Why QE Didn’t Cause Hyperinflation

Ben Bernanke, and the Keynesians were right: Quantitative Easing has not caused the kind of inflation that the non-mainstream Austrian economists claimed that it would. The theory was that a soaring monetary base, and the zero-interest-rate-policy would lead to easy money flowing like a tsunami, and creating such a gush that inflation on goods and services — the change in cost from month-to-month and year-to-year — would soar, making daily life impossible for those on fixed incomes, and in a worst-case-scenario — like Zimbabwe, or Weimar Germany — forcing consumers to use an armful or wheelbarrow of cash to purchase a loaf of bread. Let’s look at the monetary base:

That is a huge spike!The monetary base — also known as M0 — is the total amount of coins, paper and bank deposits in the economy. Quantitative easing injects new money into the monetary base, and as we can see above, has great increased it. So why can I still buy bread without a wheelbarrow? That is because the monetary base and the money supply are two different things. In a fractional-reserve banking system, deposits in banks can be lent, re-deposited, and lent again. Government policy determines the number of times that money can be lent — in the United States, total credit cannot exceed lending by more than ten times. The money supply — which accounts for fractional reserve lending — is known as M2. Let’s look at it:

So banks must be hoarding cash? That’s right. They are:

And what effect has quantitative easing had on prices? Here’s the CPI (inflation for consumers):

And the PPI for raw goods, intermediate goods, and finished goods (inflation for producers):

We are not experiencing an inflationary storm, not by any means. More like struggling over a mild deflationary slump. Hyperinflation is characterised by inflation in the thousands or millions of percent, and although the monetary base has increased fast enough to hugely inflate the currency, that hasn’t materialised. To understand why, we have to understand the phenomenon that quantitative easing sought to combat. Ben Bernanke’s academic career was characterised by his study of the Great Depression, and specifically the idea that following from the Wall Street crash of 1929, deflation made debt much harder to repay, leading to bank failures, leading to a credit contraction on fears of more deflation, leading to even more deflation, and so on in a kind of spiral of death. Quantitative easing has sought to prevent that spiral of death, and to prevent deflation from causing the real value of old debt from spiking, which would cause even more defaults, even less lending confidence, and even more deflation. And it has been relatively successful. But — very much like the Japanese response to its housing bubble in the 1990s — it does not seem to have done enough to allow a resumption in growth. From Dr. Housing Bubble:

The collapse in housing prices has been similar in both [the United States and Japan] and the path of each bubble seems extremely similar.  For example, the above chart looks at Japan real estate starting in 1984 and aligns U.S. home prices starting in 1997.  So a decade sets both bubbles apart but the path is unmistakable.  Japan gave up all gains in their housing bubble bust and the U.S. housing market has yet to reach that trough.  Does this mean a baseline of 1997 is where a true bottom will be reached?  Hard to say yet there is little evidence to show for a rise in home prices.  There is still over 6,000,000 homes in the shadow inventory that need to be liquidated at some point and will add pressure to home prices on the downside.  In terms of bank housing lending collapsing and real estate values imploding we are two for two between Japan and the United States.

Essentially, in both the United States and Japan, credit bubbles fuelling a bubble in the housing market collapsed, leading to a stock market crash, and asset price slides, triggering deflation throughout the respective economies — much like after the 1929 crash. Policy makers in both countries — at the Bank of Japan, and Federal Reserve — set about reflating the bubble by helicopter dropping yen and dollars. Fundamental structural problems in the banking system that contributed to the initial credit bubbles — in both Japan and the United States — have not really ever been addressed. Bad businesses were never liquidated, which is why there has not been aggressive new growth. So Japan’s zombie banks, and America’s too big to fail monoliths blunder on. Policy makers “saved the system”, and ever since then have gradually dealt with slowdowns through monetary and fiscal easing.

Hyperinflation is an entirely different phenomenon. It tends to occur not when countries print too much money, but with a collapse in the real economy. The money printing is usually a desperate after effect. The classic examples of Weimar Germany and Mugabe’s Zimbabwe confirm this idea — Weimar Germany was devastated by the production standstill in the Ruhr industrial region, and Robert Mugabe obliterated Zimbabwe’s agricultural infrastructure. So — as Japan enters its third lost decade — is the United States headed for a growth-free and deflation-heavy future?

