tag:blogger.com,1999:blog-6837159629100463303.post1735416064290799521..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: HyperinflationJason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-6837159629100463303.post-57412814613837753402014-07-08T21:24:54.540-07:002014-07-08T21:24:54.540-07:00Thanks!... I tried out the search box just now (I ...Thanks!... I tried out the search box just now (I look this particular one up a lot).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-85259155372521517362014-07-06T20:20:54.244-07:002014-07-06T20:20:54.244-07:00Jason, Japan is spending twice what it gets in tax...Jason, Japan is spending twice what it gets in taxes. The extra money is coming from the central bank monetizing bonds. How do you decide that the central bank is not funding the deficit? Just because the head of the central bank says he is using some other policy? I think the central bankers with hyperinflation always say they are working on some reasonable sounding policy and not funding the government. So how can you make any prediction for Japan?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-27947253907170019552014-05-11T11:45:29.708-07:002014-05-11T11:45:29.708-07:00I'd also like to emphasize this is all very th...I'd also like to emphasize this is all very theoretical at this point. But it does give an explanation for why the BoJ could print so much money and still not be able to meet its inflation targets. Theories of expectations lack explanatory power (how much money could they print before expectations suppressing inflation?) much like theories of eventual inflation (when will inflation take off?). Inflation in Japan really should have taken off by now -- either because markets should realize Japan isn't going to cut its base by a factor of 5 or because 25 years is a long time for a delayed effect.<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2013/09/the-mystery-of-japanese-monetary-base.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2013/09/the-mystery-of-japanese-monetary-base.html</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-58532713597890330072014-05-11T11:32:47.751-07:002014-05-11T11:32:47.751-07:00Why would hyperinflation be preferable to zero inf...<i>Why would hyperinflation be preferable to zero inflation?</i> I only said that it might be and it is highly politically dependent. Hyperinflation can return us to the status quo where monetary policy is the primary tool of demand management. But maybe we'd rather have fiscal policy be that primary tool -- then zero inflation would be preferable.<br /><br /><i>Constant rate of increase.</i> By this I meant something like a <a href="http://en.wikipedia.org/wiki/Friedman's_k-percent_rule" rel="nofollow">k-percent rule</a> that ignores economic indicators. Japan's monetary base/currency have "constantly" increased in the common usage of the word, but not the mathematical usage where <i>dMB/dt = constant</i> (Friedman's k-percent rule). Japan may be increasing its money supply by 0.7% every 10 days, but it is not bound by law to do so, nor is there an ongoing war or populist government that is distributing that additional money to the population. The BoJ is trying to meet inflation targets. That is why inflation goes to zero and monetary policy becomes ineffective.<br /><br /><i>Brazil, Argentina and War</i>. In both cases, the government appeared (appears) to be printing currency to pay the government's bills (and support populist measures). War is just another potential way that governments will print currency in a way that ignores economic indicators.<br /><br />The key point is if the central bank makes the (currency component of the) monetary base endogenous by using some target like inflation, NGDP, interest rates, then inflation goes to zero as the base becomes large relative to NGDP. If the base is exogenous due to paying for a government's fiscal policy or war (or adopting a k-percent rule), then accelerating inflation will result.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-48155542384201999512014-05-11T07:37:51.667-07:002014-05-11T07:37:51.667-07:00I said that wrong, is "war" in any way k...I said that wrong, is "war" in any way key to your theory or just one way that governments go overboard in printing money?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-42367006929962360592014-05-11T07:34:46.841-07:002014-05-11T07:34:46.841-07:00Thanks Jason. Why do you say hyperinflation migh...Thanks Jason. Why do you say hyperinflation might be preferable to zero inflation?<br /><br />There are many places that get hyperinflation without war. Certainly 26% is easy to get to. I think Brazil and Argentina are doing that right now. <br /><br />You have said that, "a constant rate of increase in the monetary base results in accelerating inflation". Japan is increasing their money supply by around 0.7% every 10 days. How does your theory say the previous but that this does not lead to accelerating inflation? I don't see where "war" is mentioned in your theory. Can you work through how you would use your theory to predict if Japan or the UK were headed for hyperinflation? Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-73180721648326821702014-05-10T14:10:05.288-07:002014-05-10T14:10:05.288-07:00Would that be reasonable read of your model?
