01 Apr 2009


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Tim Swanson sends me this article saying hyperinflation is impossible. I’m not convinced. Let’s not forget, folks, that during 2008 the narrow M1 money supply rose by 17 percent. The public expanded its demand for cash balances and sopped it up, that’s true. But I think Bernanke has more than offset the “second order deflation” that Hayek and others worry about.

I would need to research this more, but off the top of my head I think it’s important to note that–if I’m not mistaken–a lot of the base expansion during the last quarter of 2008 was in the form of propping up banks and temporarily holding their “toxic” assets as collateral on short-term loans. If I’m a bank and the Fed keeps me solvent by letting me constantly roll over 28-day repos on my mortgage-backed securities (I am probably slightly off on the lingo), then I’m not going to be keen on lending out the new reserves.

But if instead, the Fed buys those mortgage-backed securities from me at a price that keeps me solvent, then what would stop me from making new loans at that point? So the fact that Bernanke keeps announcing new trillion dollar plans, some of which involve the outright purchase of assets, makes me expect M1 and M2 to start exploding very soon.

Finally, if you need another type of argument to be worried about hyperinflation, consider: Brad DeLong links to another Keynesian who is saying stuff like this:

We need not worry about hyperinflation. Or rather, in a world where hyperinflation is a real possibility, hyperinflation is the last thing we’d be worrying about. There are certainly circumstances under which America could face uncomfortably high inflation down the road, the result of which would most likely be Fed tightening and a painful double-dip recession. But there are two key points to be made about this.

One is that “uncomfortably high” given present conditions is pretty darn high. In the midst of deep recession, inflation isn’t nearly as nasty as it might otherwise be. For one thing, when dollars are getting weaker people don’t want to hold dollars, and so they spend them, which is a good way to make a dent in the shortfall in demand. For another, inflation will help housing markets clear. And for another, a weaker dollar should goose American exports.

The second, and related, point is that inflation is one of many concerns that we face at the moment. Fed independence is a big issue, and 20% annual inflation is something we’d prefer to avoid, but so is, say, a 6% contraction in output. I’d love for Congress to allocate all the necessary funds and then turn around and take the necessary steps to rein in the deficit, but given actual political constraints I’m extremely glad the Fed has done what it’s done — I prefer to see some action appropriate to the scale of the downturn taken and roll the dice with inflation….

Another way to think about this is that maybe all the folks worried about inflation should instead focus their ire on the supermajoritarian rules constraining Senate action.

Yep, every time I read the above I become more convinced that I need to buy more gold and silver.

UPDATE: Here is a Mises Daily making the case “for” hyperinflation. (As in, the case that it will happen–not like someone making the case for handwashing.)

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