Well, Japan has been in a state of stasis supported by debt. While its government has massive debts — over 220% of GDP — these debts are predominantly owed to domestic creditors. Japan also has a very high personal and household savings rate. America, on the other hand, is in huge debt to hostile foreign creditors, but not only this, monetary easing is not so much a domestic policy as it is an international one, because of the dollar’s role as the global reserve currency. Essentially Japan’s slowdown and life-support was never quite as threatening to its ability to produce the necessary goods and services as America’s. Japan is less dependent on imports than America, which relies on its largest creditor to export vast quantities of consumer goods, basic materials and components. Japan does not have the same corrosive trade deficit with China.

If — as mainstream economists hope — China can be patient enough to allow America to resolve its problems, and manufacture more at home then inflation is very unlikely. America may stumble through a lost decade, before new technologies, and new business models finally pull America out of the slump. American policy makers might even have the foresight to let failed business models fail and liquidate failed businesses, allowing for new growth to take root, and avoiding Japanese zombification.

If China, on the other hand, decides that it is sick of being America’s industrial base then both nations could face significant problems Entering into a trade war with a nation that holds so much of America’s debt, and produces so much of the goods that sit on American shelves is an extremely risky proposition. A drastic fall in goods circulating in America — as the result of Chinese export tariffs, yuan flotation, or an outright export ban — could be a .flashpoint

But a greater danger still might be an oil slowdown. Is it any coincidence that Saddam Hussein’s Iraq was invaded by the American Empire very shortly after turning his back on the dollar and demanding payment in Euros?  Certainly, the case can be made that Saddam was being petty and vindictive, but with a slumping American economy, with a devalued dollar, and with mounting American debt concerns, Arab patience with America — and Arab willingness to sell oil for dollars, rather than yuan, roubles, or gold — will certainly be tested.

Of course, the American strategy since Nixon and Kissinger has been that American military supremacy is enough to essentially give America a free lunch. But there ain’t no such thing. That policy has depleted American manufacturing, and piled-on American private and public debt to the point of a Minsky moment and serious crises.

77 thoughts on “Why QE Didn’t Cause Hyperinflation

  1. Thanks John, I’ve been returning your blog and it’s proven to be a worthy read. I do not believe the future of the United States will be quite so hawkish as you do, merely from lack of political capital alone, but it’s clear we are replacing the Cold War deployments with Middle Eastern ones to secure resources and prevent Russia and China from getting too adventurous. We were able to create this debt because people were scared of Russia and China, we were the best bet for their continued liberty. Will our new vision for the Free World prove a stupid mistake? Will people be happier having China as the toughest world power, usurping NATO? Will Southeast Asia willingly allow China to claim their shores and manipulate their policies? Everyone seems happy buying our treasuries when things go bad.

    Besides, China is strong-arming other countries in the worst possible way, with their monopoly in rare earth metals and their wholesale purchase of monumental tracts of African land (participating in the oppression of locals in the process, something they’re quite good at), they are taking a page from our history books. The USA has no shortage of oil shale (3x the reserves of Saudi Arabia) and enough rare earth metals to last the world for centuries. That too is a reason why people might have faith that our downsized industrial sector is just a sad phase.

    I also don’t understand how we could enter into a trade war with a country that greatly relies on a trade surplus with us. Wouldn’t it benefit us to move all those jobs back here?

    • Right! Because the U.S. has never uses any coercive force on uncooperative sovereigns…
      The U.S. spreads freedom and liberty across the globe [one drone strike at a time]!

  2. If I could answer the question at the end of the last post- it is because your products will not be competitive. Your wages are higher than china, hence your products will cost more. Moreover your manufacturing base is gutted, and would require capital to rebuild.

    • Jonah:

      Kane is right, but there are a couple of things I need to add

      1/ China is getting less oil and less raw materials (particularly gold) than it wants out of its dollar pile — and it expects that unless America undertakes serious fiscal and monetary reform to stabilise the currency, it will lose even more in the future. Ideally, China would like to see an austerity program that doesn’t quite do enough to cripple the American economy, but stabilises the dollar for long enough for China to seriously diversify (particularly into precious metals). Bernanke and Obama will have none of that. We shall see who wins.

      2/ China is not dependent on exports, especially not exports to America. China is dependent on manufacturing, but look at the other side the coin. America is dependent on imports. The output of manufacturing could go anywhere — to the Chinese domestic market in exchange for the ever-improving yuan, for rupees, roubles, euros or sterling. Or the output capacity could be redirected to weapons.

