Sunday, December 18, 2016

A Correspondent Writes About "Inflation or Deflation"

I think the question of hyperinflation or crash is a political question, and in that sense it isn't "predictable" because it depends on what actual individual political actors decide is their best-worst option when the time comes. Neither hyperinflation nor a crash is a phenomenon of nature, deterministic and with a mind of its own. Hyperinflation requires central monetary authorities to increase the money supply at an increasing rate. A crash requires them to hold the money supply constant relative to a growing or unstable debt burden, or to even sharply reduce the money supply in the face of such a debt burden, causing mass liquidations and a flight to cash. But either one of these is a political decision.

We can broadly understand the consequences of hyperinflation or deflation (asset prices rise and rise in money terms, or fall and fall in money terms), but we can't really predict which one will happen ahead of time. That being said, hyperinflation destroys the monetary system itself by completely undermining confidence in the medium of exchange, which is something you'd think a modern central banker would be hesitant to commit to as a policy because they'd be destroying their own franchise, or at least creating gross uncertainty about their future ability to influence such a franchise. With deflation/crash, certain crony capitalists get wiped out, which would be very "annoying" for the central banker who has relationships with them, but the monetary franchise remains in tact.

This is probably why we see modern economies "wobble" between inflationary growth and deflationary crashes from time to time-- the central bankers are essentially playing a big game of chicken where they veer from one risk to the other, not quite going all the way. The economy almost "overheated" in 2007/2008, so they engineered a crash... the crash was devastating so they engineered a reflation with quantitative easing. At no point has the system been "allowed" to fully experience one extreme or the other, either a hyperinflation and monetary reset, or a full liquidation of bad investments during a crash with an economic/financial reset. Every time they play chicken, they undermine the real economy even more. What Dalio is arguing, and I would agree, is that they probably play with things so much that it gets to a point where they can't play any further and the decision about how to reset is essentially made for them.


High Plateau Drifter said...

After enough good wine, the cynic in me takes hold, and I must confess to a suspicion that both females, Hillary and Yellen were set up to take the next fall and subsequent blame for the economic catastrophe that lies ahead. Two clueless females hoping to show the world that women can wield power just like men.

The mystery is why Trump would volunteer to take Hillary's place as the sacrificial goat.

Anonymous said...

The baby boomers' answer to every problem was to borrow money.

Obama was the affirmative action president who held on by borrowing a trillion dollars (on average) every year for eight years.

As CP has written, the government retirement Ponzi schemes will only hold together if an extra couple trillion per year can be borrowed.

People are innumerate - they have no clue how astonishingly much $1 trillion is.

The S&P 500 combined earnings are only about $1 trillion.

whydibuy said...

Hey, low plains loser, how is the deep state conspiracy going for ya?
Have they crashed the market? How is that crash bet of yours doing, lololol?
Another loser call by our resident conspiracy theory wackjob.
Oh, I see you have another conspiracy cooked up since the last one was a bust, just like all of them are. Two women set up to take a fall. By who??
Yeah, it looks you've had a bottle or two of wine.

Vlad said...

It takes lots of money to do politics.

Progressives use street crime to drive intact white families from local, county, state, and federal jurisdictions. This gives progressives control of streams of tax revenue from these jurisdictions. And that funds the lives of millions of social parasites who organize to make to easier to be a social parasite.

Social parasites at the top of the heap control lower-ranking social parasites by holding out hope of foundation grants. Think Ford Foundation, the Rockefeller Foundation, and the like. Grant aspirants compete with each other by becoming ever more crazily left wing. That is part of the process that moves the Overton Window ever more leftward.

Fortune 500 companies and other large organizations feather bed themselves with social parasites so as to get kinder regulatory treatment and continued access to capital.

Here is what must be done: