Confessions of a 'Flationary Agnostic

[Master Shake]

From Jesse's Cafe Americain.

I have no particular allegiance to either the hyperinflation or the deflationary camps. Both outcomes are possible, but not yet probable. Rather than being a benefit, occupying the middle ground too often just puts one in the middle, being able to see the merits in both arguments and possibilities, and being unwilling to ignore the flaws in each argument. But this is where reason takes me.

In a purely fiat regime, where a monetary authority has the ability and the willingness to monetize debt, there is NO mandated, no predetermined outcome for hyperinflation or deflation in the event of a credit crisis, unless that money is pegged to an external standard, which is ruled out by definition in a purely fiat regime.

In a credit crisis there is often a 'credit crunch' which is what was seen in the financial system when short term credit transactions seized up out of fear. This is not the same as a true monetary deflation which is a real contraction in the money supply, at the least. So far we have not seen this. And we may never.

Also, I would have to agree that the eventual fate of all fiat currency is failure and reissuance of a 'new' currency, due to the sustained erosion of a seemingly incessant, if gradual, inflation. This does not HAVE to be, but it is, as an outcome of human nature. Men will always and everywhere eventually succumb to the temptation of currency debasement, a free lunch, and so they cannot be trusted to manage a nation's affairs with the unrestrained keys to the Treasury.

And at the end of a currency's lifespan, there is quite often a bout of serious inflation that precipitates the reissuance and restructuring. How long this period of time can be no one can say.

That is the simple fact of it. The only limitation on the Fed's ability to inflate is the value of the dollar and the bonds; that is, their acceptability to 'creditors' who are willing to exchange goods and services with real value for paper.

And it should be perfectly clear that to choose a monetary deflation as a fiat policy decision for a country that is a net debtor would be bizarre to say the least.

Everything else is noise and generally ad hominem attacks. And the louder the noise, the less likely the person speaking knows anything about monetary systems.

Rest here.

http://jessescrossroadscafe.blogspot...-agnostic.html

[metalman]

Re: Confessions of a 'Flationary Agnostic

From Jesse's Cafe Americain.

I have no particular allegiance to either the hyperinflation or the deflationary camps. Both outcomes are possible, but not yet probable. Rather than being a benefit, occupying the middle ground too often just puts one in the middle, being able to see the merits in both arguments and possibilities, and being unwilling to ignore the flaws in each argument. But this is where reason takes me.

In a purely fiat regime, where a monetary authority has the ability and the willingness to monetize debt, there is NO mandated, no predetermined outcome for hyperinflation or deflation in the event of a credit crisis, unless that money is pegged to an external standard, which is ruled out by definition in a purely fiat regime.

In a credit crisis there is often a 'credit crunch' which is what was seen in the financial system when short term credit transactions seized up out of fear. This is not the same as a true monetary deflation which is a real contraction in the money supply, at the least. So far we have not seen this. And we may never.

Also, I would have to agree that the eventual fate of all fiat currency is failure and reissuance of a 'new' currency, due to the sustained erosion of a seemingly incessant, if gradual, inflation. This does not HAVE to be, but it is, as an outcome of human nature. Men will always and everywhere eventually succumb to the temptation of currency debasement, a free lunch, and so they cannot be trusted to manage a nation's affairs with the unrestrained keys to the Treasury.

And at the end of a currency's lifespan, there is quite often a bout of serious inflation that precipitates the reissuance and restructuring. How long this period of time can be no one can say.

That is the simple fact of it. The only limitation on the Fed's ability to inflate is the value of the dollar and the bonds; that is, their acceptability to 'creditors' who are willing to exchange goods and services with real value for paper.

And it should be perfectly clear that to choose a monetary deflation as a fiat policy decision for a country that is a net debtor would be bizarre to say the least.

Everything else is noise and generally ad hominem attacks. And the louder the noise, the less likely the person speaking knows anything about monetary systems.

Rest here.

http://jessescrossroadscafe.blogspot...-agnostic.html

the most succinct restatement of itulip's case for 10 yrs i've seen yet. well done!

[ThePythonicCow]

Re: Confessions of a 'Flationary Agnostic

From this same article:

The growth rate of dollars is slowing at the same time that the 'demand' for dollars, the velocity of money and the creation of new commercial credit, is slowing. GDP is negative, and the growth rate of money supply is still positive, and rather healthy. This is not a monetary deflation, but rather the signs of an emerging stagflation fueled by slow real economic activity and monetization, or hot money, from the Fed. The monetary authority is trying to lead the economic recovery through unusual monetary growth. All they are doing is creating more malinvestment, risk addiction, and asset bubbles.

The term velocity of money has never quite seemed right to me. This paragraph does a good job, perhaps unintentionally, of hinting at what I think is a better way of looking at this.

The usual monetarist theory of money, as I understand it (a relative econ newbie) is that you've got so much money, so much goods and services, and that (1) the value of goods and services traded in a given time period is equal to (2) the sum, over all transactions in that period, of the dollars exchanged for those goods and services. This second term is equal to the static amount of money in circulation times the frequency with which each unit of money (each dollar, say) is traded, on average. That frequency is the velocity of money.

This suggests that at any instant in time there is a tight connection between a good or service and its price. The money world and the real world of goods and services march in lock-step, as if according to some universal price chart, which may vary by time, place and circumstance, but which is inviolate in a sufficiently micro scale. Inviolate that is in the theoretical world of economics, not while bartering in a Thai market ;).

No, I say. The money world can get rather seriously out of whack with the real world. There can be great slippage between them. The Austrian economists speak of malinvestment, noting that there may be a poor correlation between investments in productive capital and what would be most useful or needed. This is getting at this same slippage, from another angle, but only partly in my view.

I think we have two separate notions masquerading as inflation. There is the simple monetarists notion of an increase in the money supply or in its velocity. There is also the increasing uncertainty of the value of money in the real world. There are great sums of money floating around as credits on various balance sheets that simply can no longer be realized in real goods and services at current price levels. Both the totality of these great sums could not be spent at current price levels, and the marginal value of "the next dollar spent" is increasingly volatile and unpredictable. This is due in part to malinvestment, risk addiction, and asset bubbles, as noted in my quote above.

A sufficiently wealthy person, or more realistically, a sufficiently corrupt financial institution, cannot spend all he or it has. The supply of (what purports to be) money may vastly exceed (at anything resembling current price levels) the supply of goods and services available. Such a circumstance might not lead to rapid price increases, due to an inefficient connection between the monetary world and the real world. This inefficient connection I call slippage.

I can think of this like a hydraulic system, where money is the working fluid. The affectiveness of the fluid is a measure of how much force a given surface area of fluid can apply. If the fluid is frothy with gas pumped in to it to expand the volume of fluid, it is less affective. This is like typical inflation. If the volume of hyrdaulic fluid vastly exceeds the volume of fluid needed to make the mechanism function normally, then that excess fluid cannot be used usefully. The fluid that is currently in use might have more or less affectiveness this moment than last, depending how much gas is dissolved in the fluid. The affectiveness of the fluid currently in use is not affected by how much excess fluid sits in some storage tank (or some off-balance derivative ;)).

However that hydraulic analogy is misleading. In such a practical, real-world hydraulic system there would be some sort of valve controlling how much of the spare fluid in storage was allowed into the working mechanism at anytime. This value would be an ordinary part of the overall apparatus. In our monetary system, the valve is not an intentional practical design element, but rather slippage due to corruption, misinformation, and inefficiencies.

This makes estimates of inflation or deflation more difficult, because measures of total monetary supply bear little correlation with the working affectiveness of money currently being transacted for goods and services.

The hard part of fixing such a broken system is that we have to shrink the excess money and no one wants it to be their ox that is gored. Cleaning up the corruption necessitates shrinking that excess, because the real world working economy of goods and services cannot in anyway come close to absorbing that much purported money. Only the corruption, the slippage allows this much imbalance between the real world and the money world.

One cause of this slippage is embezzlement, hence the word bezzel referring to that which appears on the books but is missing due to still undiscovered embezzlement. This bezzel is one component of what I am calling slippage.

Money possessed has becoming an increasingly unreliable measure of future purchasing power of goods and services. What is perhaps most significant about the current "inflation" vs. "deflation" debate is the high level of anxiety that its participants display. What I call slippage makes it increasingly difficult to know just how wealthy we are now or soon will be. That makes some of us anxious, and makes other of us more adamant that whatever position we hold on the issue must be the one and only correct position. Monetary slippage causes human anxiety.

[grapejelly]

Re: Confessions of a 'Flationary Agnostic

Brian on Contrary Investor makes a strong case this issue (today) for fiscal "stimulus" taking the place of failed monetary stimulus.

Reason is this:

1. Fed has monetized something like $1.5 trillion

2. That money is fueling the increase in all financial assets and commodities

3. None of that money is flowing to the producers & consumers economy as we know it it here at iTulip (thanks EJ and thanks Michael Hudson).

4. If the money flowed to equities, fantastic. But it also flows to commodities. All asset classes are rising in lockstep, incredibly well correlated.

5. So now you have $3 gas or $3.50 gasoline and "no jobs" and a rising tide of household bankruptcies and decrease in household leverage and spending.

6. The politicians will "do something" because they can't let this crazy amount of Fed juice keep driving up commodities.

7. They will begin additional rebates, cash for clunkers, first time homebuyer credits, and much more, much more indeed...

One thing is for sure in my world: there will be NO deflation. NONE. The next step is US gubmint spending more money like crazy on "jobs" and housing subsidies and so forth.

Just exactly the reaction after the Crash of '29 that resulted in many years of the Great D. Same thing happening now.

Same thing will be responsible for many, many years of depression.

[c1ue]

Re: Confessions of a 'Flationary Agnostic

TPC,

Your theory on slippage is interesting - but a general description is not as helpful as a real world example.

Specifically what is the level (absolute or percentage) of 'slippage' now vs. last year? 3 years ago? 5 years ago?

Secondly the analogy of money being the hydraulic motive force behind the economy is a simple restatement of the PC/FIRE economy analogy utilized by iTulip. The only difference is that 'slippage' theory assumes FIRE drives PC when iTulip instead states that the two are related, but only indirectly.

Thus under FIRE/PC iTulip theory, massive amounts can be pumped into FIRE without positive impact on PC whereupon the death of the PC economy winds up killing both economies.

Under 'slippage' theory, what is happening now? Increase of 'pressure' which will overcome slippage? Slippage increasing more than 'pressure'?

Please elucidate.

[Jesse]

Re: Confessions of a 'Flationary Agnostic

I think of velocity of money as an economic tachometer.

The rest of the analogy follows from that.

[sunskyfan]

Re: Confessions of a 'Flationary Agnostic

From Jesse's Cafe Americain.

And it should be perfectly clear that to choose a monetary deflation as a fiat policy decision for a country that is a net debtor would be bizarre to say the least.

Everything else is noise and generally ad hominem attacks. And the louder the noise, the less likely the person speaking knows anything about monetary systems.

There is the ASSUMPTION of choice here. FIAT has limits otherwise VOILA the Fed acted and our problems are fixed. In a complex control system, hydraulic or otherwise, things are not so simple. The Fed already turned its volume nob to maximum and even invented one that goes to 11 with little effect so far.

The second paragraph is perhaps the best recursive self-serving statement I have read on the matter.

[tombat1913]

Re: Confessions of a 'Flationary Agnostic

There is the ASSUMPTION of choice here. FIAT has limits otherwise VOILA the Fed acted and our problems are fixed. In a complex control system, hydraulic or otherwise, things are not so simple. The Fed already turned its volume nob to maximum and even invented one that goes to 11 with little effect so far.

The second paragraph is perhaps the best recursive self-serving statement I have read on the matter.

This is not necessarily true. The Fed has been paying banks not to lend, the knob is turned to 11 and the speakers aren't plugged in.

[ThePythonicCow]

Re: Confessions of a 'Flationary Agnostic

TPC,

Your theory on slippage is interesting - but a general description is not as helpful as a real world example.

Specifically what is the level (absolute or percentage) of 'slippage' now vs. last year? 3 years ago? 5 years ago?

I know of no numbers or statistics that are available to measure slippage. Numbers follow from numeric models. My slippage notion is at present fuzzier than any existing numeric model. It strikes at a core assumption of economics, the assumption that "money buys things." Just as the hydraulics theory one might study in college (caveat -- I didn't study hydraulics, so might be blowing smoke here) breaks down if there are too many gas bubbles in the lines, similarly all the existing analytic economics theories of which I am aware break down if there is too much slippage between the monetary world and the "real" world of tradeable goods and services.

Secondly the analogy of money being the hydraulic motive force behind the economy is a simple restatement of the PC/FIRE economy analogy utilized by iTulip. The only difference is that 'slippage' theory assumes FIRE drives PC when iTulip instead states that the two are related, but only indirectly.

Thus under FIRE/PC iTulip theory, massive amounts can be pumped into FIRE without positive impact on PC whereupon the death of the PC economy winds up killing both economies.

Under 'slippage' theory, what is happening now? Increase of 'pressure' which will overcome slippage? Slippage increasing more than 'pressure'?

Please elucidate.

As I noted in my earlier post, the analogy to hydraulic fluid reserves was a poor one. I probably should not have used it. By slippage I am not referring to the big FIRE bubble overwhelming in size the smaller "real" world of tradeable goods and services.

One could have slippage even with a small monetary world and a large real world. Imagine trying to conduct an open market to sell your garden vegetables in a town that was forcibly populated by the government with profound idiots or advance Alzheimer patients. You could not guess from one second to the next what would be the selling price of your produce.

Or imagine carrying around currency notes that had an embedded chip which randomly changed the value of the note every few minutes. That would be serious slippage.

We have a money world and a real world. Most of us like money because it provides us with unfettered, measurable power in the "real" world of tradeable goods and services. But if the amount of such power a unit of currency is like to provide us is difficult to predict, that is quite unsettling. We can even adjust to steady inflation (loss of currency value) over time. But the possibility of erratic, wild, possibly huge swings in the purchasing power of a currency unit shakes the foundations of our economic existence and our economic theories.