      3/ I am bullish on America in the very long run. If any economy in the world can come back from deindustrialisation, it is the motherland of modern capitalism sitting on a wealth of natural resources. But there are serious structural problems for the next 10-25 years. Starting with indebtedness, and continuing on through deindustrialisation, the weakening of the basic materials sector, crippled infrastructure, the decline of the dollar, etc etc.

    • Yeah, but at the same time, Chinese would have to fill the gap on their end. They’d be voluntarily taking a multi-trillion dollar hit to their economy just for the sake of disciplining us.

      • Former PBoC member Yu Yongding:

        “Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks. Unfortunately, anger counts for little in international finance. The danger facing the US is that after Tuesday’s debt deal any sense of urgency over a dire fiscal situation will dissipate. The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar.

        China is worried about the possibility of a US default for obvious reasons. As the largest foreign holder of US Treasuries, either a default or a downgrade would bring huge losses. Even after this week’s debt deal, however, the risk remains that US debt will continue to grow to the point where its government is left with no option but to inflate the burden away. While there is little China can do about its existing Treasury holdings, it can rethink past policies – and ask both how it fell into this trap, and how it might free itself.

        The situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be.

        If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money (and the recent rumours are that the US might return to quantitative easing) China must realise that it can no longer invest in the paper assets of the developed world. The People’s Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favourable to the global economy as well.”

        Telling Apple they have to export 50% less iPads to America would not hurt Apple much (they can send them elsewhere — everywhere wants them), it would not hurt China much (Apple will still manufacture many iPads), but it would hurt America quite a lot. Same applies to most goods (other than American flags and a select few other things) manufactured in China and sent to America.

      • Personally I disagree that a lack of demand from the US woul not hurt apple, or any other similar enterprise. One must assume that they are not already maximizing their sales elsewhere, but also to lose your biggest market puts a dent in anyones bottom line.

    • Of course, there are some huge bubbles under the surface in China. I have long known China is sitting on a housing bubble (priced in yuan, that will appreciate) to overshadow the sub-prime crisis in America. But I don’t expect them to make any difference at all. Why? China is sitting on a productive engine the likes of which the world has never seen before. When the tide rises, all the boats rise with it.

  3. “The monetary base — also known as M0 — is the total amount of coins, paper and bank deposits in the economy.”.Does not the MB consist of notes,coins plus bank sight deposits at the Central Bank-FRB?

  4. Kane: Apple (and others) wouldn’t necessarily like China imposing export-to-America quotas, but they can fill the slack elsewhere, particularly China’s domestic market.

    For Apple in particular, the domestic demand from China is phenomenal, absolutely stunning. That’s why they found 22 (yes, 22) fake Apple Stores (selling legitimate Apple product, of course) in Kunming alone, and why Apple’s two biggest stores by sales and by footprints are in Beijing and Shanghai.

    In any case, flotation of the Yuan would achieve almost the same thing, but American companies would do it voluntarily. China would probably prefer that.

  5. Everything seems to make sense except that the spike in extra reserves corresponds to an amount of capital destruction in the real economy. By maintaining low interest rates at an artificial rate means we are still eating our seed corn of previous stored capital. Imagine a besieged fortress with a large storage of grain. We are eating the grain at a much more rapid rate then it is being replaced. Things will work until they don’t and then shortages will begin to show up. Money will then lose it’s value in comparison to real goods. Unless we start producing more than we are consuming or the world keeps lending to us.

  6. Very interesting, and good. But I disagree with you that there is no inflation (despite what stats the government provides us). There is food inflation, and there has been substantial energy inflation. In my opinion, inflation is being intentionally underreported. Also, If the banks are sitting on so much cash, then why are banks, like BOA conducting firesales of assets?

    • Thanks, & thanks for stopping by. I do think you’ve slightly misunderstood a couple of the details, or perhaps I was not clear enough, because I have written about it in previous posts. There is significant food and fuel inflation and there has been so since oil was $30 a barrel (with a few steep deflationary flashes in fuel). That has been cancelled in the BLS statistics by deflation in Chinese imports, e.g. consumer electronics, and also in services. This is a biflationary phenomenon, and policy makers are not addressing it. I think I may need to write a post today breaking down biflation, and the problems with CPI.

