31 votes

Questions for the Austrians

Why hasn't hyper-inflation hit yet? We are well into QE-infinity now and although food prices have gone up, we are yet to see Weimar-type paper burning on the streets. What gives? What manipulations are going on to prevent such exponential inflation?

Thanks all.




Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

my first thought...

is that Ron Paul should answer that question in his next weekly address... :)

I was positive it was going to happen around the election or shortly afterward. I even made front page with this: http://www.dailypaul.com/248959/when-do-you-believe-the-cras...

Great question!

'Peace is a powerful message.' Ron Paul

There is massive equity and credit destruction in progress.

Bankruptcy and foreclosure is an easy example to grasp.

When a foreclosure occurs (let's use round numbers) on a house with a $500,000 loan and the house sells at auction for $100,000, $400,000 is wiped off the ledger. It's just gone. Further the bank can write it down, more or less getting $100,000 (.25 x 400,000).

Multiple that by the number of houses with foreclosures in the last several years.

It's credit destruction.

Pour money into equities. When they decrease in price, nominal value disappears.

Credit derivatives. When they get priced to 0 because they are worthless, many digital zeros are wiped out.

So, yes, while hyperinflationary printing is going on, we're also living through deflationary forces at the same time.

So, you need to be prepared for BOTH inflation and deflation. Junk silver and food are good ways to prep for both. Because you can eat the food either way and sell the silver either way.

Because you are overlooking Money DEMAND

Everyone talks about Money Supply, but people almost always forget about Money Demand.

Like anything else, the value of money is determined by BOTH supply AND demand.

As money supply has been skyrocketing, so has money demand. Money demand is high when people would rather hang onto money than to exchange it for something else.

Apple Computer has around $30 billion in money equivalents, just sitting around doing nothing. That's just one example.

The BIG -- HUGE -- money demand has been the banks exchanging their toxic waste (which has a true value of near zero) for money pumped out by the Fed.

Some of the money has made its way into liquid assets, too -- mostly US Treasuries and stocks.

But the big place the money has gone is into the banks, and that is due to a high demand for money.

Have you seen the velocity of

Have you seen the velocity of M2?

QE is not Inflationary

The reason why we haven't had hyperinflation yet is because QUANTITATIVE EASING (QE) is not inflationary per se. In financial market jargon, QE is nothing more than an asset swap. The Fed gives currency reserves in exchange for Treasury notes and bonds, but the total amount of currency reserves plus Treasury is not changed by QE. Those currency reserves do not circulate in the economy but rather find their way back to the Fed as EXCESS RESERVES earning a mere 0.25% as an over night deposit. In fact, if anything QE is deflationary because interest income on Treasury debt that would otherwise have been earned by commercial banks is instead paid to the Fed which subsequently remits it back to the Treasury.

I like to think of QE as much ado about little. Even a 2004 Fed research paper authored by none other than Bernanke himself along with co-authors Sack and Reinhardt, "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment", casts doubt on the effectiveness of QE when interest rates are at the zero bound

http://www.federalreserve.gov/pubs/feds/2004/200448/200448pa...

Basically Fed ran out of monetary bullets when they drove rates to 0%, but they needed to “do something” to at least appear to be relevant not to mention to justify the cost of keeping all those PhD’s on the payroll. This explains in part why the economic recovery has been so tepid despite unprecedented fiscal spending, (maybe because of it?). It’s the Japanese scenario all over again and let's not forget that Japan pioneered the practice of QUANTITATIVE EASING and look what it what it got them.... two lost decades and deflation.

If the Fed had any meaningful monetary bullets to shoot, WHY would they not have already fired them? In my opinion Fed QE is nothing more than the Fed doing a rain dance.

Ed Rombach

Nonsense

The reason why we haven't had hyperinflation yet is because QUANTITATIVE EASING (QE) is not inflationary per se. In financial market jargon, QE is nothing more than an asset swap. The Fed gives currency reserves in exchange for Treasury notes and bonds, but the total amount of currency reserves plus Treasury is not changed by QE.

1. Treasuries are not money! Buying treasuries with newly created federal reserve notes is not an "asset swap," it is monetization. Moreover, the Fed has bought many hundreds of billions of non-treasury securities.

