Mish’s views on the likelihood of hyperinflation in the United States.  In the subject article, Mish lays out a good case for why he believes hyperinflation is not in our future. 

This is not to say I agree fully with him on this issue.  Mish believes the Fed would not create hyperinflation, and could not even if desired.  While I concur that the Fed would not create hyperinflation, I do not agree that the Fed is powerless to create hyperinflation.  Mish summarizes his view with the following:

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

More so, hyperinflation will not solve the problem.  Hyperinflation does nothing to reduce the burden of unfunded liabilities.  Why would the Fed take the nuclear option when it would do nothing to solve the fiscal problem, still in place and not addressed?  Hyperinflation would end the game.  The Fed’s job is to protect the banks, and hyperinflation will destroy them. 

However, the Fed absolutely can cause hyperinflation if it chooses to do so.  It is one thing to say that the Fed likely will not, and to explain the reasons why.  But it is inaccurate to state the Fed is powerless to do so:

At this stage in the cycle, and in sharp contrast to what most believe, the Fed is essentially powerless…

I say the following not because I believe the Fed will do it, but to counter the notion that the Fed is powerless:


  • The Fed can buy any assets for any amount it desires.  There is no limit to what the Fed can buy if it decides to do so – auto loans, student loans, the S&P 500, derivative contracts, etc.  Fill in the multi-trillions.
  • The Fed absolutely can charge interest to banks for holding excess reserves. 
  • Theoretically, the banks can hold excess reserves as cash in the vault.  Practically, the banks cannot get enough $100 bills into their vaults to avoid holding excess reserves with the Fed.
  • The Fed can charge enough interest for holding excess reserves to cause the banks to look at any breathing American as a good credit risk relative to the cost of holding excess reserves. 
  • At some point, the banks will lend.  Is it at a 2% charge?  5%?  20%?  50%? 


Again, I do not believe any such offer will be forthcoming; however the Fed absolutely can cause hyperinflation if it desires.

There are many reasons why the Fed will not pursue such a policy, but this does not equate to the Fed not being able to pursue such a policy.

However, if Congress ever gets its hands on the central bank or on the ability to create a new version of greenbacks, the odds of hyperinflation will increase noticeably.

The Song and Dance Continues



I find this article regarding the current U.S. presidential election of interest not because the author has anything particularly insightful to say, but because what he says allows for a very easy examination of the desire for continuation of the shell game.

Now, it is not exactly that: the author identifies the many ways in which both the republicans and democrats are hypocritical in their faith in government, and almost inversely so.  In this, he has offered what could be considered out-of-the-box thinking as far as the mainstream media is concerned.  For example:

The Republicans claim to want smaller and less intrusive government. Yet they vehemently demand tighter government controls over abortion, immigration, marital arrangements and sexual behavior. On other politically less salient issues such as drugs, prison reform, alcohol use by young adults and doctor-patient privacy, Republicans consistently support government intervention….

The Democrats' vision of government is equally paradoxical, but in the opposite direction. The Democrats, like left-wing parties in Europe, laud the economic role of government, and especially its importance in supporting public goods and regulating business abuses. But they deny the right of government to regulate, or even try to influence, private behavior, even when it impinges on community life in such areas, for example, as marriage, child-rearing or trade union activity, especially in the public sector.

Of course, neither version is true in reality; these stereotypes are only true in terms of what is desired for the population to believe regarding the two parties.  The system is established the way it is in order to ensure that, whichever party wins, government grows.

The republicans nowhere are working for a smaller government – this certainly could have occurred under Bush with republican majorities in both houses of Congress, yet it did not.  They gave Americans a vast new program of prescription drug benefits, on top of the annual growth in virtually every department.

Even Ryan, the budget buster, shows no plan of reduced spending and his plan doesn’t balance the budget for decades.  This is somehow considered smaller and less intrusive.

And the democrats – they certainly want to regulate personal behavior – what on earth is Obamacare?  Even more obvious, democrats have much to say about the definition marriage and child rearing, just to comment on two of the examples used by the author.