      I did mention most of these things in my attack on Paul Krugman last week. I weathered a couple of pretty strong attacks from Krugmanites on that thread:


  7. Pingback: Understanding Biflation « azizonomics

  8. “Why QE Didn’t Cause Hyperinflation” i’d agree with the title if you added one more word being: yet !

    You do raise the chinese issue, that they might stop putting up with the american Dollar policy. But it is not in their current Economical, Political and Social interest. They are way to heavily dependant on external energy and food sources. If you read properly through the lines you actually see that they are more concerned then a adolescent/puber trying to make its point by excersing excessive power.

    The only true threat to the current system is the “Silver Bullet” when the mainstream public starts to lose its faith in the Fiat based system, and starts small scale bartering in silver and gold.

    We also have recently witnessed in the MENA countries the social unrest caused by rising food and energy prices. This is also slowly prolifirating in the EU (Greece, Spain and even London !) but also in china the food/commodity prices have exploded and have caused the Chinese authorities quite the headache naturally the “Western-media” isn’t covering this topic at all.

    As long as faith remains, we won’t witness Hyper-inflation yet. But in my home country the introduction of the Euro has costed the average Citizen 30% to 40% of it’s purchasing power. And support for the Euro has been dwindling eversince the launch of the Euro.

    We stand at the wake of the Fiat-ponzi unwinding, and Hyper-inflation is a expression a serious lack of Faith vis a vis a mechanism of price-discovery. wich the FED and ECB are currently cosmetically altering.

    • Europe has a debt crisis, but Eastern Europe is developing into a relative manufacturing powerhouse under Germany’s leadership. The Euro might (probably will) end, but not in hyperinflation, just in acrimonious breakup. In spite of the “doom to the euro” bond vigilantes (lol) I have full confidence that America is far more likely to experience hyperinflation in the near future. Why?

      There will be no hyperinflation without an oil shock, or a crash in the availability of goods, or agricultural produce, because hyperinflation is a non-monetary phenomenon. One exception is the direct printing of money to pay government debt, but even Krugman recognises this is lunacy. (Worryingly “Ayn Rand’s Right-Hand Man” Greenspan seems to think it’s a good idea)

      America is far more likely in the short term to experience either a severe energy shock, or an import crash as China realise more and more that they are ultimately becoming less and less likely to get paid on their holdings.

      I don’t understand why people are bearish on China. Yes, in some ways it is a centrally planned mess (can’t be worse than America, though). Yes it is dependent on Russian and Arab oil (both of whom are becoming increasingly disillusioned with America). But it is the greatest manufacturing powerhouse the world has ever seen. And it possesses all the patents used by American companies in manufacturing. It has a huge civilian labour force and army, huge natural resources, and an increasingly massive gold and silver hoard.

      Bottom line: for me, the fiat ponzi can only unwind if the biggest believer in fiat — i.e. the biggest holder of U.S. Treasury debt (The Fed doesn’t count, lol) lets it unwind. I am sure it will end eventually. You are right to say that the article should have “yet” in the title — all fiat currencies end in devaluation. But if China and the Arabs keep faith (I doubt they will) yet could be very a long way away.


      I don’t believe gold and silver are alternative currencies for day to day business yet. I think they are a hedge, an investment, and like having your own personal central bank. I for one would never use gold to buy when instead I could use fiat.

  9. Back in the ’70s monetarists used to refer to the monetary base, M0, as “high-powered money”. M0 increases were thought to portend future growth the broader measures of money supply via the money-multiplier effect in the banking system and thus threatened future price inflation. Not only the Austrians have been surprised by the failure of price inflation to ignite. Folks who understood their conventional macroeconomics and money & banking courses and still pay attention to money aggregates have been mystified as well. Well, at least, I was for while.

    However, M0 isn’t really money; it’s just the sum of currency in circulation, currency in bank vaults, and deposits held by depository institutions at the Federal Reserve Banks (which is not the same as total “bank deposits in the economy” as stated in the article above). More correctly, the reserves portion aren’t really money; currency in circulation is, of course, money, but its growth only accounts for $0.2T of the $2T expansion in M0.

    To be properly classified as money, a good must fulfill three distinct requirements; i.e., it must be 1) a unit of account, 2) a store of value, and 3) a medium of exchange. Bank reserves — currency in bank vaults and deposits at the Fed — meet just two of these requirements; they do not serve as a medium of exchange.