2. The inflation is plain to see. Look at M1, it was $1368.2 billion at the start of 2008, and it is currently $2420.8 billion, that's an increase of $1052.6 billion, or 77% in just five years.

Those currency reserves do not circulate in the economy but rather find their way back to the Fed as EXCESS RESERVES earning a mere 0.25% as an over night deposit.

Suppose the Fed buys some securities from Joe Blow. Joe Blow deposits his proceeds in ABC Bank. ABC bank, not willing to lend in this economic environment, puts the money on deposit at the Fed to earn some interest. You're correct that the reserves on deposit at the Fed are not circulating, but you've forgotten about Joe Blow's money! He still has access to it, it's in his checking account, being spent regularly on goods and services he buys. The high level of excess reserves means that the money the Fed creates does not get multiplied through fractional reserve lending as it normally would, but the Fed is still creating money. Again, take a look at M1.

In fact, if anything QE is deflationary because interest income on Treasury debt that would otherwise have been earned by commercial banks is instead paid to the Fed which subsequently remits it back to the Treasury.

There's nothing deflationary about that. The money the Fed remits to Treasury doesn't get destroyed, it gets spent: on SS, and Medicare, and DoD contracts, and employee salaries, etc.

Basically Fed ran out of monetary bullets when they drove rates to 0%, but they needed to “do something” to at least appear to be relevant not to mention to justify the cost of keeping all those PhD’s on the payroll. This explains in part why the economic recovery has been so tepid despite unprecedented fiscal spending, (maybe because of it?). It’s the Japanese scenario all over again and let's not forget that Japan pioneered the practice of QUANTITATIVE EASING and look what it what it got them.... two lost decades and deflation.

If the Fed had any meaningful monetary bullets to shoot, WHY would they not have already fired them? In my opinion Fed QE is nothing more than the Fed doing a rain dance.

You seem to be under the mistaken impression that the Fed can spur economic growth. Without opening up that can of worms, I'll just explain what the Fed is really doing, and why. Basically, it has two goals: support the value of bank assets and finance the federal debt. That's it. To do this, it needs to monetize lots and lots of debt, especially treasuries and MBS, which it has been doing in earnest for several years. It's really a rather simple operation, though it gets muddled by the mountains of BS they create to maintain the illusion that they're trying to facilitate recovery.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Dollars & Sense

Buying treasuries with newly created federal reserve notes is not an "asset swap," it is monetization.

Actually it is an asset swap because the total amount of liabilities of the fed and Treasury remain unchanged. It is an exchange of an interest bearing financial asset like Treasuries, MBS or GSE debt for another type of financial asset, in this case currency reserves which do not pay interest..... unless of course those reserves end up as excess reserves which most of them do.

”ABC bank, not willing to lend in this economic environment, puts the money on deposit at the Fed to earn some interest.

Actually bank lending is on the upswing as indicated by the increase in C&I loans according to data compiled by the the St. Louis Fed.

http://research.stlouisfed.org/fred2/series/BUSLOANS/

“Suppose the Fed buys some securities from Joe Blow. Joe Blow deposits his proceeds in ABC Bank...... but you've forgotten about Joe Blow's money! He still has access to it, it's in his checking account, being spent regularly on goods and services he buys.”

Fed does not buy treasuries or other assets from Joe Blow. Fed QE operations purchase assets from banks, so Joe Blow’s money is not an issue.

”The money the Fed remits to Treasury doesn't get destroyed. It gets spent: on SS, and Medicare, and DoD contracts, and employee salaries, etc.”

Actually, the money the Fed remits to the Treasury is extinguished in the sense that it ceases to exist. Remember that it is only fiat and hence there is no intrinsic value associated with it. I gets accounted for as if the Treasury is receiving something of value but I submit to you that this is merely an illusion. Fiat money, i.e. currency reserves are created by deficit fiscal spending of the federal government. The government literally spends these reserves into existence. The fed facilitates the whole process by merely clearing the checks, which means crediting a reserve account at some commercial bank and debiting the Treasury’s account at the fed. It’s mostly all done via electronic entries on a spreadsheet.
In connection with this, the issuance of Treasury debt is simply a statutory legacy of when the US was still on the gold standard. The government, as it functions today, spends first and then any of that spending that is not covered by current tax revenues must by law be “financed” by debt issuance. The only other thing that the fed does is to target interest rates, but they cannot target interest rates and control the money supply at the same time. That would be like trying to hit two birds with one arrow.