While the author’s use of the stereotype serves the purpose of legitimizing the battle lines, what is interesting is that the author points out the hypocrisy in the philosophy – one cannot be consistent if advocating faith in active government in one arena and at the same time suggesting that active government is detrimental in another:

In short, the left's faith in government suddenly evaporates when it comes to social and lifestyle issues, while the conservative passion for smaller and less intrusive government only applies when money and economics are at stake.

Again, the reality is that the lines are not drawn consistent with the stereotypes, or the narrative the people are expected to believe.  However, it is correct that there is hypocrisy – and it is in both versions (which in fact are only two sides of the same story).

The author concludes with his own version of what is needed, and sadly, it involves a continuation of the current model – just a better one if only the author’s suggestions would be followed, it seems: 

What is needed instead is a reappraisal of politics and economics that recognizes that governments and markets can both make big mistakes, that macroeconomic management is needed but must not impede private enterprise, that complex new systems of checks and balances may be needed to protect and promote both public and private interests.

Talk about contradictions and hypocrisy: how can one have “macroeconomic management” that doesn’t “impede private enterprise”?  Complex new systems of checks and balances?  I am certain the author is calling for smarter bureaucracy, however in this there is no possibility.  Where does the author suggest these smarter people come from?  How might they be induced to act “better” than the last group of smart people?

There is no need for bureaucratically developed and enforced “complex new systems of checks and balances.”  The most complex system of checks and balances is also the simplest to implement.  It is called the free market.

At least he spoke plainly about the hypocrisy.  This will have to suffice: it really would have been too much to ask that the opposite (and only appropriate) conclusion be reached in a piece published at Reuters. 

UPDATE: After posting this, it dawned on me that I missed a key point.   Nowhere does the author suggest that one of the (falsely perceived) differences between the parties is on the issues of war / civil liberties / etc.  Not that there is any difference between the parties, but in the past it was always pretended as if there was - the peace-loving democrats vs. the war-mongering republicans.  (As an aside, the pretense was opposite of the usual reality - it was a democrat in office at the start of WWI, WWII, Korea, and Vietnam.)

The election of Obama may have put an end to that, as I have suggested elsewhere.  It certainly was unmentioned by the author of this article.

Wednesday, August 29, 2012

Ambrose has it Almost Right on the Nutty Gold Standard


The Monetary Maginot of the Gold Standard, by Ambrose Evans-Pritchard

As with most AEP columns, I approached this one with the view that he will have a sensible diagnosis but prescribe a horrendous cure.   Where would he go with this idea of gold-backed currency?  With what argument would he demonstrate what a kooky idea it is?

Some gold bugs – though not ones with historical memory – seem to have greeted Republican talk of a renewed Gold Standard with near ecstatic delight.

So here goes – gold never worked, it couldn’t support a growing economy, it brought on deflation….which argument would AEP lean on in order to do his part in the pooh-poohing of gold?

They need their heads examined. Gold must be free if it is to police the political class.

Well, hush my mouth!  Is Ambrose saying what I think he is?  I shan’t get my hopes up too high, as he has let me down before.  Gold!  Free!  Both words in the same sentence.  Is he headed toward a free-market in money?

The beauty of gold is that it is a store of value beyond political or state control, or largely so.

I am really getting giddy….

It is a coldly disassociated asset based on atavistic attachment dating back thousands of years. It is common to mankind, and therefore nigh impossible to suppress. It is, to boot, a safe haven from tyranny, the portable wealth of persecuted peoples over the ages.

Whoo-hoo!!!  Ambrose, can I buy you a drink?

Once governments link their policies and fortunes to gold through a fixed system, the metal – or its owner – becomes prisoner of abuse.

Well, now Ambrose makes clear he is speaking of a government enforced and controlled gold standard – he hinted at this earlier, but now he eliminates doubt.  Bartender, close my tab.

He goes on to point out some of the many numerous events when government has abused and otherwise violated the then-in-place government enforced gold standard.  Thus, to his earlier suggestion that gold must remain free if it is to serve the purpose of restraining the political class. 