Yes....<i>Would that be reasonable read of your model?</i><br /><br />Yes.<br /><br />Barring any major political change (e.g. war, Chavez-style populist takeover) there won't be any inflation. But maybe hyperinflation might be preferable to zero inflation.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-4717833531636312662014-05-10T13:42:15.649-07:002014-05-10T13:42:15.649-07:00Jason, that's a very interesting paragraph! Ho...Jason, that's a very interesting paragraph! However, can you use the ITM to determine if a country is ripe for hyperinflation or not? For example Vincent has predicted that Japan may reach 26% annual inflation for multiple months (perhaps as much as a year?) by ~2016. He bases that on the idea that the Japanese CB (BoJ) is the primary government bond buyer currently, that the debt is large (over 100% of GDP) and the deficit has been large, and (I think) that BoJ bond buying continues at a high rate. He estimates a positive feedback loop may develop which proves to be difficult to get out of which ultimately results in hyperinflation. He defines the hyperinflation threshold as 26% annual rate (several economists dispute his threshold, some saying 50% a month is a better figure, but whatever). Marcus Nunes is on record as predicting this will not happen by 2016. Also, Vincent thinks the US is in danger of hyperinflation for much the same reasons that Japan is, but he has not made any concrete predictions that I'm aware of. He acknowledges that in any case, it's very difficult to predict when the feedback loop into hyperinflation will begin. He has had interesting responses from Nunes, Sadowski and Cullen Roche: none of whom share his concern about hyperinflation in Japan or the US in the near term.<br /><br />The way I read where your model of where the US and Japan are on your plot of log(P/P0) vs log(MB/MB0) indicates to me that hyperinflation is not likely to occur in either the US or Japan in the near term (say w/in the next 5 years or so?). Would that be reasonable read of your model?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-69999845722408240942014-05-02T11:10:49.589-07:002014-05-02T11:10:49.589-07:00Sorry for the delay; here is the summary:
Inflati...Sorry for the delay; here is the summary:<br /><br />Inflation is always and everywhere an information theory phenomenon. If one looks at money as a means to transfer information from aggregate demand (the information source, measured by NGDP) to aggregate supply (the information destination, measured by the monetary base), then there are three possible scenarios. One is the information source is exogenous, while the destination is endogenous -- i.e. reacting to market forces. This scenario describes the IS-LM model where aggregate demand is not set by the money supply and the central bank is reacting to economic conditions. A second scenario is where both information source and destination are endogenous; this leads to a quantity theory of money. In this scenario the information source is no longer external, rather the source and destination move together reacting to each other. In the third scenario we have an endogenous information source and an exogenous monetary base. Here aggregate demand reacts to monetary policy set for reasons outside the economy (e.g. printing base money to fund government operations, or pegging interest rates as the US did in WWII). This not only leads to inflation, but accelerating inflation that, if continued long enough, leads to hyperinflation. It can be immediately ended by pegging the currency to an endogenously set currency (Brazil set its currency to the US dollar), ending a pegged interest rate (as the US did after WWII), or targeting inflation, NGDP, base growth or any other economic indicator. Note that these three scenarios can drift into each other. Under certain approximations (and time scales) aggregate demand/NGDP can be seen to be an exogenous factor in the short run (because it reacts more slowly than changes in the base) or an endogenous factor in the long run (because it eventually reacts to changes in the base -- i.e. long run neutrality of money).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-79679539447439044672014-04-10T02:36:47.900-07:002014-04-10T02:36:47.900-07:00Great! Can I get you to write a one paragraph sum...Great! Can I get you to write a one paragraph summary with the key ideas? I will link to this page so people can find more. Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-8123306889417982662014-04-09T20:56:51.925-07:002014-04-09T20:56:51.925-07:00I would be honored to make it on your list! That r...I would be honored to make it on your list! That really is a great resource you have created!Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-5237318185205486142014-04-09T10:41:11.599-07:002014-04-09T10:41:11.599-07:00I have collected many explanations for hyperinflat...I have collected many explanations for hyperinflation and will add an entry for yours after I have digested it. I thought you might be interested in my work. I also have a simulation of hyperinflation.<br /><br />http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-2653095468982757482013-09-06T20:57:24.007-07:002013-09-06T20:57:24.007-07:00Note that in the hyperinflation case, the central ...Note that in the hyperinflation case, the central bank (or government) should be seen as trying to make money -- they are not trying to target inflation or NGDP.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-59784684233311346562013-09-06T20:54:49.911-07:002013-09-06T20:54:49.911-07:00The wikipedia entry on supply and demand in its de...The wikipedia entry on supply and demand in its description of the supply curve allows an interesting interpretation:<br /><br />"... the supply curve is the answer to the question 'If this firm is faced with this potential price, how much output will it be able to and willing to sell?'"<br /><br />One should add "to make money" at the end of that statement.<br /><br />To translate: if the central bank is faced with this price level, how much base money will it be willing to print (to make money)? Essentially, it will be willing to print a larger quantity of dollars at a high price level (since they are worth less ~ 1/P, you need more of them) than at a low price level.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.com