Economics question: printing money / hyperinflation & historical examples

[SeriousSam]

So for some reason the Youtube algorithm decided to suggest the video below, despite not really watching anything economics related. Admittedly I do watch the odd "doomsday" event documentaries, but hey the science behind some of them is rather interesting. Anyway... this is about current events e.g. covid / US printing money etc. and how that aligns with similar historical occurrences that resulted in hyperinflation.

https://www.youtube.com/watch?v=ddgxidI-X74

Now I have a basic understanding of economics, so some of it seems plausible, but hyperinflation... I have serious doubts. I do think the trillions of dollars about to spent in the US will come back to bite them in the proverbial. Though that will more likely be socio / political if the man on the street sees no tangible benefit. However, since watching it youtube has suggested many more videos on this subject. In fact way more than I imagined would have been made. Including quite a few that go into far more economic theory and detail. Plus pieces on inflation etc. have started popping up on Politico etc.

So for the more economically minded among us, how real a threat is this?

[Scuber]

It's incredibly unlikely that the US will suffer from hyper-inflation. The US dollar, being the current reserve currency, is so widely traded globally in mass quantities that the US "printing" in the trillions has little effect. If it was just the US struggling economically and printing money then perhaps it may be a different story, as I reckon this would spark debate whether an alternative currency should be the reserve currency, depending on when the US economy was expected to recover.

What also helps wards off inflation for the US dollar is that multiple countries around the world have been experiencing hyper inflation recently and their population are resorting to alternative currency (generally illegally), like the US dollar and even bitcoin, for stability.

Current list of economies under review due to inflation:
https://viewpoint.pwc.com/dt/gx/en/p...29%20in%202020.

[kalniel]

As above.

We'll find out, and you probably got the video because US release their inflation figures later today, but so far QE back in 2008 and again last year didn't result in hyper-inflation and it seems the current situation has more in common with them than the Mongols in the 13th century.

[wazzickle]

Looks like the above two posters will understand the details far better than I, so I'll contribute my understanding of the conceptual side of the framework:

Currency is based on value, which is an arbitrary notion dependent on concensus. If we all agree that something fitting the logical requirements of a currency (fungible, rare) have value, then they have value; if we all decide that they don't have value anymore, they don't have value anymore.

The $ is conceptually backed by the incredibly wide base of people who use it and agree to its value, and evidentially backed by the variety of industries and businesses that use it. The arbitrary nature of currency is such that those in charge of the economy levers and buttons can just say 'there is now more of this thing that we agree has value'. However, the total value - not represented by bits of paper, but rather by confidence in that paper and the industry and business they represent - remains the same. Hyperinflation happens when the base is too small and too much extra currency is created, leading to the exponential effect of people no longer having confidence in the currency, the industry and business it represents, and the people in control of the levers and buttons, such that they are forced (they think) to create more and more, until overall confidence is so low that the pieces of paper become next to worthless.

As such, the conditions that could lead to hyperinflation - a small, underperforming base of industry and business, low confidence in the government - aren't present in strong enough quantities for hyperinflation in the US to be a clear and present danger.

Cliffs: currency and value exist by concensus, and if the concensus is that they don't mean much, the proposed solution of 'create more currency' leads to a chain effect of it meaning less and less extremely rapidly, but in the US, there's enough confidence in the value that backs the currency for that not to happen anytime soon.

[kalniel]

Nice use of 'fungible' in it's correct context too

That leads nicely onto how we measure inflation, which is via a basket of representative goods and services.

The figures are out for the US since this seems a US-centric thread: 2.6% annual inflation, which is pretty close to their 'normal times' target, and is mostly due to fuel increasing in price compared to where it was a year ago (when it plummeted in cost because suddenly no-one was going places).

[TeePee]

Nice use of 'fungible' in it's correct context too

That leads nicely onto how we measure inflation, which is via a basket of representative goods and services.

The figures are out for the US since this seems a US-centric thread: 2.6% annual inflation, which is pretty close to their 'normal times' target, and is mostly due to fuel increasing in price compared to where it was a year ago (when it plummeted in cost because suddenly no-one was going places).