    Historically banks have used their excess reserves to create new loans, which naturally increases broader measures of money supply. For that reason, the excess reserves curve in your third chart is flat until 2008 and then spikes sharply.

    So, why aren’t banks lending? Why isn’t the money supply expanding to use up these excess reserves?

    Are bankers acting like Scrooge McDuck, swimming in a vault full of cash and tossing Benjamins in the air? Some of the explanations for this phenomenon are about this ridiculous.

    The best explanation, however, is that excess reserves are not sufficient for a bank to create the loans necessary for money supply expansion. The bank must also have adequate capital to expand its lending. And though the bailouts of restored much of bank capital destruction of the past decade or so, it’s still in sorry shape. The regulators know this. The bankers know this. Everybody who pays attention knows this. But with a few more rounds of QE, who knows? Put a 6x money multiplier on $1.6T of excess reserves and you double M2, which bound to bring about 1970s style inflation. Couple that with a bankrupt government already held in low esteem by its trading partners in the Middle East and Asia, and you might just get your hyperinflation. What happens if OPEC were to announce that from hence forth oil will be priced in ounces of gold? It sounds crazy, but the 1st and 3rd charts that you provide look pretty crazy also.

    • “What happens if OPEC were to announce that from hence forth oil will be priced in ounces of gold?”

      They will call it a black swan (but don’t say we didn’t warn them). After all, don’t the Arabs know that gold is merely a barbarous relic of history? Don’t they know what is good for them? After all Kissinger offered them a hell of a trade — all that ever-devaluing green paper for their luscious black gold. Look what the media is doing to the S&P for merely hinting things may not be entirely sound. What they would do to the Arabs for demanding gold? Condemn them as the fiendish hordes of camel-riding skeletal warriors led by a zombified bin Laden?

      I expect the Chinese to be the first card to fall. They have nukes, and a serious military presence in the pacific. America can realistically do very little to them other than MAD. The Arab regimes are very much supported by American military might, and furnished with American hookers. Of course, they would be just as happy with Russian guns and Russian hookers…

      Black Swan Clusterflock.

      • I was just in China. Many banks there — not just Beijing but in the hinterlands — have posters advertising to Chinese customers to buy gold. Now, what kind of bank suggests to customers that they should withdraw money from their bank account to purchase gold? Particularly if marginal purchases of gold will be supplied from imports, which means that the money withdrawn will be permanently removed from the Chinese banking system. The ads are not for paper gold, but physical gold bullion and bullion coins. Perhaps it would be a bank with too many USD assets and too much RMB deposits/currency on the liability side. The USD assets are at risk of cracking up and the growth in RMB is causing domestic price inflation. (Your concept of biflation describes what US consumers experience, but China is experiencing the conventional sort of price inflation.)

        I think it is fairly safe to say Chinese banks are agents of Chinese government policy. Since when have governments encouraged individual citizens to own gold bullion? Especially nominally communist governments?

        Meanwhile, the Vice President of the United States of America goes on a road tour in the Far East to pitch the recent debt ceiling/budget deal as evidence that US government paper is still a good investment. The same debt ceiling/budget deal characterized by his own party leaders as a “Satan sandwich”.

        Two black swans don’t make a herd. It seems like truly weird stuff like this has become so normal that it doesn’t register any longer with most folks.

        • All our ‘money’ printing (not just the U.S.) bothers me. No downside? What if congress were to issue money directly, as was done during the Civil War (called ‘greenbacks’). One form, the United States Note was not backed up by any specie, and was issues at 0% interest (ie. no debt to the government). rather than having our central bank issue currency at interest (via. the purchase of T-bills). Then Congress (or possibly a department within the treasury (ie. not a central bank), would have control over the money supply, and could expand and contract it as required by the economy. We might even be able to slowly begin to pay down our national debt. I have been trying to follow the argument of all the ‘goldbugs’ that the problem with our currency is that it is not backed up by anything. Have we forgotten were were on the gold standard during the depression? How did that work our for us? To me the problem is not what our money is backed up by, rather who controls the supply of it. Perhaps the federal reserve act of 1913 establishing our central bank, was a mistake. Any thoughts?

  10. AZIZ,

    I just found you today and I would like to express my appreciation for your fine work.

