The hyperinflation proponents are back at it. This time in two parts, led by Jeff Nielson.
The most absurd part of Nielson’s claim is his statement “Hyperinflation has already occurred“. His claim is in reference to the US, not Zimbabwe.
Allegedly Nielson provides “proof“. Let’s take a look.
In Hyperinflation Defined, Explained, and Proven: Part I, Nielson defines inflation as an “increase in the supply of money”.
That’s a reasonable starting point, but in a fiat-based credit society in which we live, Nielson ignores credit, and credit is far more important.
Nielson goes on to state “Hyperinflation, by obvious extrapolation, is the extremely excessive money-printing of the central bankers.”
“Extremely excessive” is a vague as well as subjective definition. Nonetheless, as “proof” of hyperinflation, Nielson posted this chart.
Adjusted Monetary Base
Of that monstrous increase in base money, the following chart shows that 2.2 trillion of it is parked at the Fed as excess reserves.
It’s almost as if the Fed printed $2 trillion and buried it at the bottom of the ocean.
Actually, it’s not quite that benign, because banks do collect interest on the reserves. Also, the Fed asset buildup artificially lowered interest rates while fostering asset bubbles.
However, the net effect is hardly in the hyperinflation category as the following chart shows.
Growth of Monetary Base Minus Excess Reserves
It takes a ridiculously wild imagination (or equally wild definition) to present base money as “proof” of hyperinflation.
What Is Money?
From an Austrian economic standpoint, Nielson does not know how to measure money. Base money is not the proper measure.
Austrian economist Frank Shostak came up with the term AMS (Austrian Money Supply) to measure true money, available on demand, not credit. Shostak proposed savings accounts are not money on demand.
There is reasonable debate regarding what is credit and what is money, but that debate generally revolves around the issue of whether or not savings accounts constitute money available on demand.
Michael Pollaro has an excellent discussion at True “Austrian” Money Supply Definitions, Sources, Notes and References.
Technically, savings accounts don’t represent money available on demand. With savings accounts, you deposit money at your bank, and banks are free to lend it. You get paid interest in return. Savings accounts are misnamed. They are actually lending accounts that derive interest. There is also a 30-day notice rule on withdrawals, even if it’s not enforced.
Many argue that from a practical standpoint the money is available on demand, as you can pull it out any time.
Philosophical issues aside, the two publicly available “True Money Supply” numbers are TMS1 and TMS2. The first does not include savings accounts and the second does.
Pollaro states “Savings Deposits are included in the [TMS2] money supply on the basis that the 30-day notice period has rarely if ever been enforced, and unlikely to be enforced except perhaps in a systemic banking crisis where the government would very likely mandate a freeze on all bank deposits.”
To give the maximum amount of leeway to Nielson, let’s assume TMS2 represents the best definition of money.
True Money Supply
That is a pretty steep rate of growth of money (the slope matches the previous chart), but it’s hardly hyperinflation material.
At the start of the great recession in December 2007 TMS2 stood at $5.287 trillion. It’s now $11.965 trillion.
That’s roughly a 10% increase in money supply per year. If one wants to make an inflation claim, defined precisely that way, it would be reasonable.
The standard definition of hyperinflation, and one that I accept, is a complete collapse in the faith of a currency. There is legitimate debate over how “fast” that needs to occur (but certainly not over decades).
By any reasonable definition, hyperinflation “now” claims are pure Fantasyland material.
Hyperinflation Silliness Part II
In Hyperinflation Defined, Explained, and Proven: Part II Nielson goes on to explain “why the current economic context makes a full-blown, monetary episode of hyperinflation inevitable”.
Part II is based on the fatally flawed analysis of part one.
When you start off with a vague definition of hyperinflation, “extremely excessive money-printing”, coupled with lack of understanding as to what money supply is and how to measure it, follow-up posts cannot be any better than the initial post.
In part II, Nielson states “Our corrupt governments are racing to see which one can create hyperinflation the fastest: driving the exchange rate of our currencies all the way to zero, stealing all of our wealth.”
I agree with the corruption thesis, but must point out that it is mathematically impossible for the fiat currencies to all fall to zero relative to each other.
Currencies can all fall to zero vs. gold, but that would mean gold would obtain infinite value vs. every currency in the world. Although theoretically possible, the notion is simply ridiculous from a practical standpoint.
