Wednesday, May 25, 2011

Mish v. The Inflationistas

Michael (Mish) Shedlock of Global Economic Trend Analysis does a good job destroying the hyperinflationistas:

Stack of Things Missed by Hyperinflationists

1. Trade math
2. Reserve currency math
3. Credit dwarfs currency and changes in credit and the value of credit are far more important than the changes we have seen in money supply.
4. Failure to understand pricing currency of oil is meaningless
5. Misconceptions about excess reserves (Please see Fictional Reserve Lending for a discussion).
6. Not understanding limits and restrictions on the Fed
7. Not understanding limits and restrictions on Congress
8. Failure to understand peak oil will not cause hyperinflation. Heck, peak oil will not even cause inflation.
9. Inflation in China, does not constitute inflation in the US.
10. Unfunded liabilities do not constitute debt
11. Myopia - The US is not the only country with massive structural problems. Let's stop pretending otherwise
12. Failure to understand the Fed will not destroy itself and the banks by allowing hyperinflation


Anonymous said...

Gray's Papaya begs to differ:

Matt Franko said...

He seems to be inching ever closer Tom, Resp,

Anonymous said...

twelve "reasons" and Mish still doesn't get it.

Hyperinflation is the death of a currency. It's a political event, not an economic one. And the fact that he even entertains the idea that the Fed could cause hyperinflation shows his complete lack of understanding.

And his comment that implementing a fixed convertibility to gold would stop hyperinflation is laughable.

The guy is hopelessly out-of-paradigm.

Tom Hickey said...

Mish is an Austrian. Virtually all the Austrians are inflationistas. Mish has been calling deflation for quite awhile and has been pretty much alone in this among them.

Agreed that he is out of paradigm with MMT, but he is out of paradigm with them, too.

It seems to me that he has read MMT, although I don't know how extensively. He has apparently incorporated some of it in his thinking. He is also friends with Post Keynesian Circuitist Steve Keen and often quotes Michael Pettis. While neither Keen nor Pettis are in paradigm with MMT, they are close.

Based on his political commentary, my conclusion is that Mish has not changed his Libertarian philosophy, but over time he is moving closer into paradigm with MMT as a trader and market analyst. He still has a way to go though.

Mish is making a positive contribution to the inflation/deflation debate in general. The Libertarian/Austrians that seem to dominate in trading circles don't pay any attention to MMT, but they do pay attention to Mish.

@ Anonymous

I read Mish as saying (non-specifically) that hyperinflation is politically based rather than chiefly economic or monetary, e.g., conditions were forced on Weimar and Mugabe instituted ill-advised land reform. Moreover, Mish says specifically that the Fed cannot cause hyperinflation and probably wouldn't if it could.

Anonymous said...

well, apparently Mish called Cullen Roche of Pragcap an "idiot" for Cullen's MMT views. I'm afraid that guys like Mish realize they have too much at stake to substantially alter their belief system. His readers might revolt and turn to some other blogger.

Crake said...

Mish wrote that pricing goods in a reserve currency does not means goods will not be transacted in other currencies or even if you they are transacted in the reserve currency, it will not cost much to convert on the sport as transaction fees are low and currency is basically fungible made me wonder:

As global trades increases, to keep goods being transacted in US dollars, wouldn’t you have to increase the world supply of US dollars or run the risk that there were not enough US dollars to facilitate the trade? Therefore, restricting the growth of the US dollar supply, would actually jeopardize the US dollars as a reserve currency, the opposite of what the inflationistas predict.

Tom Hickey said...

Crake: "As global trades increases, to keep goods being transacted in US dollars, wouldn’t you have to increase the world supply of US dollars or run the risk that there were not enough US dollars to facilitate the trade?"

Demand for USD drives up the relative value of the dollar, crimping US exports and expanding the trade deficit if the US does not decrease imports in proportion to falling exports.

But the USD is not the only global reserve currency now, even though ti is the principal one. The euro is also a reserve currency used for trade.

Crake said...

Tom, I am interrupting what you wrote as “it is what it is” - that our trade scenario (imports-exports) takes care of itself supplying the exact number of dollars to foreign markets as the trade dictates is needed.

Is my interruption correct or am I not understanding your answer correctly?

Calgacus said...

Crake, as Mish says, it more or less doesn't matter what currency sales of a commodity are denominated in for direct economic reasons, though there could be some psychological effects.

That reserve currency status implies trade deficits is called the Triffin dilemma

Tom Hickey said...

Crake, to get dollars the ROW has to export to the US. Individual nations can get the dollars through trade or buying them on the fx market. But the dollars have to come from the US. making more dollars available to the ROW, decreasing competition for USD in the fx market.

US exports are deducted from its imports to arrive at the trade balance. A trade deficit indicates that the ROW desires to save in dollar rather than buy US stuff or invest in US assets. which is presently the case.

But it could occur that the US becomes a net exporter. Then there could be fewer dollars than the ROW wishes to hold, which means there will be competition in the fx market for USD, driving the price up.

It is also the case that the ROW may desire more USD as a safe haven in troubled times. Then there is competition for the dollar in the fx market also and the dollar rises. For example, long eruo, short dollar trades are now being closed out due to the growing crisis in the EZ.

As the dollar rises, there will be more dollars for sale as people become indifferent to holding dollars. So dollars are always available at a price.

A higher price of USD adversely affects US exports, so the US does not want the dollar to rise too much. This rise is offset by falling import prices as the US buys cheaper foreign goods.

Theoretically, there should be the right amount of dollars at the right price, but that is theoretically. For example, the US is concerned that emerging nations are not letting their currencies rise, artificially depressing the cost of their exports.