> This ends in hyperinflation.
If productivity continues apace, if value added to the economy continues apace, I don't see why it ends in hyperinflation.
If productivity continues apace, if value added to the economy continues apace, I don't see why it ends in hyperinflation.
Note that there is another potential ending for this: a deflationary trap like Japan is in, or like the U.S. was in from 2009-2020.
I'm betting on hyperinflation, though. The reason is that nearly all past hyperinflationary events have come from large sector shifts in aggregate demand and aggregate supply, notably when coming down from a war or transitioning from a command economy to a market economy. COVID just provided exactly such a supply/demand shock: large quantities of production were shifted into medical devices and remote work, while demand shifted away from travel, experiences, and gasoline to home improvement & home office supplies. When demand shifts back, those industries will have significantly reduced capacity, and a lot of bargaining power to raise prices. The raised prices cascade through the economy, and that's what triggers inflation.
It's like the economy is your heater, money-printing is turning up the gas because it's not getting hot enough, low productivity is not realizing that your igniter is broken, and COVID is lighting a match. Without COVID you'd just open your windows and air out the gas (although it still wouldn't fix your broken igniter). With it, we go boom.
In Zimbabwe the government printed money and handed it out to people. This money directly makes its way into the economy.
In QE the Fed buys assets such as mortgage securities from banks. The banks chose not to lend more aggressively and decided to hold on to the cash. As a result there was no hyper inflation.
So how does QE affect stock / house prices ?
When the FED comes into the market willing to lend to anyone and everyone interest rates fall. As a result returns on bonds and bank deposits also fall. Forcing people into stocks. The effect of QE on asset prices is therefore indirect.
So the QE money itself is hoarded in a deflationary environment while savers get pushed into speculating on assets.
As the economy slowly recovers over 5-10 years the QE money is slowly sucked back out and assets slowly deflate to a fairer value. In theory this can work without too many hiccups.
The problem here lies in the inequality that this generates. Large banks, companies stay afloat thanks to buy backs. Asset owners get richer. Wages stagnate and people lose their jobs albeit less than if QE didn’t exist.
This topic is much more complex than I had initially thought. Nobody should come to conclusions such as “A crash is inevitable” or “Hyperinflation”.
However my worry is that the economy seems to have become permanently dependent on low interest rates. Sure it won’t be zero but something like 1 % looks like a distant dream.
It seems to suggest that we have run out of ways to increase real productivity. A good example is the shale industry which will basically go bust if interest rates are like 3 %.
We seem to be in a new regime of lower economic growth, high asset prices and inequality. The real danger here is the political sustainability of this. Zero interest rates are an indirect pay cut via rents and mortgages. At some point asset owners will have to take a haircut.
But at this point, we're talking technology and society instead of economics. Will innovation continue, and are those innovations a big enough deal that they will continue to make our world more productive, wealthier, more successful? I lean towards yes, but it is not at all obvious. It is certainly possible that productivity growth stagnates, most countries catch up to a generally-developed level of output, and asset prices stagnate as temporary demographic bumps are smoothed out.
Growth is fundamentally tied to the availability of cheap energy. If you look at oil prices in gold you’ll see how it’s almost twice as expensive today.
We are also facing constraints on energy extraction due to climate change.
Every time oil prices spike shale oil comes online but the economy chokes on the price oil crashes and the shale producers go further into debt.
This may also be why a lot of growth is in the digital sphere which is far less energy constrained. Maybe future growth will be Virtual reality GDP :P
The only way I can be wrong is if someone invents a cheap fusion reactor or a cheap magical battery that stores endless amounts of solar energy. This is highly unlikely to happen.
Disclaimer: Very speculative thesis but I believe in it.
On the inequality side, it is a bit unfortunate to be in the workforce at this time competing with the massive influx of other savers, bidding up productive assets to save for retirement, enriching the people who were "lucky" enough to be in the generation before that population/affluence boom. But there's not really anything that can be done about it, not without tightening financial conditions enough that it has severe negative effects for the labor market.
>I'm betting on hyperinflation, though. The reason is that nearly all past hyperinflationary events have come from large sector shifts in aggregate demand and aggregate supply
The user is arguing that large scale shifts in aggregate demand and supply are what is different this time.
This time around, the banks are well capitalized and the QE is targeted at monetizing the federal deficit (federal government issuing treasuries in order to finance relief packages and the like and FED buying them), so the money is actually going to make it into the broad money supply, which might lead to inflation (though hyper-inflation is probably an overstatement at this point).
Basically Lyn compares what happened in 2008-2009 to 1929 - which was a banking crisis; whereas what happened in 2020 is closer to 1940-1945 / late 1960's in terms of the FED monetizing the debt. We had inflation in the late 1940's and in the 1970s, so it's possible we'll see something similar.
1) 1929 bears no resemblance to 2020. They are completely different economies, and economic factors. It’s a non-starter to compare the two time frames.
2) Inflation != hyperinflation. We can handle inflation just fine, it’s a 5% change, a 10% change, etc. Hyperinflation leads to a collapse (Venezuela, or Zimbabwe or similar). If the United States collapses, you better have stocked up on lots of beans and ammo.
3) We should really only look at historical financial crises as unique events with unique circumstances, not as comparisons. It’s like people looking at home prices now and saying “it’s all going to crash, it’s 2008 all over again!” which is a surface-level analysis that doesn’t take into account how 2007-2008 happened. 1929 - Dust Bowl. 1970s - oil embargo. Etc.
I enjoy reading Lyn’s commentary as well, but the comparisons are non-starters. There isn’t, or so far hasn’t been any predictable events that have taken place. You can’t look at history and say “this thing is the same thing as this other thing”. They just manifest differently.
Not sure I buy that. Yes, there will be temporary upwards pressure on prices in some segments of the economy but also, following your argument, temporary downwards pressure on prices in other segments. So a) it's going to balance out and b) it'll be temporary. Not enough to trigger sustained inflation, not nearly enough to trigger hyperinflation.
Are we going to see higher inflation in this decade vs. the last? Absolutely. But hyperinflation is a different beast altogether and I'm quite skeptical we have the environment for it to come alive.