The 2.6% in context isn't quite 'Normal times'. It's up from 1.7% the month prior, and the highest rate in a couple of years. Inflation alone, at a reasonable rate (The 2% is a reasonable target), isn't a problem, when it's combined with economic growth. The US is seeing growth right now, thanks to Government Stimulus. That same stimulus is part of the government printing money (Although in the US only a small part of the 'Stimulus' bailouts went to stimulating the economy, mostly it was a transfer of decades of State Debt to the Federal Government). The idea is simply to keep the economy going until it can naturally recover accepting some higher inflation in the process. Everyone ends up just a tiny bit worse off, but collapse is avoided. The problem comes when the economy doesn't grow, and inflation continues to rise. 'Stagflation' as seen during the Carter year, with double-digit inflation in the midst of a recession. This is a likely future. Housing and raw materials prices have increased dramatically over the last year, and the affect on the CPI is delayed. With a few States still enforcing limits on business openings, and the severe restrictions on international travel, the punishment to the Economy is continuing.

A more direct measure of immediate inflation would be the American Institute for Economic Research's EPI index. This differs from the CPI as it only includes everyday items, like food and fuel and not longer term purchases like vehicles and housing. It's a different measure, not necessarily an overall better one, but much more immediate. The current EPI shows inflation of 4.4% over the last year, the highest rate since 2011, and an annualized rate of 11.3% over the last three months. Again, because of the way EPI is calculated, changes to fuel prices can have a big effect, and the annualized 3 month figure is an indicator, rather than a real measure.

The US isn't the only country printing money. The costs of lockdowns in the UK have been immense.

[TheAnimus]

So whilst hyper inflation generally speaking means the costs of all things have risen, regular inflation is just an index.

For example the technical manual for the RPI in the UK lays out the near thousand different goods and services that they track the price of at hundreds of different locations. As TeePee notes this means some changes are more obvious than others.

As the price of oil plummeted last year, even going negative briefly (if you could store dino juice legally in Texas you would have been paid to take it) it is obviously going to correct, taking the average of $40 last summer, it's already over $60, a 50% rise. This is going to create plenty of inflation despite what the government is doing.

The main issue is how Quantitative Easing actually inflates things, because ultimately it's the government cancelling it's own debt, it's inflating the money markets. This then enters into our lives because credit is cheap, the problem is that those who aren't benefitting from the very cheap borrow costs, are going to find that their assets are being left behind.

For example I sold the flat I bought 10+ years ago, for roughly double the price paid originally. However on current mortgage rates, it would not be that much more expensive on a monthly basis than it was at half the price. This is where you start to see the issue that QE creates, those who have access to credit are effectively going to be able to inflate the assets that credit is most commonly used for. That benefits people who hold such assets and those able to get credit. It also drastically increases the "inequality gap" for those who can't.

Meanwhile on the international view of printing money, ultimately the view on the street is clear, compared to the economic concerns we face due to NPIs, the printing money isn't apparently an issue, because which other currency are you going to buy?

[TeePee]

The main issue is how Quantitative Easing actually inflates things, because ultimately it's the government cancelling it's own debt, it's inflating the money markets. This then enters into our lives because credit is cheap, the problem is that those who aren't benefitting from the very cheap borrow costs, are going to find that their assets are being left behind.

For example I sold the flat I bought 10+ years ago, for roughly double the price paid originally. However on current mortgage rates, it would not be that much more expensive on a monthly basis than it was at half the price. This is where you start to see the issue that QE creates, those who have access to credit are effectively going to be able to inflate the assets that credit is most commonly used for. That benefits people who hold such assets and those able to get credit. It also drastically increases the "inequality gap" for those who can't.

A big indicator of this is the current rise in property prices. Big investment money is moving in to property assets, pricing out many potential homeowners. House prices grew over 10% last year across the US, but in some areas (like mine ) the rise was much greater. We've had an average 21% rise in my area, with SFHs up significantly more. Mostly a lot of people leaving the cities for more rural areas for different reasons.

[CAT-THE-FIFTH]

[wazzickle]

Some things I've always been curious about when they talk about the national debt.

To whom do we as a country owe this money? China? International giganto-banks? The IMF? Institutional investors? Bonds markets? A mix of the above? I see talk about entire country's credit ratings being downgraded - who wields this power?