    I wanted comment about your statement: “The classic examples of Weimar Germany and Mugabe’s Zimbabwe confirm this idea — Weimar Germany was devastated by the production standstill in the Ruhr industrial region…”

    I believe you are one of the first bloggers commenting on hyperinflation to include analysis on the production side of the Weimar (or any country in the midist of hyperinflation.) It seems obvious to me that when discussing money printing, one must also take into account the amount of goods and services available, against the backdrop of an increasing money supply.

    It requires no complex math to conclude that as goods and services become scarce, money supply could stay the same and the cost of said goods and services would go up. Goods and services do become scarce in an economy when “money” ceases to function as a unit of account, a medium of exchange and store of value. ANY manupliation of these three core pillars “money” causes a missallocation of “money” and eventually leads to the reduction of goods and services.

    Now, (to the long-winded point.) Yes, the Weimar hyperinflation acheived nose-bleeded levels, but I would like to argue that Weimer Germany would have entered hyperinflation regardless, just the timeline and the final numbers were pulled forward and increased due to the French occupation of the Ruhr.

    I come to above conclusion not from rock solid empirical data or some fancy new economic theory, but from my family’s history. You see, many of my ancestors lived in Hungary and Austria during the 1920’s and they too experienced hyperinflation during this period. Now, I am sure that the French occupation of the Ruhr DID have an effect on the Hungarian and Austrian economies, but, it by no means can explain the hyperinflation in these countries.

    PS This story has been passed down through 3 genartions of my family. During the Hungarian hyperinflation after WW2, my grandmother worked for great-grandfather at the family bar. It was her job to take all the money from the tills and twice daily walk down to the bank and exchange it for gold. You see, the Hungarians of 1946 already knew about hyperinflation and knew how to deal with it!

    PSS The money printing and big bills come at the END of hyperinflation. This weird phenomenon as explained to me to me by family as such, “Everybody had more money then they had ever had in their life and still their fat bank account could not even buy the basic neccessities.”

    One last thing on hyperinflation. Much of the reason we have not seen hyperinflation in the USA (though the purchasing power of the dollar is certainly declining) is due to massive stored wealth in the USA. If you drop money from helicopters in a poor country, that new money will quickly chase anything that will retain value. Since a poor country is poor because they cannot produce many goods and services, there are simply too few goods and services in comparison to the increase in money supply. One round of money printing in said poor country should be enough for a rational central banker to stop, but that central banker will listen to the people and the people will scream, “We don’t have enough money! And the money we do have (In 1’s, 5’s and 10’s) doesn’t buy much, so we have to carry around large amounts of currency!” The solution EVERY central banker comes up with is, “Shoot, we need a currency with a larger denomination!”

    Voila! Hyperinflation!

    • Thanks for stopping by, and thanks for your kind words. You have left a couple of fascinating insights, especially the family history aspect. Certainly Weimar hyperinflation was a result of the wider phenomenon of greater industrial slowdown caused by (among other things) the huge leech of war reparations and a shortage of raw materials (a feedback loop caused by an inflating currency), and not solely by the deindustrialisation. The slowdown of the Ruhr is the classic example, and probably the biggest hyperinflationary pump. You are absolutely right the money printing doesn’t start ’til the end.

      Another factor you get towards is the volume of goods and services as a deflationary pressure in America. With so many second hand and older goods floating around in the economy, prices of many non-consumable items (e.g. consumer electronics, automobiles, furniture, etc) have a big weight dragging them down. The things that don’t have such a pressure are consumables, especially food and energy, and that is where I expect the hyperinflationary shock to eventually emerge, because American production is dependent on external oil, and the ability of the dollar to buy oil.

      • Yep, you certainly “Get it” and I believe many other US and World citizens are starting to “Get it” as well.

        Another weird phenomenon of hyperinflation includes a robust black market. As citizens react to harsh economic times, honest tax payers quickly turn into black market privateers. This “new” market functions exactly like any other market in said country, except, most the time the two parties don’t pay taxes! It is this diminishing marginal return of MONEY PRINTING that adds yet another level pain to the economy.

        One last story, this time about modern Hungary. In Hungary, most small to medium sized firms pay their employees 2 pay checks! The first pay check is called a WHITE pay check and the WHITE paycheck is the wage reported to the government and of course is the basis for government tax revenues. But, there is a second pay check, called the BLACK pay check. The BLACK pay check is the under the table wage that a friend of a friend described to me as “significant” portion of their pay and is justified as the money need to “survive!”

