The Hyperinflation Myth Explained Saturday, Nov 30 2019 

There is a widespread myth that hyperinflations are caused by excessive government money “printing.” Perhaps you are among the vast majority who believe this pernicious myth.

Well, it simply isn’t so, and the belief alone is responsible for great misery, worldwide.

Consider these excerpts from the following article:

Fed analysis warns of ‘economic ruin’ when governments print money to pay off debt
NOV 26 2019, Jeff Cox, CNBC

St. Louis Fed economists warn in a paper of potential “economic ruin” if policies that advocate money-printing to pay off government debts are ever adopted.

Immediately, the article provides us with a misunderstanding. “Money-printing” never is used for paying off U.S. federal debt.

The federal debt is the total of net deposits into Treasury security accounts. When you buy a T-bill, T-note, or T-bond (aka “federal debt”), you open a T-security account, and into that account, you deposit the price of the T-security.

There, your dollars remain, collecting interest, until the T-security matures, at which time, your dollars — the dollars you deposited plus the interest in the account —  are returned to you.

During that entire round trip — you depositing dollars and those same dollars being returned to you — the only so-called money “printing” has occurred daily over a period of years, as your account accumulates interest.

The U.S. federal government could pay off the entire U.S. debt today, if it wished, simply by returning the $20 trillion that currently exist in T-security accounts. No money “printing” or taxes involved.

Returning to the article:

“A solution some countries with high levels of unsustainable debt have tried is printing money.

“In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money,” wrote Scott A. Wolla and Kaitlyn Frerking.

“History has taught us, however, that this type of policy leads to extremely high rates of inflation (hyperinflation) and often ends in economic ruin.”

They cite Zimbabwe in the 2007-09 period, Venezuela currently and Weimar-era Germany . All three faced massive deficits that led to hyperinflation due to money printing.

In fact, all three nations provide examples of the real cause of hyperinflation, and it isn’t money “printing.”

(As an aside, money is  not printed; it is created via bookkeeping. Money has no physical existence. A dollar bill actually is a title to a dollar. Just as the paper title to a car is not a car, and the paper title to a house is not a house, the paper dollar bill, is not in itself a dollar. The actual dollar is nothing more than a non-physical accounting notation on the government’s books.)

The cause of general price increases, i.e. inflation, is shortages. Usually, these are shortages of food or energy. It is shortages, not money “printing” or full employment or excessive demand (as some people claim), that makes prices go up.

Zimbabwe
Hyperinflation in Zimbabwe began in February 2007. . In the late 1990s, the Robert Mugabe government evicted white landowners and gave their farms to blacks.

Many of these “farmers” had no experience or training in farming. As a result, from 1999 to 2009, the country experienced a sharp drop in food production, creating massive food shortages.

The non-farmers were unable to obtain loans for capital development, (money shortage). Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%.

Everything, especially food, was in shortage, which is what caused the Zimbabwean hyperinflation.

Venezuela
Hyperinflation in Venezuela began in November 2016 during the country’s ongoing socio-economic and political crisis.

Since the 1990s, food production had dropped precipitously, with the government beginning to rely upon imported food using the country’s then-large oil profits.

In 2003, the government created a currency control board that placing currency limits on individuals, and that caused widespread shortages of goods.

In 2005, the government announced the initiation of Venezuela’s own “great leap forward”, following the example of Mao Zedong’s Great Leap Forward. An increase in shortages began to occur that year as 5% of items became unavailable.

In January 2008, 24.7% of goods were reported to be unavailable in Venezuela, with the scarcity of goods remaining high until May 2008, when there was a shortage of 16.3% of goods. Shortages increased again in January 2012 to nearly the same rate as in 2008.

In 2013, shortage rates continued to increase and reached a record high of 28% in February 2014. In January 2015, the hashtag #AnaquelesVaciosEnVenezuela (or #EmptyShelvesInVenezuela) was the number one trending topic on Twitter in Venezuela

General shortages caused the Venezuelan hyperinflation.

The Weimar Republic, Germany
The Weimar Republic experienced hyperinflation, between 1921 and 1923, primarily in 1923.

In April 1921, the Germany Reparations Commission announced the “London payment plan”, under which Germany would pay reparations in gold or foreign currency in annual installments of 2 billion gold marks, plus 26% of the value of Germany’s exports.

