Businesses Hire When They Are Swamped With Demand

In his post about aggregate demand, David Beckworth posts an updated chart of unemployment vs. business demand concerns. It’s a remarkable match – you could almost substitute one line for the other.

The R2 of this regression is a remarkable 76.93%. I can’t tell, but it sure looks like this would be significant to the 95% confidence interval as well.

Here’s a summary of the fancy math: This is a fantastic, high quality correlation. Very few economic variables have this level of correlation.

It goes to help support a simple idea about jobs and hiring: Businesses hire when they are swamped with demand.  
Over at Davids place, someone very sharp who works with the St. Louis Federal Reserve is commenting, saying in a certain form of an RBC model, business owners would respond in exactly the same way. These business owners would think it’s a lack of demand, even if it was just the economy getting confused or the economy not having enough to do in total.
This might be true – but who cares? Even if the reason is RBC we should be doing everything we can to move that demand upwards! We know we can increase aggregate demand in relatively neutral ways through lowering taxes which hit broad sections of the population.
If the economy is having problems figuring out what to do, make it more obvious what it should be doing. Compel businesses to hire people because they are getting swamped with demand from consumers with more money to spend.
Why aren’t we lowing payroll taxes? Oh, thats right.

Comments

  1. You mean it’s not about regulation, taxes, drilling and gay marriage?

    Sorry, I digress.

  2. Dunce Cap Aficionado says:

    ‘BHWTASWD’ Coffee mugs coming soon.

  3. Clonal Antibody says:

    It is clear that Sales concerns precede layoffs. Lag employment by a quarter, and your r squared should become much higher

  4. Robert Rice says:

    Identifying we have a demand problem is half the battle. The second half is identifying why and how to solve it.

    And the answer to that is almost as straight forward as the observation that businesses have a demand problem: given current prices, there simply is not enough money in the hands of spenders to create the level of demand we need. It isn’t like everyone has money pooled away in savings accounts they’re just waiting to spend. We have to look no further than the savings rate in this country and debt to income ratios to see that is not our scenario. In which case solving the problem is relatively straight forward; get money into the hands of those who will spend it. Pick your elixir: Tax credits (similar to what Bush did), cut payroll taxes, hire a team of people funded with freshly minted moneys to rebuild our infrastructure, do the same and have them focus on high value R&D, some combination of these, etc. All we need is more money in the hands of those who will spend it. Problem solved.

    The problems with getting money into the hands of those who will spend via one of the prescriptions just mentioned are the false beliefs on monetary creation in relation to inflation as well as fear of excess deficits. We’re going to have to persuade a large number of people directly or indirectly inflation occurs only in a similar context as the title of this article. People think any level of monetary creation has some kind of automatic effect on price levels. This is nonsense. I used to share this belief until it occurred to me prices aren’t set by the quantity of money in the system (although this is related of course), they are set by businesses relative to confidence. Demand pull inflation is all about business confidence. Until the economic conditions are created where businesses across the spectrum feel confident in raising prices–and that occurs in the context of full production or near it–prices will not generally go up, because businesses generally won’t want to risk profits, particularly in this economic climate.

    So to put the first nail in the coffin of the belief money creation is inherently inflationary: If prices rise in perfect unison with money creation/dissemination into the hands of spenders, and if they rise by a proportionate amount, real demand would never rise. But real demand (as measured in the number of products/services sold) does rise with enough money creation and dissemination. Thus, at a minimum there is not a proportionate increase in prices to the increase in monetary holdings by the spenders, at least not in all scenarios. This should begin casting doubt.

    The second and much bigger nail is related to my point above on business confidence: unless the economic conditions create certain psychological conditions–which raising demand to raise production to raise employment from say 50% to 60% would not create–then there won’t be a pandemic in price increases. Businesses aren’t going to be confident in raising prices until they are swamped with demand and are at or near full production.

  5. hangemhi says:

    Tony Robbins has a video going viral about the crushing US debt. If you can’t get through to economists, maybe a guy like Robbins will listen. He’s got a big megaphone and prides himself on personal creative innovation http://www.youtube.com/watch?v=jboTeS9Okak

  6. Brilliant talk from Dirk Bezemer at INET:

    http://www.youtube.com/watch?v=qvBuK8yQxbY

    Dirk really nails things from a horizontalist perspective.

    • Oilfield Trash says:

      Best 25 minutes I have spent in a long time. For very complex issues he gets to the meat of the issues. Unless of course you work in a bank or wall street. You want to help people buy a house, finance a business. You do not need things like Freddie and Fannie. The Real economy has become a debt slave to the FIRE sector. For real growth of wealth distributed on a more equal basis this has to end.