        Take away what you wish.

      • I am trying to find the line in Mein Kampf, but Hitler basically accused the Government at the time of paying wages to idle workers to engage in passive resistance. This “borrowed money” from “International Financiers” broke the government, and caused massive hyperinflation because of supply side shocks (Idle workers) This resulted in massive importations of goods. It could be argued members of Government borrowed the money to assist overseas interests.

        Wikipedia does not give enough reasons. I trust Hitler’s opinion. He did rise to power so must have had basic intelligence to analyse the siuation.


  11. joebob:

    Thanks for bringing your experience in China to the table. A family member of mine went to the bank (in the UK) and enquired about owning gold. The manager said they had “never been asked” about owning gold, and asked “why would you want a lump of metal when you can get a savings account that pays interest?” I shall assume that that is Western govt policy.

    The Chinese banks reflect the CPC party line: get the hell out of USD, get the hell into productive assets and precious metals. This is partially because they want the yuan to have a firmer foundation, and partially because they fear USD collapse.

    I have long been fascinated by China. When I was a child in the early 90s I noticed that all the consumer goods we purchased, all the tourist souvenirs, all my toys were Made In China. Ten or fifteen years (and one Chinese girlfriend) later and after studying a lot of history I read Sun Tzu, Confucius, Chairman Mao, etc. I think I am finally getting a handle on what China is doing. When Mao came to power, and after being subjugated by Japan they were at an all-time nadir in their history. The CPC devised an ingenious plan, to industrialise but to simultaneously deindustrialise all of their rivals. They recognised their strengths: poor and massive population, natural resources, good geography (in terms of shipping goods, and in terms of winning wars). Their plan is coming to fruition. They have massive leverage. The only piece that needs to fall into place is to avoid being subjugated by America while they diversify their currency and amass gold and oil, and avoid war with America at all costs while they are still America’s military inferior. Some of the hawks in the Pentagon are getting wise to the long term economic stratagem, but they don’t really have any concrete or coherent answer to it. America vassalised China, and vassalised Arabia in the 70s through Kissinger and Nixon, but that led to this. The situation turned on its head. For now, they are stumped — all they can do is war game, and hope to make America more of an autarky and less of a nuclear-armed sitting duck.

    In the big think tanks like the CFR they talk global governance. Ian Bremmer — probably the smartest guy at the CFR today — talks about making the internationalist structure too big to fail: read between the lines, so that China can’t cut the umbilical cord. So the best thing America can offer is bland statements about interdependency? I mean come on. The Chinese are not dependent on dollars or on “American imports”. I’ll do a blog on it, breaking things down, probably tomorrow.

    My solution is that America, Britain and Europe take aggressive action to manufacture more. Again, I need to develop upon and elaborate this theme.

    I am sure there is a tale in Chinese folklore that represents what they have done. I would be very, very interested if someone could relate it to me. This smacks of folklore.

    • The closest analogy I can come to is in the 48 Laws of Power:

      Law 11

      Learn to Keep People Dependent on You

      To maintain your independence you must always be needed and wanted. The more you are relied on, the more freedom you have. Make people depend on you for their happiness and prosperity and you have nothing to fear. Never teach them enough so that they can do without you.

      I still think this comes from Chinese folklore, though.

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  13. Anonymous:

    Mish is wrong.

    97.4% of nothing is still nothing. It doesn’t matter how much of the Made in China dollar goes to American companies and American “services”. If you don’t have the goods (or more compellingly, if the underlying oil infrastructure breaks down) — and the CPC absolutely do have the final say as to whether America gets the goods or not — then you don’t have the goods, and things unwind. The fact that China has accumulated such a huge pile of dollars from such a small sliver of “Made in China” just goes to show the dependency.

    Just as interestingly, a majority “Made in America” goods are assembled (at least in part) from Chinese components and fabricated from Chinese resources.

    Forget the dollars — look at the underlying resources and infrastructure.

  14. I’m confused here.


    If velocity goes down, despite money supply going up, wouldn’t that put downward pressure on PQ – which is Price level * index of real values?

    By this equation it seems like an increase in velocity would be more likely to cause hyperinflation.

    Any comments would be most appreciated.