Nielson concludes with this straw man argument. “The Deflationists present us with the absurd hypothesis that no matter what level of monetary criminality is pursued by the West’s central banks (and Big Banks) as they seek to dilute our currencies to zero and steal all of our wealth, the criminals will fail. More than that, the Deflationists present the laughable assertion that as the bankers race to drive our currencies to zero that these fraudulent, fiat currencies will actually rise in value.”
Actually, the above absurd hypothesis is far more likely than the notion gold will attain infinite value vs. all fiat currencies that become worthless.
Moreover, and more importantly, Nielson ignores time. I am a deflationist – for now. That does not mean I will be one three years from now. It all depends on what happens between now and then.
I don’t know what will happen. And Nielson doesn’t either.
What happens over the near-term and long term are two different things. If one starts with the simple notion we are in an asset bubble of immense proportions (Nielson do you disagree?) then conclude that bubbles burst by definition, how is it possible we escape another deflationary asset bubble bust in which prices fall and currencies buy more?
Label that “asset deflation”, not “deflation” if you insist. But asset deflation and the ability of banks to lend go hand in hand. The combination is what’s really important from a practical standpoint.
In part III (coming up), Nielson proposes to explain the “time-lag between when a currency has been rendered fundamentally worthless, and the time when the official exchange rate of that currency reflects this worthlessness.”
I can hardly wait. Hopefully Nielson puts a time line on when the dollar becomes completely worthless. Many before him have tried, with laughable results.
John Williams at ShadowStats penned an absurd article many years ago on the coming “Hyperinflationary Depression”.
Nielson called William’s work “brilliant”.
Williams has a huge following, mainly by the hyperinflationist crowd. Williams himself has been predicting hyperinflation for some time. I have written about it before.
- December 12, 2010: Williams Calls for “Great Hyperinflationary Great Depression”; A Very Easy Rebuttal
- May 25, 2011: Hyperinflation Nonsense in Multiple Places
All of the hyperinflation calls missed by a mile. The dollar strengthened mightily, and treasury yields just made 65-year lows.
This is what happens when you fail to take into consideration:
- Credit conditions
- Global economic conditions
- Printing by other central banks
- Currency instability in Europe
- Untenable situation in Japan
- A proper definition of money supply
- Time preferences
Williams makes all of those mistakes. In addition, he is far too US-centric in his analysis.
For that, Nielson labeled William’s work “brilliant”.
Williams is now hiding in his cave. Nielson is latest hyperinflation torch bearer.
To proclaim victory, in advance, Nielson had to invent a preposterous definition of hyperinflation.
I have gone through this kind of thing before, with John Williams, Peter Schiff, and others.
People rallied around Schiff when he called for hyperinflation. This time, I expect the hyperinflationists to rally around Neilson, despite his patently absurd definitions.
For those who wish to think, please think about the ramifications of another major asset bubble bust, and what that will mean in “practical terms”, notably: asset prices will get cheaper, a dollar will buy more assets.
I reiterate: No One “Knows” How This Will End.
Schiff doesn’t, Nielson doesn’t, and I sure don’t. That said, the mess in Europe, Japan, and China appear more likely to come to the forefront sooner than the mess in the US.
My central thesis is asset bubbles pop, sooner or later, and that by definition is deflationary. This model was correct in 2007 and unless bubbles expand infinitely, forever, it will be correct again.
When? I don’t know, but it’s happened twice (2000 and 2007). The hyperinflationist track track record is zero percent.
Bitgold, GoldMoney, Schiff
Many people have asked me to comment on the recent relationship between Schiff and Bitgold/Goldmoney. Lots of bad blood spilled over on on that one, prior to the agreement.
Now Schiff and Bitgold are partners. To me, that’s a very good thing. Nielson attacked Schiff and Bitgold.
Nielson is wrong, and Schiff is finally right. I will explain in detail later.
This is the important take away: Schiff, Nielson, James Turk (founder of Goldmoney), Roy Sebag (founder of Bitgold), and I are all firm believers in gold.
Some of us are inflationists, some of us are hyperinflationists, and one of us is a deflationist (at the moment but also for the foreseeable future), but we all agree that gold is an asset that deserves a strong percentage of your wealth preservation strategy.
There is no need to put wild targets on the price of gold or make wild hyperinflation claims. Hyped up claims don’t serve any useful purpose.
For now, we can agree (I think), that central banks will respond with a vengeance to deflation threats, and gold will be a beneficiary.
Mike “Mish” Shedlock