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.
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.”
Basic math
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.
Part III
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.
Brilliant Nonsense
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.
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.
Final Thoughts
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