Since reparations were required to be repaid in hard currency, one strategy that Germany used was the mass printing of banknotes to buy foreign currency, which was then used to pay reparations, greatly exacerbating the inflation of the paper mark.

The brief German hyperinflation was caused by shortages of hard currency with which to pay for imports of goods, especially food and food production.

The resultant shortages caused the general increase in prices, i.e. the German hyperinflation.

In summary, prices rise not because the people have too much money (Germans, Zimbabweans, and Venezualians certainly didn’t) but because needed products, mostly food and/or oil, are in short supply.

Back to excerpts from the article:

The Fed analysis references a paper on MMT (Modern Monetary Theory) in a sidebar box on monetary “owls” — the owls, “suggest that a government that controls a fiat money system is not constrained because it can simply create more money to pay its debts.”

Indeed, MMT supporters argue that a country that runs up debts in its own currency can never default, and as long as inflation remains tame, there really are no problems with government deficit spending.

They further say that public spending can be used to stimulate the economy, that essentially a deficit in the public sector can be a surplus in the private sector.

In this, MMT is absolutely correct, and noted economists agree:

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.

The article continues:

The total federal government debt is just over $23 trillion, or 103.2% of GDP.

The Fed itself has come under criticism for “money printing,” which it did in three rounds of quantitative easing during and after the Great Recession.

This came along with keeping its short-term lending rate anchored near zero for seven years.

However, the central bank’s stated aims were to bring down long-term interest rates and stimulate economic growth, not to finance the national debt.

And that is exactly what happened. Despite all the hand-wringing from the deficit hawks, inflation stayed low, the economy grew, and the national debt was not “financed.”

Nothing “finances” the national debt if the word “finance” means pays off. The national debt is not like your debt, my debt, business debt or state/local government debt.

The national debt is just the net total of deposits into T-security accounts, that are paid off by simply returning the money in those accounts.

“There are ways in which the government can make investments today, that increase deficits today, that produce higher growth tomorrow and build in the extra capacity to absorb those higher deficits,” Stephanie Kelton, professor of public policy and economics at Stony Brook University, said in a video for CNBC.com.

“Their red ink becomes our black ink and their deficits are our surpluses.”

Kelton added that deficit spending can be used to fund improvements in education, infrastructure and other inequality-reducing programs without causing long-term damage.

Absolutely, 100% correct is Stephanie, a very bright lady with whom I have been in contact for many years.

Some of the most prominent advocates for MMT are Democratic presidential candidate Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, both of whom identify as democratic socialists, as well as former Pimco economist Paul McCulley.

Too bad Sanders and Ocasio-Cortez do not really believe what Kelton has told them. They continue to search for ways to “pay for” Medicare for All, when the solution hangs right before their eyes: The federal government can and should pay for Medicare for All via deficit spending.

And contrary to what Ocasio-Cortez claims, this does not require more borrowing. Remember this quote from the St. Louis Fed: ” . . . the government is not dependent on credit markets (i.e.borrowing) to remain operational.

Most mainstream economists and Wall Street authorities, however, reject the basis that deficits don’t matter absent inflation.

Bond market guru Jeffrey Gundlach at DoubleLine Capital has called MMT “a crackpot idea,” while former White House economist and Treasury Secretary Larry Summers has labeled it “dangerous.”

However, hedge fund king Ray Dalio at Bridgewater Associates said its adoption is “inevitable” amid growing wealth disparity.

“Most mainstream economists and Wall Street authorities” do not understand the truth of Monetary Sovereignty. They still disseminate the “Big Lie,” that federal financing is similar to personal financing, where debt is a burden on the debtor.

Federal debt (deposits) is not a burden on anyone — not on the federal government and not on future taxpayers. It is a benefit to the economy and to taxpayers, and does not cause inflation.

There has been no relationship between changes in federal debt, aka deficits  (blue) and inflation (red).

Addendum
One of the many places where MMT (Modern Monetary Theory) and MS (Monetary Sovereignty) differ is with regard to the relationship between “full” employment and inflation.

MMT claims that one cause of inflation is “excessive demand.” We never have seen anyone point to nationwide demand as excessive (especially when inflation describes not one or two products and services, but an entire nation). We cannot agree on MMT’s proposed solution to inflation: Taxes.

