Wednesday, August 7, 2013

Reflections on the debt supernova

It should be evident now that "money printing" is not a sufficient cause of inflation or hyperinflation. Excess reserves pile up in the banking system and the Fed ends up "pushing on a string" with little effect on either price level or output. Hence John Williams' massive miss on his hyperinflation call. The first Great Depression taught us this.

Wikipedia helpfully defines two trigger mechanisms for hyperinflation: the "velocity" model and the "money in circulation" model. Also, please recall my fundamental definition of inflation:

Inflation is a labor market phenomenon, i.e., a wage price spiral, accommodated by monetary policy. Here I am adopting the "economics" definition of inflation as a general rise on the price level.

Now, so long as the capitalists continue to subject labor to diminishing real incomes, the only inflation that can exist is asset bubbles, financed by the increasing incomes of the capitalist class. While there is at least a feeble attempt by households to rebuild balance sheets, filling up one's gas tank with gas to beat rising gas prices does not constitute a sufficient increase in the velocity of money to trigger a hyperinflation. Fundamentally, the budget constraint on the vast majority of real incomes precludes accelerating inflation. So much for the velocity means of triggering a hyperinflation.

With the recent speculation that Lawrence Summers is the President's favorite for the new Fed chief, there is some reason to attend to the "money in circulation" model of hyperinflation. Summers is an advocate of taking on lots of new federal debt to stimulate the economy. The way that this will be accomplished may end up being a close facsimile of the Modern Monetary Theory prescriptions in that the Fed will essentially print these dollars and send them into the economy as "new money in circulation" through the Treasury. However, Janet Yellen is likely to do the same thing.

There is certainly an argument for undertaking large infrastructure projects while interest rates are extremely low. And the massive increase in debt is consistent with Sornette's estimations of the worldwide debt bubble's trajectory referenced a couple of posts ago. (Ron Paul has suggested that the Fed might simply forgive such debt held by the Fed, which would make it a pure MMT exercise.)

The point being that much of such spending might conceivably flow to the people as incomes (although the last bout of stimulus demonstrably did not, some 90+% of it winding up in the pockets of the 1%) and ignite an inflationary or hyper inflationary outcome. But I doubt it. More likely I think is that essentially carry trade-generated asset bubbles persist wherever the hot money flows, while labor's compensation remains stagnant. The vanishing middle classes around the world will experience stagflation, but not concomitantly rising wages.

Hence, Sornette's finite time singularity is likely to be profoundly deflationary when the bubble pops. There might at last be something like a global debt jubilee around 2020, simply because the debt service finally overtakes the ability of markets to absorb the debt required to pay it. This will be the End of the Modern Age, possibly, if complete monetary chaos halts much of international trade. The 2020s may be the decade when large scale barter becomes the norm between nations.

In the CIA's humint (human intelligence) areas, the study of faces is a recognized discipline. One needs to know very little about Lawrence Summers to realize he is a complete ass. The only public faces in recent memory that show such obvious bad intent are those of Phil Gramm and Paul Wolfowitz.

But it doesn't matter who is appointed to the Fed chair, because Janet Yellen will do the same thing as Summers, only possibly less aggressively.


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