Hyperinflation a possibility?

[The Mad Crapper]

Hello, I'm new to board. By way of brief introduction, I'm not a fan of Obama, and I think he's done a horrible job thus far. My primary concern is the economy. This morning I read an excellent piece on Forbes online that I would like to share. Rather than cut and paste the article in it's entirety, I'll post pieces at a time, so we can discuss. Here goes:

It is common practice to measure a government’s burden on the economy by comparing the government’s debt to the nation’s productive output or GDP. And while we agree that over the long haul it is a nation’s productive prowess that provides the means necessary to pay the government’s debt obligations, we think it is more instructive to compare those debt obligations to the nation’s savings.

You see, it’s a nation’s savings, its willingness to defer consumption that makes the government’s borrow and spend programs possible. All other things equal, an economy that consumes much and saves little is an economy that cannot long afford a borrow and spend government.

The crucial question then in any proper examination of a government’s burden on the economy is this… is the nation’s pool of savings large enough to fund the government’s borrowing requirements, for how long and at what rate of interest?

[bcbm]

yeah hyperinflation is a pretty real possibility in the near future once the dollar is dropped as the global standard currency.

[Kotze]

You see, it’s a nation’s savings, its willingness to defer consumption that makes the government’s borrow and spend programs possible.I thought the article was about the USA, a nation that issues its own currency. How does a nation that issues its own currency ever run out of it? The answer is that while inflation can be a problem, the nation going bankrupt, the nation running out of $ just like some company, is not an issue, for the issue of issuing is in the hands of the government, and don't let any formalities about central bank "independence" fool you.

When you have the monopoly of issuing a currency, any unit of it you got back via taxes is a unit you had put into circulation before. For you, spending has to come before income, no matter how irresponsible other people might call such behaviour. It's understandable that they have the wrong perspective, because they usually don't have money-printing machines in their basement. If you want that people have units of your currency, you must put more of it into circulation than you take out of it via taxes.

Setting taxes equal to spending over the short run does not guarantee 0 inflation, nor does having such a rule for the long run (like the "moderate" pseudo-Keynesians want) guarantee that — and why should it, given demographic changes, changes in technology, changes in spending and saving behaviour.

An individual can put money in a piggy bank and buy some things tomorrow or next month with it, and with stable currency, this works like having a super-freezer. You can get fresh food today or tomorrow or in a year. Isn't that amazing? But it's also misleading. If everybody buries some money and then everybody tries to use it all at exactly the same date, funny things happen. Sadly, going by the excerpt it looks like the article is written from the piggy-bank perspective, which is not appropriate on the macro level.

A better perspective is called Chartalism, Functional Finance, Modern Monetary Theory (that's respectively the very old, old, and new name for basically the same idea).

[KC]

You see, it’s a nation’s savings, its willingness to defer consumption that makes the government’s borrow and spend programs possible. All other things equal, an economy that consumes much and saves little is an economy that cannot long afford a borrow and spend government. This is a typical republican argument for "reducing spending" and "balancing the budget". Funny how they have done the exact opposite on both of those points.

The argument for comparing debt to GDP is that debt is an investment, and that borrowing is justified if it creates a greater rise in GDP (which is sort of like taking a loan out on 5% interest and investing in something which guarantees 10% in a year - you're making a return of 5% interest even though you're currently in debt for the loan).

The argument for comparing it to national savings is more concerned with the government's ability to pay the loan off up front, which in terms of government spending is pretty ridiculous. The US government is able to borrow money because its bonds are guaranteed not only through economic and political relations but also because the US bond is considered the most reliable investment by investors across the globe. It is a much more complicated thing than considering it in such isolated terms.

That's why nobody believes it, aside from some ideologues that nobody listens to.

This is of course aside from the fact that it doesn't take monetary policy into consideration whatsoever, something kotze touched on in the above post.

Hyperinflation has pretty much 0% of happening in the US because of the fact that the value of the US dollar is controlled by the monetary policy of the Fed.