Tuesday, August 31, 2010
auerback on inflation and hyperinflation
the upshot: hyperinflation requires real-world destruction of the ability to either produce a significant amount of goods or procure same through import. weimar lost the ruhr valley -- which employed 25% of its workforce and created most of its ability to generate foreign exchange -- while being asked to pay a colossal war indemnity in gold or foreign exchange. zimbabwe, similarly, through misguided and corrupt implementation of land reform, destroyed well more than half of its ability to produce food. the confederacy was invaded and unable to prevent the destruction of most of its production capacity as well as its ability to tax.
literally none of these preconditions now exist in the united states or indeed any western state with a self-directed currency. barring the breakdown of civil order removing a huge slice of american productive capacity, hyperinflation is not a realistic outcome of our situation -- which is indeed highly deflationary, with systemic private sector delevering meeting insufficient government deficit spending to reduce demand, expand the output gap, and increase both balance sheet damage and savings prerogative.
that's not to say the united states will not experience bond market volatility. the dollar economy has long run a current account deficit that has rendered the american banking system dependent on foreign deposits for funding. the dollar itself will likely have to fall in value against the currencies of some of its major trading partners in order to close current/capital account imbalances in the long run. but that is very far from hyperinflation or even inflation. similar events and worse befell several nations in the great depression without ever generating serious inflation.
the united states is also an industrial nation in a world that may be experiencing the onset of resource scarcity. real goods may cost more in real terms in the future as a result. this decidedly won't be a result of either fiscal or monetary policy but rather material restrictions.
the western world is trapped in the aftermath of a crushing debt bubble collapse. richard koo has termed the phenomena a balance sheet recession, and his (correct) analysis of this profoundly deflationary problem yields a solution of utilizing government spending to offset and enable private sector saving in order to break the paradox of thrift and effect balance of sectorial flows without triggering a powerful deflation to force the requisite government deficits into existence. this is not a growth strategy but a survival mechanism, a way to assist the private sector with balance sheet repair.
we ignore it to our peril -- as we are beginning to see, now that government fiscal stimuli put in place in 2009 are waning and economic weakness is rapidly returning.
and yet ignore it we will. as befits the social mood of deflation, austerity has become the watchword not only for households and businesses but wrongheadedly for governments as well. a public which incorrectly thinks sovereign finances are just household finances writ large demands as much. that, in a democracy, means very little fiscal policy response is likely at least between now and november's elections.
by that time, if my expectation is met and no further expansionary fiscal action is taken, i expect the united states will be deeply mired in a shocking economic contraction that will exceed the frightening expectations of even the pessimists -- and the question as to whether or not we are in fact experiencing a global depression will be altogether resolved.
We need to use creative ways to help people increase and protect their savings. Instead of supporting those who are beyond repair, we need to restucture their debts We can not keep kicking the can down the road. There is no amount of stimulis that can solve this problem until the restructuring has cleared everything. With the path that you wish for us to go down and with what will surely follow after the elections, not only will our citizens be broke, but so will our government. Then who will help us!
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