Hypedinflation

One of the things we've learned as this blog has critiqued the left over the last few years is that they are wrong on virtually every subject. Pick any contentious social problem, and we can show how their proposed solution is inferior. It's even worse, really, because they aren't even getting the problems right. Most of their biggest gripes are imaginary - systemic prejudice, for example - and they ignore the real problems, like a political system that is destroying the democratic legitimacy on which it rests. Even when I agree with their positions, they are still wrong. For instance, I think abortion should be legal, yet I find fault in all the left's arguments in favor of it. I merely believe that they kinds of people who'd equate infanticide with political freedom shouldn't be reproducing anyway.

This conclusion - that the left is always wrong about everything - was updated from the previous viewpoint that they are usually wrong. For instance, the left used to love Noam Chomsky, who literally wrote the book on how the US corporate media is an even more effective propaganda instrument than state-directed media at selling Americans on the CIA-driven policy of secret wars around the world. Trump has tweeted just that: that the media are the enemy and lead us to war. So, naturally, the left suddenly consider the whole idea to be ludicrous. They are wrong, but only because Trump is right. Since their entire platform now consists of almost blind opposition to Trump, they now are capable of being right, but only to the extent that Trump is wrong. These days there really is no reason to examine the Democrat platform at all. We can just study Trump, knowing the leftist stance is deterministically deducible. It's likely the least interesting political theory of all time; opposition to one guy. Their entire platform is hatred of Trump, albeit with a few lesser planks consisting of hatred of white people, western history, men, and straws.

Just because the liberals are always wrong doesn't mean the conservatives are always right. Correctness is not a zero-sum game, because there are many more ways to be wrong than right. It's the reason why Socrates spent more of his time dismantling false arguments than advancing correct ones. It's why we dismiss the advice of some alt-right leaders to "never punch to the right" as cult-like drivel. The same goes for people like Mark Levin assuring us he is a "true conservative." He thinks that, if liberals are wrong (they are), and he is the opposite of them (a reasonable claim), then he must be correct. Often he is, but it's an overly simplistic binary mindset, to be sure.

The one domain where I see conservatives getting it wrong the most is in economics. It's somewhat understandable, given how liberals are nearly as allergic to economics as they are to Darwinism. After the absolute nightmare that was the 20th century, they still advocate for socialism. So it's easy, as a conservative, to pick up a complacent sense of superiority. Still, less wrong does not equal right. It's still essential to critique the faulty economic arguments from the right, and really it's the only game in town anyway. A critique of the left's economics normally consists of a series of facepalms. Therapeutic, perhaps, but not productive.

Now that the excessive introduction is out of the way, let's take a look at Charles Hugh Smith's piece Here's Why Rip-Roaring Inflation is Inevitable. (I have previously critiqued his blog, which is linked in the sidebar.) It's the kind of sky-is-falling headline that a lot of people will ignore anyway. Still, it's worth trying to articulate whatever faults can be found in the piece, to improve our own understanding of monetary systems. We'll just take the piece bit by bit. It begins with the thesis:

One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy.

It's a fair economic question to ask, the but the wording of "enduring mystery" is a bit heavy. When one's model continually fails to predict reality, that often means...well, you know what that means. He then proceeds to explain in four "basic points."

1. Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money. [...] In effect, the new money robs purchasing power from all existing money.

Correct.

2. Where "inflation" (higher prices for the same item) shows up depends on who gets the newly created money. [...] The net result of giving all the new money to the wealthy is the inflation of an asset bubble, which is precisely what's happened in the past decade.

The claim is that there is already inflation in investments. In effect, there is more money looking for investments than there are investment opportunities, so we see the ridiculous tech-sector valuations, real-estate bubbles, etc. It's not clear what this means in reference to his original thesis. Does this solve the mystery of missing inflation, on his second of four points, or not?

3. The inevitable consequence of asset inflation is rising income and wealth inequality. The wealthy few have gorged on assets with all the newly issued credit-money, and as the assets soared in value, they've become immensely wealthier. A funny thing happens on the way to extremes of wealth/income inequality: social unrest, disorder, revolt.

Perhaps I was wrong and Mr Smith is not really a conservative. It reads more like a Bernie Sanders campaign speech than an economic analysis. The situation is not the rich sucking the lifeblood out of the poor. It's more like a Ponzi scheme. The only way the rich "gorge on assets" is if they have the good fortune to buy early and sell before the plunge. A lot of wealthy people lose their shirts when the bubbles pop.

4. To quell the revolt of the many, the Powers That Be will create trillions in new money and helicopter-drop it to the masses.

It is quite clear that the author has abandoned the thesis put forth in the opening sentence - the question of the missing inflation - and has instead chosen to service the provocative title. The theory is now that, in response to unrest caused by inequality, the government will unleash trillions in ransom payments to buy peace, directly spending unprecedented inflation into reality. It's such a fantastical tale that you wonder if the author understands what hyperinflation is.

This is precisely what Venezuela has been doing for a decade: distributing newly created money that isn't matched by a corresponding increase in the production of goods and services.

No, it isn't "precisely" what has happened in Venezuela. Yes, the government has increased spending dramatically by several times (in USD) since Chavez was elected. But the currency hasn't inflated several times. It's inflated several thousand times. Hyperinflation happens when the people lose faith that the currency has value. Other factors were involved. The real GDP of Venezuela is falling. Partly because they were so dependent on oil prices, and also, we assume, because socialist economies aren't known for efficiency. Spending went up while the economy shrank, and people lost faith in the currency. The government is not currently engaged in printing because it wants to appease its people. It's doing so to make its own debt payments in the face of declining tax revenues in a currency that no  one wants to hold.

Real-world inflation will blow the doors off every forecast of low inflation forever. From the point of view of the wealthy few who control the status quo in the US, they have a stark choice: either continue pushing wealth/income inequality to extremes that trigger social and political revolt, which puts their control at risk, or create and distribute trillions in "free money."

Welfare or die, it seems.

Well, as mentioned earlier, analyzing a bad argument can be instructive. In his opening thesis, the author refers to the mystery that trillions have been pumped into the economy without generating the expected inflation. It's not certain how many trillions he's talking about, but at least four trillion can be accounted for by foreign reserves, which increased from $2.5 trillion to $6.5 trillion in the last decade. Any monetary analysis that forgets the USD is the global reserve currency is likely to be error-prone. It's too bad the author misses that, because it is itself a hyperinflation risk to the US. Imagine if, tomorrow, all those countries holding USD foreign reserves decided amongst themselves that the dollar was bogus and they would trade in some other currency. All those dollars would be "sold" back to the US in exchange for real wealth. Dumping $6.5 trillion in cash back on the domestic economy would certainly drive serious inflation. Many commentators talk about China's "nuclear option" to dump its US treasury holdings. Well, someone will buy the debt, if the price is right. The result will be a higher interest rate to service the debt. But that's not nearly the damage that could be caused by dumping foreign exchange reserves. The government would be forced to counter by jacking up interest rates & taxes and cutting spending. Of course, likely they'd jack up interest rates & taxes and leave spending alone. They could also pre-emptively strike by devaluing the dollar. That would weaken the calling-on-the-loan aspect of foreign USD dump, but the inflation would still have to be dealt with.

The point to take away from all this is that the hyperinflation occurs when governments print to meet their debt obligations in the face of declining revenues. Eventually a loss of trust erodes revenues even further, causing a spiral of spending. That is not the same as a mere increase in social welfare spending, which may or may not lead to hyperinflation.