Jay Question to Chromatic Dispersion
Jay posted this question to me
Chromatic,I've heard ONLY Gold Bugs say, Fed will hyperinflate to reduce the burden of debt. But I've never heard an argument why.
Most of the dumb argument is that - well you pay the debt in depreciated money. This is not a very good argument - for the simple reason that - if everyone is defaulting and causing deflation - it is even a much better solution to the debt burden!!! Because, it is so painless!!! You owe nothing!!! Nada!!
As opposed to hyperinflation - where you owe something (whose value is less though)!!!Also, at the end of deflation, the currency value is preserved!!! There is no disadvantage in deflation at all!!!
It is just that Gold Bugs want their gold value to go up and hence they argue for hyperinflation!! If the government defaults on its loan - it is much easier!! The future generation dont have to pay this loan back!! But, by hyperinflating - they still have to pay some money. I'm not sure why people say govt will hyperinflate to reduce the debt burden.
Of course, whether the govt defaults OR hyperinflates - either case it is going to have tough time getting fresh loans in the future!! So why choose hyperinflation (as if hyperinflation is less painful than deflation)? If at all, deflation is better because government can print more money!!!
Do you see any reason why government should hyperinflate?One vague argument one might give is that - if government deliberately defaults it is like scar on the prestige - but if it hyperinflates, it can blame it on something like oil price instead of money printing. That is plain wrong.
For instance, government can allow GSEs to fail and say - oops it is the business that failed - but the US govt still pays the govt debt!!! How about that? Government will put the GSE executives in jail and tell the world - these greedy bastards...i.e instead of oil (as in the case of hyperinflation), they can blame the deflation on GSE/bank executives!!! Can you give me any reason why the Fed/Govt considers deflation as a bad problem as opposed to hyperinflation?
Also, people often say Bernanke said - helicopter money if there is deflation. The reason why Bernanke said this was that he was seeing deflation ahead. Guess what? if he sees hyperinflation ahead - he will convert to - money destructor - i.e burn as much money as possible instead of burning heating oil!!! I think Bernanke is only addressing the imminent threat - he will act either way depending on the situation.
I believe, the gold bugs are arguing that hyperinflation is easy to achieve. By now it is obvious to you deflation is also as easy to achieve!!!
Your argument is that - deflation is easy to fight - just print money is your argument!!! The argument you fail to see is that - Hyperinflation is also easy to fight!!! Just stop printing money and increase the interest rate!!! In Weinmar Republic, Hyperinflation STOPPED soon after Bundesbank stopped the printing press!!!
You are very well aware of that, arent you? So why do you think goverment wont stop hyperinflation by raising interest rates - like Paul Volcker did? If hyperinflation happens - you will see that Bernanke is better than Volcker!!! Are you telling me that is not the case?
I hope, you are not taking cheapshot argument like Bernanke is an idiot. Bernanke is only showing the colors that he wants you to see. Why should he show you the side that is not relevant i.e his capability to fight hyperinflation better than Volcker when hyperinflation arrives?
So, in short can you explain why hyperinflation is preferred in US than Deflation?
Ofcourse, when you say govt will go to any length to cure deflation - you have to assume they can also repeal the newly enacted bankruptcy law as well (so that it is easy on people to unload the debt burden!!!). It has the same weightage as - govt preferring to hyperinflate. Ofcourse, I agree that, Fed will fight deflation with a vengeance.
But they will only try to cause mild inflation - NOT hyperinflation as you envision. One another argument gold bugs put forward is: the money that is printed to fight deflation will turn into hyperinflation!! However, they are blind to the fact that - the money that has been printed so far will not cause deflation!!! So, deflation will happen first. If the country goes in the path of hyperinflation - the Fed will immediately stop it. Fed will distribute "Whip inflation now" badges etc!!
Tell me why Fed loves hyperinflation? They love mild inflation - that is all they want. Neither hyperinflation nor deflation. The moment they see higher inflation, they will rein in the money supply - the equivalent of helicopter money will be to increase the reserve ratio!! Can you tell me why the Fed wont do this to stop hyperinflation? If you are assuming deflation will be very brief, tell me why hyperinflation wont be. Are you telling me Fed is powerless to raise the reserve ratio, or raise interest rates like Volcker did?
Bottom line, my PPI vs CPI argument above is what is important, I believe. So, the deflation only goes deep as the Fed fights the deflation!! What people find hard to understand in the above statement is: As govt prints money in deflation, how can CPI directly go low? The mechanism is different in deflation. As Fed prints money PPI goes up - so more layoffs - so few people having money to buy - so products will be bought only if the prices are even lower!! i.e Jobless people can afford only if the prices are lower!! As more and more money is printed, more and more jobs are lost!!! Hence CPI falls!!!Do you still think, hyperinflation is going to happen?