      • Yeh more Dirk Bezemer please, did see another vid with him in on you tube a while ago, hes very impressive.

      • Oilfield

        I would agree that we do not Fannie and Freddie…….. in their present form, but as they were initially conceived they were fine IMHO.

        I listened to a podcast by Arnold Kling once and he talked about Fannie and Freddie (he used to be an economist for Fannie I think). As they were initially conceived in the 30s they were simply a lender of last resort for mortgages. Prior to that time houses were virtually all bought over five yrs with a balloon payment
        at the end. The 30 yr mortgage was invented at that time and Fannie guaranteed the mortgage for banks as long as they met the lending guidelines.. They were the secondary mortgage market. Unfortunately for us, Fannie and then Freddie were beneficiaries (or victims) of the privatization wave and they then had investors they needed to think about, driving them to compete with all the private secondary market guys and get caught up in the MBS wave. This is when it all started to blow up.

        Now maybe the idea of a thirty year mortgage is a bad idea. I dont know. I certainly have benefited form it as have many people but I could certainly be persuaded that there are better ways. I DO think homeownership is something people want. Although it ties them to an area it also provided protections from the whims of landlords. Our homeownership society evolved cuz we wanted it not just cuz the govt wanted us to want it.

        Sorry to get off the topic (It happens a lot I know) but your comment on Fannie/Freddie made me do it ; )

        • Oilfield Trash says:

          The Freddie and Fannie are describing does not exist anymore. Wallstreet took them out back and shot them

  7. The major problem is that President Obama is a debt hawk. He actually wanted to let the Bush tax cuts expire even for the middle class, but his political advisors told him it was a campaign promise he could not break. Now he is pushing this idiotic Buffett Rule instead of something that would actually benefit the 99 percent.

    • Robert Rice says:

      Of the same opinion. The Democrats fighting the Republicans on debt is a losing battle for them. Anyone can tell the Republicans are a lot more serious about debt concerns and government spending, so it isn’t as though the Democrats can outdo them. What they need to do is challenge the premise of the debate by arguing the U.S. Federal Government is *not* overly indebted.

      The Democrats need a game changer when it comes to the economy. The monetary theory advocated for here is just that. If the Democrats came out and simply explained the distinction between the paradigms of the currency issuer and user, then convincingly argued the Federal government cannot go bankrupt, then demonstrated the Federal government will not cause automatic inflation by creating money to pay down debt or to distribute it in some fashion into the hands of the populace for increased economic activity–if they did this and showed how these prescriptive actions would not hurt but rather benefit us, they would gain the underhand. This will quite literally pull the rug out from underneath the Republicans. Enough of the populace would receive this news with relief IMO. The solution is really quite simple. Just make the argument, beat the drum consistently and for long enough, and do it with conviction.

      • hangemhi says:

        Yes, has anyone here read the Ryan budget? It is 99 pages of debt fear mongering. Meanwhile, whenever I explain to someone that the Gov doesn’t need to be paid back and similar mmt/mmr arguments I literally incite anger and outrage from anyone who is a Republican. Democrats ask questions and put up objections, but are at least mildly open to the idea (I’m sure the reverse would have been true during Reagan’s years). In general I think the debt myth lives on because people can’t imagine that what they hear every single day isn’t true that they don’t listen – they just immediately object. I think the only way this will ever get mainstream is if celebrities – like Robbins – are convinced. And givin the anger/outrage you have to go after left leaning celebrities – I’d try to get on Real Time with Bill Maher, for example. Or try to reach out to Oprah – imagine the audience if she came back for a one-off show with big fanfare and spent an hour debunking the debt myth?

        • Robert Rice says:

          Republican economics is the economics of currency users. Their ideas are fine for state governments, but not for the Federal. Their hearts are in the right place. Their problem is bad theory of which Ryan’s budget is a perfect empirical example. That, and they often have a lack of commitment to an open mind (i.e. intellectual dishonesty). Holding one’s beliefs as unfalsifiable is a common practice amongst them.

  8. Steve Keen’s talk is also up:
    http://www.youtube.com/watch?v=js9WBi_ztvg

    • hangemhi says:

      Cullen – what’s your view of Keen’s work? I seem to recall some major difference. And at minute 14:27 in this video he says “by the looks of that graph alone you can see that we have a long way to go before this crisis is over”. Meanwhile you’ve said maybe 2 more years of deleveraging. I think Keen believes private sector debt has to be somewhere around 100% to 150% of GDP – and aren’t we at least twice that now?