    • When Q falls — due to (as my hypothesis goes) an oil shock or trade shock — MV and P will not necessarily move in step. MV=PQ is a descriptive equation. If Q falls by a large amount, the key to triggering hyperinflation is demand (which is not a figure in the equation). If demand remains constant (and it did in Weimar Germany and Zimbabwe) that places an upward pressure first on V (as consumers chase scarcer goods), and then on M (as primary dealers and commodities desks burn reserves, to fulfil demand, and to profit from rising commodities).

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  18. Aziz,

    Regarding Black Swan events and your link above; I can give you one example:

    I worked at a Major Finance provider. I was doing an audit of their systems and processes. I discovered in an attempt to move their back office processing to India, they had made a grave error. They forgot to register the assets with an Australian regulator. This means that if the Borrower defaulted they could not recover the asset under Australian law. Huge risk!

    Once I put it to their attention, they did not want to pay the penalties and extra costs to register the assets. They chose a probability model based on the previous recession data. I argued that there was too much at stake, especially as the USA was heading into a housing collapse. I argued with the Managers, even wrote to the CEO of the parent bank. I said there is a good chance of a severe recession. The Debenture holders could panic if news got out of the practice. I was told to be quiet. They know better. I was a contractor anyway so I did not care about job security. I warned them.

    The GFC hit and the rest is history. The Finance company folded (Was “merged” with the parent bank, and the parent bank carried the loans.

    What did I learn out of this? People are protective of their positions and decisions made. They try to save money and sell into areas that are risky, because it helps their bonus.

    We need regulation to protect the Children from themselves.

      • Thank you. May I add that this a Micro firm example of building robustness in systems. And something that should be extended at the Macro level. I guess we had these systems in place (Glass Steagall Act) but vested interests wanted to be able to take advantage of our collective lack of memory (Who was old enough to remember the 1929-40 economic environment to make vociferous calls on late night TV 😛 to prevent a repeal of Glass Steagall?)

        • “Vociferous calls” You are correct.. Most people in nursing homes today who can’t string a sentence together were only children at the time of the depression. So I would say that history is bound to repeat. Luckily we have the internet and hyper-vigilant writers to warn people of history’s mistakes.

  19. Agreed that Hyperinflation relies on a supply shock (Study Weimar German History); Fellow Bloggers, you would be surprised how much cash the middle and upper class has access to, and when goods are limited, they will still demand them. It is the poor and the elderly on fixed incomes who are squeezed out during hyper-inflation.

    Personally I see deflation (Unless China restricts all supply through trade embargoes), with an inter-connected world, and large manufacturing base (We have too much spare capacity), goods will continue to be supplied, and as the Commodities bubble unwinds, you will see lower and lower input prices. The amount of investment in mining, and agriculture over the past decade is staggering. There will be a glut in Commodities soon.

      • I agree on the Biflation scenario. May I add people with limited resources notice inflation on needs (Utilities, Fuel for getting to work, essential food, housing) but forget about deflation in wants (TV, Computers Ipods) because as a % of their income on a daily (Fuel) weekly (Food), monthly (Bills) basis, it is re-enforced. You only buy a Car, Ipod, Computer on rarer occasions. This explains why CPI numbers are lower (To the average citizen) than what people experience. Computing CPI on minimum sustenance levels excluding wants like alcohol, tabacco and travel, will better reflect CPI levels in groups on limited fixed incomes. Especially in regards to indexation of pensions or welfare benefits.

        A solution for Governments grappling with inflation in needs due to excessive super profits, is nationalisation of Duopolies that have the market cornered. Utilities, Grocery Chains, Fuel. The duopolies can keep their current staff and efficiency KPO’s, just excessive profits are reduced, and debt costs are reduced because of sovereign bonds financing capital expansion/replacement.

        • Precisely. You should not be Anonymous. You are too intelligent and articulate. We can only make the world a better place if we stand up and become counted. I use my real name. Some day we may be quoted.. Some day we may be used as examples of people who stood up for a better way.

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  33. Its such as you read my thoughts! You seem to understand so much about this, such
    as you wrote the guide in it or something. I think that
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  36. Howdy! Do you use Twitter? I’d like to follow you if that would be okay.
    I’m definitely enjoying your blog and look forward
    to new updates.

  37. Hey there! This is my 1st comment here so I just wanted to
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  38. Has anyone explored the possibility that the US is experiencing a currency bubble? I am definitely not an expert, but it looks like there was a huge spike in foreign exchange turnover at the same time that the Mo spiked. How much of the dollar’s value could be backed by herd speculation?

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