Mish's Global Economic Trend Analysis |
- Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge
- Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?
- Eurozone Retail Sales Decline 15th Month, Plunge Led by Italy, France; German Sales Contract Slightly
- France to Hire 150,000 Subsidized Workers With Zero Qualifications; Why Stop There?
Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge Posted: 30 Aug 2012 11:10 PM PDT Markit reports Japan Manufacturing PMI Hits 16 Month Low Key Points:Japan is in its third deflationary decade in spite of massive fiscal stimulus, massive monetary stimulus, and the major industrial world's highest debt-to-GDP ratio. US demographics are not as bad, but US consumer debt overhang and student loans are worse. The deflationary forces facing Bernanke are massive. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything? Posted: 30 Aug 2012 05:16 PM PDT In response to Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation where I stated "The Fed Cannot Realistically Cause Hyperinflation" I received a couple of emails worth reviewing. Reader Philip writes ... I do not understand how you could say that the Fed cannot cause hyperinflation. The government has a huge debt. The debt is manageable at super low rates. But, if rates rise due to some inflation or even just caution from abroad then the government starts paying a very large sum in interest. That takes away from its obligations even more than the current deficit amount. Either the Fed has to step in and monetize the debt by printing more and more money spiraling out of control.Definition of Terms As always, before one can have a rational discussion, one must agree on definitions. Hyperinflation is a complete loss of faith in currency. In other words, currency becomes worthless in a short period of time. Is there a risk of high interest rates? Yes. But I do not think that risk is high in the near future. Even assuming I am wrong, high rates are not the same as hyperinflation. The US dollar is not headed to zero given the US has the largest stash of gold of any country. That alone would preclude hyperinflation. There are many other reasons that I have touched upon that suggest interest rates are not going up fast. Credit Markets The Fed has tried to revive the credit markets but has essentially failed, except for student loans. Making debt slaves out of students is actually a hugely deflationary force. Moreover and as I have stated many times, the Fed cannot give money away, spend it, or force anyone to spend it. That is a very tough battle for the Fed with attitudes where they are (and as I have mentioned, attitudes are very important). Banks do not want to lend, credit-worthy businesses do not want to borrow, and consumers are still deleveraging. Those are extremely deflationary forces. Would Printing $50 Trillion Tomorrow Do Anything? Ignoring interest on excess reserves (a proviso I mentioned), printing $50 trillion dollars tomorrow might not do anything. Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists. As previously mentioned, such massive printing might briefly cause a temporary attitude change accompanied by a brief asset bubble of some sort (especially in long-dated treasuries given banks would put some of it to that use). However, massive printing would collapse treasury rates, further destroying those on fixed income, and make it even harder for pension plans to meet assumptions. Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion? Theory vs. Practice Certainly we are guessing as to what printing $50 trillion might do. As a practical matter, the odds of finding out are essentially zero. The Fed is not going to print $50 trillion tomorrow. More realistically, would printing $2 trillion a year for the next 10 years cause hyperinflation? No, it won't. So where is Fed induced hyperinflation going to come from? The answer is it isn't. Government vs. the Fed At this stage in the cycle, and in sharp contrast to what most believe, the Fed is essentially powerless (which is exactly why Bernanke is begging Congress to act) In contrast to a Fed that cannot spend money (except to meet its payroll and expenses and pay interest on reserves, etc), the federal government could actually spend $50 trillion tomorrow. But it won't. Hyperinflation? Even from a monetary aspect hyperinflation is nowhere in sight. Hyperinflation is a Political Event, Not a Monetary Event It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments. I responded that way in an email to reader Peter who replied "Sorry, but your theory is not based on the data. Read the literature on high and hyperinflation episodes." Well, I have read countless excerpts and Peter is badly mistaken. Please consider Hyperinflation Nonsense in Multiple Places. The entire post is worth a look for some remarkably silly predictions, but for the debate at hand, here is the pertinent snip: Jeff Harding at the Daily Capitalist asks Why Does Hyperinflation Occur? In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.Harding is correct. This is how I further elaborated... Zimbabwe vs. WeimarHyperinflation Model is Complete Silliness Those calling for hyperinflation are extremely misguided. It is not going to happen in any timeframe worth discussing. On the political side, no country is going to force war reparations on the US. The US is not going to peg its currency to another, the Fed is not going to print $50 trillion (and it would not matter anyway unless Congress spent that much), government is not going to confiscate land to the point of causing massive human and capital flight, etc. etc. Moreover, the US's gold holding, the fact the US has the largest capital and bond markets in the world coupled with ease in starting a business vs. nearly anyplace else in the world, absolutely 100% precludes a hyperinflationary outcome for the foreseeable future. The hyperinflation model is absolute complete silliness. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Posted: 30 Aug 2012 08:48 AM PDT Once again there is grim data from Europe. The safe thing to do is expect grim data every time European data is reported. Except for an occasional outlier, you will not be too far off. Eurozone Retail Sales Decline 15th Month Markit Reports Eurozone retail downturn deepens in August Key points:Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
France to Hire 150,000 Subsidized Workers With Zero Qualifications; Why Stop There? Posted: 30 Aug 2012 08:19 AM PDT Looking for a loony idea to address unemployment in France? Look no further because I have a doozie. Via Google Translate from El Economista, France will create 150,000 jobs for young people without qualifications The French Government has today adopted a draft law providing for the creation of 150,000 subsidized jobs for young people with little or no qualifications, which are most affected by unemployment and employability harder.Why Stop at 150,000? The second half of that translation is a bit choppy but the bill clearly targets "500,000 eligible people" between 16 and 25 with no skills and no qualifications. So, why stop at 150,000? Why not hire them all? And why stop at age 25? Why not hire everyone with no skills and no qualifications regardless of age? Hopefully the answers are so obvious that hiring even 5,000 with no qualifications seems preposterous. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
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