Taxes are recessionary, and the opposite of inflation is not recession; it is deflation. Taxes are austerity, and are not a cure for inflation.

MMT also says that deficit spending at a time of full employment is inflationary. Again, we disagree. Deficit spending means the federal government’s taxation is less than its purchases of goods and services.

It is not clear why the federal purchase of goods and services during times of full employment (if those times ever really have existed outside of WWII), should be more or less inflationary than during times of low employment.

The theory seems to be that during full employment, people have more money (not necessarily true), and they will spend rather than save that money (also not necessarily true), and when they are spending in competition with increased government spending, all that increased demand will cause inflation.

The main problem with that hypothesis is that in the real world, it never actually happens:

1) No one can agree on exactly what “full employment” is.

a. Does “full” employment include single or married, men or women or children and of what age?
b. Does one person earning $100K equal four people each earning $25K?
c. Does “full” include only full-time or part-time work, and exactly what are the definitions of each?
d. Does “employment take into consideration productivity, i.e is one man on a riding mower equal to 4 men pushing manual lawnmowers?
e. And what about unemployed or retired people. Some have a great deal of money to spend; others don’t. How is that accounted for?

2) Federal spending not only increases demand, but it also increases supply. In response to federal contracts, contractors gear up to create more product to meet the anticipated demand.

3) The federal government generally buys different things than the public buys, creating demand in different areas, so a general increase in all prices does not ordinarily occur. Prices may increase in specific products or materials but overall price increases are not caused by federal buying except during major wars, when the government buys so much a broad range of products is affected.

Consider the case of Medicare for All. Will federal funding of this program cause a general increase in prices at a time of “full” employment? Will it cause a shortage of food and/or oil, the main cause of inflation?

That is the real question, and I submit the answer is, “No.”

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

 

How to prevent and cure inflation. (It’s not what the “experts” tell you.) Thursday, Sep 19 2019 

Two related philosophies about federal finances are MMT (Modern Monetary Theory) and MS (Monetary Sovereignty). You now are reading an MS blog.

MMT and MS agree on the following principle that was expressed by MMT’s L. Randall Wray in his paper “WHAT ARE TAXES FOR? THE MMT APPROACH” 

“Taxes are not needed to ‘pay for’ (federal) government spending. The logic is reversed: government must spend (or lend) the currency into the economy before taxpayers can pay taxes in the form of the currency. Spend first, tax later is the logical sequence.”

Image result for monetary sovereignty mitchell

The U.S. government cannot run short of dollars.

U.S. federal taxes are not needed. The U.S. government, being Monetarily Sovereign, has the unlimited ability to create its own sovereign currency, the U.S. dollar.

The U.S. government never unintentionally can run short of dollars. Even if all federal tax collections totaled $0, the federal government could continue spending, forever.

The articles you read about the “unsustainable” federal debt are, very simply, wrong. There is no level of U.S. dollar obligations the federal government cannot easily sustain.

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets (borrowing) to remain operational.

Professor Wray’s paper continues:

Some who hear this for the first time jump to the question: “Well, why not just eliminate taxes altogether?” There are several reasons.

First, it is the tax that “drives” the currency. If we eliminated the tax, people probably would not immediately abandon use of the currency, but the main driver for its use would be gone.

We disagree with the “taxes drive the currency” notion. Contrary examples abound. Professor Wray’s own “Roobucks” are not “driven” by taxes. They are driven by the discounts they provide. Bitcoin is not “driven” by taxes.

However, the real point is contained in the following paragraphs from Wray’s paper:

Further, the second reason to have taxes is to reduce aggregate demand. If we look at the United States today, the federal government spending is somewhat over 20% of GDP, while tax revenue is somewhat less—say 17%.

The net injection coming from the federal government is thus about 3% of GDP. If we eliminated taxes (and held all else constant) the net injection might rise toward 20% of GDP.

That is a huge increase of aggregate demand, and could cause inflation.

Ideally, it is best if tax revenue moves countercyclically—increasing in expansion and falling in recession.

That helps to make the government’s net contribution to the economy countercyclical, which helps to stabilize aggregate demand.

The implicit assumption of the above paragraphs is that the private sector’s money supply drives inflation, and the way to control inflation is to reduce the private sector’s money supply.

In a similar vein:

A Wikipedia article says, “Low or moderate inflation may be attributed to fluctuations in the real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.”