You seem to be under the mistaken impression that the Fed can spur economic growth.

Trust me. I have no illusions about the fed’s ability to spur economic growth. That’d why I refer to all of their QE operations as nothing more than a rain dance.

Ed Rombach

Tax Collection Rates

A co-worker who was taught about money from an early age found a common indicator that occurred during previous hyper-inflations was non-payment of taxes.

Once the populace stops paying taxes, hyper-inflation can occur. We need fiat dollars to pay our taxes. Many of us pay over 50% of our income in taxes. Taxation creates a huge demand for fiat currencies.

I have been considerably less worried about hyper-inflation at this time as US Tax collection is very high.

i'll take a stab at it.

My guess is the banks are holding the printed money and stacking up cash reserves. They aren't lending it to a busted broke public. Second, even though we are slowly losing the reserve currency status, we still are the worlds reserve currency. Third, the dollar still has value in the publics eye. Once they....if they realize it's a worthless FED note and the illusion is blown wide open, game over. Fourth, once China and other nations dump the dollar and flood the world with trillions of dollars, it's on.

Anyways, that's my stab at it.

Consumer goods vs food & energy

Bob-45 touched on this a bit below.

1. The vast majority of consumer goods are purchased in China at labor rates that are 5-10% of ours at most
2. More and more manufacturing is automated, driving the cost of manufactured goods even lower compared to similar top of the line items from a few decades ago
3. Governments have such a HUGE appetite for computer hardware, vehicles, office supplies, etc. (not to mention bombs, tanks, etc.), that they have skewed demand and absorbed R&D costs, driving prices down in the "private" sector as well. Plus, they WANT you to buy anything "smart" so they can spy on you, so they'll subsidize these things.
4. Governments own 70% of the stock market. They can maneuver inflation statistics at will (for example, taking frivolities like food and energy out of the equation).

I read about this - the reason there has not been...

hyper-inflation is because of he fact the the banks have the money parked in Fed bank accounts. They are willing to make small percentage, but stil make billion instead of high risk. Also, a lot o mone is tied to credit default swaps.

my guess..

petro-dollar recycling and (an assumption) that a good deal of money created is shored up in foreign central banks to prop up their monetary systems. the new money is not making it's way to US consumers hands as quickly.

the bankers got all the dough

and they are holding onto most of it.

They will pull out the small amount necessary to buy up the few remaining assets the middle class still owns when the bottom really drops out.

ie won't see hyperinflation until the cash actually hits circulation...

good question

Austrians, and many other schools of economics, do believe that the money supply determines prices. As the Fed "prints" more money it devalues all the other dollars in circulation; causing prices to increase.

Increases in the cost of food, gasoline, and other basic goods are exactly where you would expect to see the first indications of inflation, and we are all witnessing this occur. When the Fed "prints" new money though it is not instantly in the pockets of everyone, often called "helicopter money" like the money was thrown out of a helicopter to everyone. The new money is first created in unliquid assets such as bonds and treasury bills. It has to go through various channels of finance before the liquidity increases to easy to use intermediaries of exchange, like the money in your wallet; "velocity of exchange" is the term thrown around by our Keynesian friends. I think the literature points to this taking about three years to start putting upward pressure on inflation... so the increase in inflation that we are witnessing today are a result of the Fed's policy about 3 years ago.

Another factor is people's expectations of inflation. If people mistakenly think inflation is low, perhaps guided from propaganda from the Federal Reserve,this will be reflected in the bond market where people try to prevent having inflation eat away at their investments. In the short term this will prevent large increases in inflation, but eventually the market wins out and inflation occurs anyway.

The best overview

you can get of when and how hyperinflations initiate is "Monetary Regimes and Inflation" by peter bernholz. He gives an overview of the history of hyperinflations and what facts are present when these hyperinflations take off. Great overview if you want a good understanding of what to look for in our economy.