His point, which is quite correct, is that governments have found ways to abuse or otherwise circumvent a government enforced gold standard whenever it was felt necessary or convenient.  He is suggesting that there should be no wish for a gold standard, because government will just abuse it anyway.

He demonstrates his perception of the U.S. political scene:

Needless to say, the Republican gold demarche is unlikely to get off the ground. It is a sop to the Tea Party.

The sop isn’t fooling many, I believe.

True Tea Party men and women are not taken in by such flummery. Gold needs no party endorsement. It shines alone.

Ambrose is once again precisely correct on the diagnosis – to pray for gold to play its role when the standard is a government standard is a false hope; this will result in heartbreak.

However, he fails on the prescription for a cure – his prescription is that gold should therefore not be used to back the currency.  Instead of going where I hoped against hope he would be going – the production of money and credit should be left solely to the market – he concludes that, since government will mess it up anyway, there is no reason to consider gold.

As far as he goes, he is correct.  However, it is a false choice that he is working within.  The gold choice is not limited to government gold.  Eliminate the monopoly.  Leave money and credit to the market: this is what will help to keep governments in check.

The “Orderly and Humane” Forced Expulsion of 14 Million Germans


Orderly and Humane: The Expulsion of the Germans after the Second World War, by R.M. Douglas

As I did with Hoover’s volume on U.S. foreign policy before, during, and after the Second World War, I plan on writing several posts covering this work by R. M. Douglas.  From the introduction:

Immediately after the Second World War, the victorious Allies carried out the largest forced population transfer – and perhaps the greatest single movement of peoples – in human history.  With the assistance of the British, Soviet, and U.S. governments, millions of German-speaking civilians living in Czechoslovakia, Hungary, and the parts of eastern Germany assigned to Poland were driven out of their homes and deposited amid the ruins of the Reich, to fend for themselves as best they could.  Millions more, who had fled the advancing Red Army in the final months of the war, were prevented from returning to their places of origin, and became lifelong exiles….altogether, the expulsion operation permanently displaced at least 12 million people, and perhaps as many as 14 million.  Most of these were women and children under the age of sixteen….estimates of 500,000 deaths at the lower end of the spectrum, and as many as 1.5 million at the higher, are consistent with the evidence as it exists at present.

In this book, Douglas compiles for apparently the first time in English a thorough study of one of the least discussed tragedies of the Second World War, and certainly of the immediate post-war period – that of the forced expulsion of Germans from their homelands in former-Germany-soon-to-be-Poland, Czechoslovakia and elsewhere in Central Europe at the end of the war.

On the most optimistic interpretation…the expulsions were an immense man-made catastrophe….

On this subject, I have considered that the fate of those living within and between Hitler’s Germany and Stalin’s Russia was hopeless – whether the two powers remained as allies, but especially if they did not.  Therefore, when I consider these expulsions and specifically the roles played by the U.S. and Britain, I wonder if any different actions taken by these two western nations would have made any difference.  I am hoping to understand this more fully by the time I finish the book, however at minimum Douglas identifies the tragedy as man-made – suggesting “man” could have “made” some other outcome.  I also consider that such tragedies, even if unavoidable, do not need to be sanctioned by third parties (e.g. the U.S. and Britain).  Here again, I look forward to any enlightenment brought forward by the author.

That this tragedy remains relatively unknown, even among the highest academic circles, is given evidence by the following anecdote provided by the author:

It is, then, entirely understandable why so many of my splendid and learned colleagues on the Colgate faculty should have expressed their confusion to me after reading in the newspapers in October 2009 that the president of the Czech Republic, Vaclav Klaus, had demanded that the other members of the European Union legally indemnify his country against compensation claims by ethnic German expellees, as the price of his country’s ratification of the Lisbon Treaty.  None had been aware that anything had occurred after the war in respect of which the Czech Republic might require to be indemnified.