We disagree with Wray and with the Wikipedia author. A “long sustained period” of money supply growth cannot exceed a “long sustained period” of economic growth.

The money supply cannot grow faster than economic growth. The two are interdependent in the formula for GDP:

Real GDP = Real Federal Spending + Real Non-federal Spending + Real Net Exports

A decrease in taxes would increase the “Non-federal Spending” factor and GDP by the same amount. By formula, tax decreases increase GDP.

Inflation usually is defined as a general increase in prices. Another way to say it is, “Inflation reduces the purchasing power of each unit of currency.”

There are two levels of inflation: Intentional and unintentional. The intentional form is the amount that the central bank believes is helpful for a growing economy. The U.S. Federal Reserve has as its target rate, 2% inflation.

When annual inflation drifts above or below the 2% target, the Fed quickly raises and lowers interest rates, i.e. raises to rates combat inflation; lowers rates to stimulate inflation.

(The Fed also lowers interest rates to stimulate economic growth, which follows the common myth that stimulating growth and stimulating inflation require the same actions.)

The Fed’s target rate of inflation is maintained by interest rate control, which controls the demand for, and purchasing power of, U.S. dollars. Increasing the demand for dollars reduces inflation; decreasing the demand for dollars encourages inflation.

But what about high inflation, say of 50% or 50,000% annually or more. Such hyperinflations always are caused by shortages of food and/or energy (oil).

The famous Zimbabwe hyperinflation is a typical example. The government took farmland from white farmers and gave it to blacks who did not know how to farm. The inevitable food shortage caused hyperinflation.

In response, rather than trying to cure the food shortage, the Zimbabwe government began printing more currency.

This provided the illusion that currency printing caused the hyperinflation, when in fact, the hyperinflation caused the currency printing.

Think of a typical scenario this way: The inflation-adjusted money supply goes up. Where does the additional real money go? The vast majority goes to spending, which by definition, increases real GDP.

One might argue that some is saved, but since saved dollars are not spent, they cannot contribute to aggregate demand.

All increases in the real money supply increase real GDP.

Further, and most importantly, all decreases in the real money supply (because of taxes) decrease real GDP. Thus taxes, rather than being effective moderators of inflation, actually are recessive.

Recession is not the opposite of inflation. The two can occur simultaneously. The opposite of inflation is deflation. Taxes do not cause deflation. Deflation, i.e. price decreases, is caused by excess supplies of goods and services.

Thus, removing currency (via taxes) from the economy would have done nothing to cure the inflation, though it would have reduced real (inflation-adjusted) GDP economic growth, while it impoverished the populace.

There are several ways to prevent or cure inflation, but taxation is not one of them. Taxation merely takes dollars from the private sector and delivers them to the federal government, where your tax dollars are destroyed.

Taxation does nothing to address the fundamental cause of inflation: Shortages.

Imagine an inflation caused by a food shortage, and the automatic response is an increase in taxes. How would leaving fewer inflation dollars in the pockets of the people eliminate the food shortage?

It wouldn’t, of course.

Consider again, Zimbabwe: Rather than taxing, designed to reduce the currency supply (while impoverishing the people), or printing currency to increase the currency supply (thereby reducing the already diminished value of Zimbabe’s money), the Zimbabwe government should have taken steps to increase the food supply.

This might have included paying to educate Zimbabwe’s farmers and/or paying experienced farmers to manage farms or paying to import food from other nations.

These steps would have required the Zimbabwean government to spend more money to correct inflation — a counterintuitive response, but the only one based on financial reality.

In Summary
Any time a nation experiences an unwanted level of inflation, the correct early step is to increase interest rates, thus increasing the demand for, and the value of, the nation’s currency.

If the inflation has grown beyond interest rate increases as a sole solution, additional steps are needed:

  1. Determine what exactly is causing the inflation
  2. If the cause is a shortage of food or energy the government must either import the needed food or energy, or fund ways to increase the domestic production of food or energy.
  3. If the government is monetarily non-sovereign (a euro nation, for instance), and cannot afford to fund imports or fund domestic production of the scarce commodities, it immediately should begin the process of issuing its own sovereign currency, i.e. it should make itself Monetarily Sovereign.

Raising taxes is exactly the wrong step since that will worsen the inflation problem, while adding recession to the burden.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

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