Hyper-inflation is inflation

Hyper-inflation is inflation at 50% or more a month... this happens at the very end of the collapse in a lot of cases, however currencies destruct different ways. Some quickly some not so quickly, or instantaneously... and this is the first event in Human History where a fiat money has floated on top of fiat moneies because it is the reserve currency. In most ancient histories a country next door would go on the gold standard and lift away into productivity destroying the other countries currency

The USD is still being held

The USD is still being held up as the reserve currency of the world. Once all hope is lost for the USD (hyper inflation), the world will drop its reserves and the US will collapse.

Interest rates are not the primary drivers of inflation

Although interest rates and inflation rates are closely linked it is important to remember that most of the money creation that happens in our economy is NOT through rate manipulation by the fed but INSTEAD through the fractional reserve banking system.

I've heard many people say how the banks got all this money for free and now they are not lending to anyone. This, in my view, deviates slightly from what is really happening. Right now the majority of people are not looking to increase their debt but reduce it. Its not that banks are not lending. It's that people are not borrowing.

The reason Ron Paul understands why QE will fail (as well as every other austrian economist) is that he understands that economics is not running on a thermostat that you can set or adjust. Economics is about people and where they are in their lives. After such intense increases in debt throughout the last 20 years people are tired of borrowing money. This means that number one driver of monetary expansion has been cut off at its core (Most people currently deciding policy are more worried about deflation which is what setting interest rates at 0 indicates).

The Fed is now down to its last resource in its fight against deflation. It has (relatively) recently begun to print money and directly purchase treasury bonds as well and mortgage backed securities (MBS). This has only been happening in the last couple of years. Take a look in contrast to the amount of debt people have incurred over the last 10-12yrs:

-Private debt (institutional debt and consumer debt) went from $20T in the year 2000 to $42T in 2012 (a $22T increase in a little over a decade!)
-Unfunded liabilities are conservatively estimated at $60T
-Finally government debt has risen by over $10T

Since 2009 the Fed's balance sheet has been expanded by about $3T. Right now they are far from having monetized the amounts of debt incurred since the beginning of this generational bubble. We have already been through a period of heavy inflation and now all the debts are coming due. If borrowing money is equivalent to creating money than paying back a loan is equivalent to destroying money. Because this situation is chronic not only throughout the US but also throughout the world we are being subjected to intense deflationary pressures which are a result of past interference with interest rates.

Remember that hyper-inflation is not a guarantee and you should not make all of your plans depend on this one specific senario. If the Fed shuts down tomorrow you can be sure you will not see hyper-inflation happen. Instead you will see a depression of the money supply like none other making each dollar more and more valuable as they circulate less and less (not that this would be a bad thing in the long run. The market is indicating that we have overextended and need to pull back).

The schools of thought surrounding the future of monetary policy at the current moment is speculative. We are basing our projections on what we have experienced in the past. It is natural to assume that the Fed will always print money but they too are subject to outside pressures. If we listen to many people calling for hyper-inflation we always hear them say that the QEs will continue to fail and they are right. But what if one day the Fed stops easing? What sort of event would cause them to do this?

If there is one thing to remember through all this is that the Fed is always behind the curb. Like Ron Paul said "We are always fighting the last battle."

Sam

Actually, QE isn't really happening right now.

http://www.dailypaul.com/268838/qe3-qe4-arent-all-theyre-cra...

The blog links to the Federal Reserve site, and shows where the Fed balance sheet is the same today as it was last January.

Therefore, inflation should be pretty tame.

Author of Shades of Thomas Paine, a common sense blog with a Libertarian slant.

http://shadesofthomaspaine.blogexec.com

Also author of Stick it to the Man!

http://www.amazon.com/Stick-Man-Richard-Moyer/dp/1484036417

Hmmm

not sure what they are linking to...but that isn't really accurate:

http://www.federalreserve.gov/releases/h6/current/

well if unemployment remains high but prices don't drop

that is inflation to me.. fewer paychecks to go around, less economic activity yet goods remain expensive.

US Money backed by Labor of the working man

US Money is not just printed and dumped into circulation. If it were, it would have been in hyper inflation mode long ago.

New fiat money is loaned to banks from the fed, not handed out (ok, its handed out, but its "on loan ... to be paid back")

Banks don't give that money to people, they give them loans that are expected to be paid back.