Douglas gives some reasons why he believes that this episode has received so little attention:

  • For Germans, it invites debate about the war-time record of ethnic German minorities living in the subject countries.
  • For the citizens of expelling countries, it draws unwanted attention and casts a doubtful light on carefully crafted war-related narratives.
  • For citizens of the U.S. and Britain, it draws light to the complicity of their leaders in one of the largest episodes of human rights abuse in history.

Douglas does not add in this context, but elsewhere sheds light on, another possible reason for the relative silence.  It is not considered polite in mixed company to show any sympathy toward Germans as regards the Second World War, and especially if it might be juxtaposed to the Holocaust – therefore even the study of such episodes might result in unwanted professional risks.  This can be concluded given his need to apologize in advance for the possibility that he might be accused of holding precisely such views:

It is appropriate at the outset to state explicitly that no legitimate comparison can be drawn between the postwar expulsions and the appalling record of German offenses against the Jews and other innocent victims between 1939 and 1945.  The extent of Nazi criminality and barbarity in central and eastern Europe is on a scale and of a degree that is almost impossible to overstate.

The author indicates that the Western Allies went beyond acquiescence in the operation, and in fact played an “underappreciated part” in the forced transfers.  This point will be important for me to understand as I read through the book – again, life dealt a rotten hand to the people stuck within and between Russia and Germany once Stalin and Hitler came to power.  Pain and suffering was certainly a given, whether or not the U.S. and Britain became involved in the war.  But acquiescence is one thing – being complicit is quite another.

Douglas assesses the expulsions from their earliest origins – beginning with actions, attitudes and intrigues occurring between and among the principle actors as early as the beginning of official hostilities.  He is humble about his accomplishment, suggesting it is only a small step upon which he hopes future scholars will build.

I look forward to his treatment of this terrible chapter in history.

Tuesday, August 28, 2012

Another Combatant Enters the Keiser – Woods Arena


John Aziz has thrown his hat into the ring of the recent spat prompted by Max Keiser’s stepping on the work of Ludwig von Mises.  In his contribution, Aziz focuses on the Austrian’s lack of using empirical data to test and confirm theory, and he disagrees with this approach.  This to me is reasonably well settled by Hayek’s lecture delivered on the occasion of his being awarded the Nobel Prize, and this issue is not the one I will address here.

Aziz uses as his main example of demonstrating this shortcoming is the fact that many Austrians predicted rapid and growing inflation in the aftermath of the Fed’s interventions, beginning especially in 2008, and yet this mass (or hyper) inflation has not yet occurred, and in fact inflation (as measured in prices) has stayed relatively benign:

…these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation, while ignoring the empirical reality of Japan, where a huge post-housing-bubble expansion of the monetary base produced no such huge inflation.

It is true, as Aziz points out – there were several prominent (and not so prominent) Austrians making this prediction – hyper-inflation is just around the corner.  This is certainly not true of all of them – one example would be Dr. North.  This critique of Aziz falls short – as some Austrians rightly recognized that inflation was not coming absent bank lending the fault cannot be in Austrians as a group or as a school.

The reason the Fed money printing has not resulted in inflation as some Austrians have warned has nothing to do with not looking at “the empirical reality of Japan”; instead, it has to do with not considering the reality of the banks holding this increased base money as excess reserves – the money created by the Fed has stayed with the Fed and has not been lent out by the banks.  The significant monetary inflation actions taken by the Fed have certainly increased the supply of money; however the demand for money has fallen as well.  Therefor the impact of prices as measured in dollars has stayed reasonably calm (this, of course, takes the government numbers as is – an assumption that many would consider not valid).

Many Austrians, Dr. North included, have regularly pointed this out.  This “miss” by certain Austrians has nothing to do with ignoring empirical reality and everything to do with ignoring a factor in the deductive reasoning.  The critique of Aziz misses the mark on this count as well – there is nothing in this “miss” that suggests a fault of Austrian Economics, but instead a fault of a complete application of factors in the analysis.

There is no shame in this – Human Action implies that we are, after all, only…human.