In the case of a government change, this debt carries over, but if for example there's a revolution, and the country's new owners don't want to honour that debt, is the only thing enforcing it the threat of a supreme credit rating downgrade i.e. the inability to borrow money in the future?

If our debt is mostly to a foreign power, doesn't that put us in an extremely weak bargaining position wrt every other aspect of our international relations? If we have a load of debt to, for example, a foreign-owned bank, and that bank goes under, what's to stop China buying up all that debt and wielding a great big weapon over us?

[kalniel]

To whom do we as a country owe this money?

Whoever wants to lend it by buying a bond.

In the case of a government change, this debt carries over, but if for example there's a revolution, and the country's new owners don't want to honour that debt, is the only thing enforcing it the threat of a supreme credit rating downgrade i.e. the inability to borrow money in the future?

Yep.

If our debt is mostly to a foreign power, doesn't that put us in an extremely weak bargaining position wrt every other aspect of our international relations? If we have a load of debt to, for example, a foreign-owned bank, and that bank goes under, what's to stop China buying up all that debt and wielding a great big weapon over us?

Not really - the terms are set when you buy the bond - you can't decide that having bought a bond that yields 1% you now insist on being paid 10%. On the other hand the institute/govt who owes the money is the one that can decide to default or not.

Pretty much the worst that a lender can do is suddenly decide not to buy bonds in the future, which might make the demand for them go down and force the govt to have to offer higher yields to get other lenders to buy them.

[j1979]

It's incredibly unlikely that the US will suffer from hyper-inflation. The US dollar, being the current reserve currency, is so widely traded globally in mass quantities that the US "printing" in the trillions has little effect. If it was just the US struggling economically and printing money then perhaps it may be a different story, as I reckon this would spark debate whether an alternative currency should be the reserve currency, depending on when the US economy was expected to recover.

What also helps wards off inflation for the US dollar is that multiple countries around the world have been experiencing hyper inflation recently and their population are resorting to alternative currency (generally illegally), like the US dollar and even bitcoin, for stability.

Current list of economies under review due to inflation:
https://viewpoint.pwc.com/dt/gx/en/p...29%20in%202020.

Bitcoin for stability.. that's a laugh. Bitcoin has risen since the last crash in Jan 2015, when lead developer Gavin Andresen, resigned, because he said the project has failed. The same week Tether (USDT) was anounced and they began buying bitcoin with crypto made out of thin air apparently pegged to the dollar, billions of dollars of fake printed money. USDT was appaerently redeemable, but in reality impossible, and as long as they stopped a run on tether, and kept themselves from prison they could pump bitcoin indefinatly.

They made 100's of bogus, advertiving campagins to get people to "invest" in bitcoin. I mean, how does a decentralised currency pay for advertising campaigns? why do these campaigns, appear one year and get replaced with negative news storys the following year?

They filled the forums with people and 1000's bots saying how bitcoin was the future even though it was not fit for purpose, but here we are with a price of 60k and all the leverage in the hands of a few.

Bitcoin is not stable and never has been. Expect 90 - 99% drops in the near future. Bitcoin started out as the counter culture currency, but now it's just one massive cassino, and all the chips are held by a few.

I personally doubt anyone in cash strapped counties is buying 0.0016 BTC for $100, that's just another bitcoin forum propaganda lie imo. Why would poor people buy a currency that costs $10 transaction fees, to send $5?

[TeePee]

New figure this month. CPI is up to 4.2%. Still a long way from hyperinflation, but with the weak economic figures last week, be prepared.

[CAT-THE-FIFTH]

The video I linked earlier explains it well if you look at it through the lens of computer hardware.

[kalniel]

New figure this month. CPI is up to 4.2%. Still a long way from hyperinflation, but with the weak economic figures last week, be prepared.

Be prepared for what? Going back to using turnips as a currency, or just a short period of above normal inflation before it settles back again?

[TeePee]

Be prepared for what? Going back to using turnips as a currency, or just a short period of above normal inflation before it settles back again?

The latter. A few years of high inflation, likely reaching 10% or more, combined with a recession and high unemployment, possibly lasting a decade or so. Don't buy those turnips yet, but probably a good idea to budget for more expensive turnips in the future.