So, basically every dollar that goes into circulation is on SOMEONE's back. Some honest, working american who gets a paycheck and pays their bills every month will be paying that money back to the bank.

So, even tho our money isn't backed by a commodity that has been saved, it is backed by some poor schmuck who intends to pay it back through hard labor of one kind or another.

You will have crazy hyper-inflation as more and more people declare bankruptcy, or walk away from their mortgages, or whatever, because then, all the money spent on the system by consumer loan spending is no longer backed by that person's good word (ongoing labor), which will upset the balance between production and money supply.

when it comes back to the U.S.

right now still in foreign countries.

foreign opinion is still maintained by media/PR.

Hyperinflation is caused when

Hyperinflation is caused when faith in the fiat currency is lost; that has not been reached yet.

But QE will definitely continue inflation. The only people that will benefit from it will be the banksters; they get to spend the money before supply/demand is thrown out of whack by the increase in the supply of money. By the time the money gets down to the other groups--which will be no money left over--prices will have gone up, further dwindling the middle class.

Eventually the whole charade will cease when this reckless printing of money continues to inflate and devalue the base of money. Causing countries to stop holding US dollars, and in return causing GDP to rapidly fall, causing depressions throughout the country. People will start to lose faith and the Fed will print even more out of desperation. That's when you'll find your $10 milk and $15 gas.

But the events to cause a hyperinflation may not ever come about due to other political events. It just depends.

Might be these things....

Might be the Austrians miscalculated by not factoring in mafia tactics. The dollar hasn't been dumped as the world reserve currency even though it logically ought to be. "We" can bomb and screw with countries to keep them playing along, accepting our useless paper for real goods, and only trading among themselves using our useless paper...As long as this is the case, the dollar has much practical value any way you cut it.

Also, you get inflation when too much money is in circulation. Money not in circulation more or less doesn't exist.... Might be the Austrians miscalculated by not realizing how little of the fake money would end up in circulation, or on what schedule it would be put into circulation, or through what channels.

Also, might be that our lowlife rulers don't want to play into the Austrians' hands by allowing the collapse to occur exactly as the Austrians predicted, so they reversed action and have been scrambling to keep the currency alive long enough for people to not make the connection between Austrian prognostication and what actually comes about....In other words, it could be that Ron Paul and the gang actually forced the rulers to stay off the collapse by any means necessary. 'Cause if the collapse happened sooner than later, who would everyone be looking to as the geniuses who called it when everyone else had their heads in the sand?....The Austrians might have been too smart for their own good.

My understanding is all the

My understanding is all the money was given to the banks and they are just sitting on it. I.e. not lending it out.

If you disagree with me on anything you are not a real libertarian...

Hyperinflation isn't caused by

Hyperinflation isn't caused by X dollars being in the system. There is no "magic" amount of money that will trigger it. Rather it is caused when a critical mass of people lose faith in the ability of those dollars to repay debts. Right now, faith is all the dollar is hanging on right now, and it will probably hang on for some time yet.

However, even now some lenders are beginning to throw up their hands at the inability of the dollar to retain enough value to allow them to earn a profit. As more and more lenders come to this conclusion, loss of faith in fiat currency will spread from the monetary institutions to the general population.

You might then think: if the answer to staving off hyperinflation is faith, then the system can be maintained in perpetuity as long as we all continue to believe in it. That, however, is an argument for propaganda and thought police. It's been tried in Zimbabwe (among other places) and failed miserably. You can't force everyone to believe that the dollar is a good value; eventually enough people are going to reject it, regardless of what you do to keep the faith.

Questions for Keynesians

1) If I take your property in exchange for scraps of paper backed only by the barrel of a gun, is that "thievery"?
2) If I remove the essential consumables from the Consumer Price Index, does that "reduce inflation"?

The cost of the eggs I buy has increased 50% in the last 14 months. The cost of the yogurt I buy has increased 30% in the last two months.

Your comments?

Professor Bernanke says: "it's transitory"

...been about a 100 years of "transitory" inflation, should be ending any day now.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Cost of Ice cream ,milk, and

Cost of Ice cream ,milk, and steak has as well.

Southern Agrarian