Chromatic,I've heard ONLY Gold Bugs say, Fed will hyperinflate to reduce the burden of debt. But I've never heard an argument why.
Most of the dumb argument is that - well you pay the debt in depreciated money. This is not a very good argument - for the simple reason that - if everyone is defaulting and causing deflation - it is even a much better solution to the debt burden!!! Because, it is so painless!!! You owe nothing!!! Nada!!
As opposed to hyperinflation - where you owe something (whose value is less though)!!!Also, at the end of deflation, the currency value is preserved!!! There is no disadvantage in deflation at all!!!
It is just that Gold Bugs want their gold value to go up and hence they argue for hyperinflation!! If the government defaults on its loan - it is much easier!! The future generation dont have to pay this loan back!! But, by hyperinflating - they still have to pay some money. I'm not sure why people say govt will hyperinflate to reduce the debt burden.
Of course, whether the govt defaults OR hyperinflates - either case it is going to have tough time getting fresh loans in the future!! So why choose hyperinflation (as if hyperinflation is less painful than deflation)? If at all, deflation is better because government can print more money!!!
Do you see any reason why government should hyperinflate?One vague argument one might give is that - if government deliberately defaults it is like scar on the prestige - but if it hyperinflates, it can blame it on something like oil price instead of money printing. That is plain wrong.
For instance, government can allow GSEs to fail and say - oops it is the business that failed - but the US govt still pays the govt debt!!! How about that? Government will put the GSE executives in jail and tell the world - these greedy bastards...i.e instead of oil (as in the case of hyperinflation), they can blame the deflation on GSE/bank executives!!! Can you give me any reason why the Fed/Govt considers deflation as a bad problem as opposed to hyperinflation?
Also, people often say Bernanke said - helicopter money if there is deflation. The reason why Bernanke said this was that he was seeing deflation ahead. Guess what? if he sees hyperinflation ahead - he will convert to - money destructor - i.e burn as much money as possible instead of burning heating oil!!! I think Bernanke is only addressing the imminent threat - he will act either way depending on the situation.
I believe, the gold bugs are arguing that hyperinflation is easy to achieve. By now it is obvious to you deflation is also as easy to achieve!!!
Your argument is that - deflation is easy to fight - just print money is your argument!!! The argument you fail to see is that - Hyperinflation is also easy to fight!!! Just stop printing money and increase the interest rate!!! In Weinmar Republic, Hyperinflation STOPPED soon after Bundesbank stopped the printing press!!!
You are very well aware of that, arent you? So why do you think goverment wont stop hyperinflation by raising interest rates - like Paul Volcker did? If hyperinflation happens - you will see that Bernanke is better than Volcker!!! Are you telling me that is not the case?
I hope, you are not taking cheapshot argument like Bernanke is an idiot. Bernanke is only showing the colors that he wants you to see. Why should he show you the side that is not relevant i.e his capability to fight hyperinflation better than Volcker when hyperinflation arrives?
So, in short can you explain why hyperinflation is preferred in US than Deflation?
Ofcourse, when you say govt will go to any length to cure deflation - you have to assume they can also repeal the newly enacted bankruptcy law as well (so that it is easy on people to unload the debt burden!!!). It has the same weightage as - govt preferring to hyperinflate. Ofcourse, I agree that, Fed will fight deflation with a vengeance.
But they will only try to cause mild inflation - NOT hyperinflation as you envision. One another argument gold bugs put forward is: the money that is printed to fight deflation will turn into hyperinflation!! However, they are blind to the fact that - the money that has been printed so far will not cause deflation!!! So, deflation will happen first. If the country goes in the path of hyperinflation - the Fed will immediately stop it. Fed will distribute "Whip inflation now" badges etc!!
Tell me why Fed loves hyperinflation? They love mild inflation - that is all they want. Neither hyperinflation nor deflation. The moment they see higher inflation, they will rein in the money supply - the equivalent of helicopter money will be to increase the reserve ratio!! Can you tell me why the Fed wont do this to stop hyperinflation? If you are assuming deflation will be very brief, tell me why hyperinflation wont be. Are you telling me Fed is powerless to raise the reserve ratio, or raise interest rates like Volcker did?
Bottom line, my PPI vs CPI argument above is what is important, I believe. So, the deflation only goes deep as the Fed fights the deflation!! What people find hard to understand in the above statement is: As govt prints money in deflation, how can CPI directly go low? The mechanism is different in deflation. As Fed prints money PPI goes up - so more layoffs - so few people having money to buy - so products will be bought only if the prices are even lower!! i.e Jobless people can afford only if the prices are lower!! As more and more money is printed, more and more jobs are lost!!! Hence CPI falls!!!Do you still think, hyperinflation is going to happen?
posted by Chromatic Dispersion at 10/28/2005 01:38:00 PM
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