      • Cullen Roche says:

        Keen’s work is good, but the circuitists don’t fully appreciate the powers of the vertical component. So it’s a rather incomplete view of the world.

  9. “Thus, at a minimum there is not a proportionate increase in prices to the increase in monetary holdings by the spenders, at least not in all scenarios. This should begin casting doubt. ”

    Sometimes prices go up slower than the quantity of money, when the velocity of money is going down. However, sometimes prices go up faster than the quantity of money, when the velocity of money is increasing. The MMT/MMR people generally ignore the second case. However, this second case is what is going on in hyperinflation. Hyperinflation is far more important to fiat money than MMT/MMR people seem to think. It is often how fiat money dies.
    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

    • In particular see the math for hyperinflation:
      http://pair.offshore.ai/38yearcycle/#hyperinflationmath

      • Robert Rice says:

        Yours is a good example of what I was arguing: If money supply could be increasing, velocity decreasing, and prices be stagnant, even falling, money creation and dissemination into the hands of spenders is not intrinsically inflationary.

        We don’t have to look diligently to find the actual mechanism for price increases. It isn’t money creation, it’s businesses. And why do businesses raise prices? There can be any number of reasons, but ultimately they believe, mistakenly or correctly, they will increase profits (or at least preserve them, as would be some of the motivation in a hyperinflationary environment). Inflation is a psychological phenomenon (velocity is also a psychological phenomenon, but that’s another matter for now). Money creation has to lead to the economic conditions which lead to the psychological conditions for those psyches to increase prices.

        Consider this thought experiment which I alluded to above: Imagine that businesses of the country in aggregate are operating at 25% production levels. For sake of argument, let’s accept they somehow have not failed, rather they are just scraping by, suffering through an awful economic contraction and subsequent stagnation. Imagine velocity cannot get any lower; people are purchasing bare necessities and not much more. If the government prints money and disseminates it into the hands of spenders and production levels increase as a result of increased demand to say 35% production, is this the economic environment in which businesses choose to raise prices? If you run a business and by some miracle are still in business at a 25% production level whereupon money creation leads to an increase in demand such that 35% production levels result, are you going to risk what additional profits you’re earning by raising prices? As someone who runs a business I can say the answer is absolutely not. I realize my sample size is small, but there is no question in my mind the majority of business operators are of a similar persuasion.

        The idea here is, until businesses believe they can raise prices without harming profits, they won’t. Now, not every business is perfectly rational, but fear in a low production environment reigns. Survival reigns. If you can increase profits by simply increasing production levels, why raise prices to increase profits, particularly if you risk losing what you’ve gained (since your competition may not be so inclined to raise prices)? Greed in a low production environment is self-defeating. I think most businesses realize this intuitively. What businesses need to raise prices is to feel good, to feel like fat cats who don’t have to worry about affecting profits negatively. They have to believe they will affect profits positively, or at a minimum believe there is a good chance of this. This psychological environment arises, not at 25% production levels or 50% or I’d argue even 75%; this environment manifests itself at or near full production.

        In summary, businesses are naturally geared toward increasing profits, and raising prices can achieve said goal insofar as the conditions are ripe. Ripe = at or near full production. Money creation has to first create sufficient demand to create sufficient production levels for the psychological conditions to arise for demand-pull inflation of any substantive level to occur.

        If we recognize the real mechanism of inflation, we can solve our economic problems tomorrow through increased deficits and money creation. These are two prescriptions in this economic environment not to be feared, as long as they are carried out prudently.

        • Robert Rice says:

          As an additional thought, current inflation beliefs are an example of the false cause fallacy. The argument is:

          P1: If money is created and this money is disseminated into the hands of spenders, prices will increase.
          P2: Money is being created.
          P3: The money is being disseminated into the hands of spenders.
          C: Therefore prices will increase.

          The form is:

          P1: If A and B, then C.
          P2: A.
          P3: B.
          Therefore C.

          The argument is valid, but it is unsound. As argued previously, P1 is false. This is the false cause fallacy. Money supply increases do not cause inflation, businesses do. The former can only create the conditions for the latter to choose to raise prices.

        • Your “at or near full production” is true for oil. So as the US prints money it increases the demand for oil. Some money goes to China that then buys more oil or Americans buy more oil as they have more money. However, since oil is at or near full production the price of oil goes up. Once the price of oil goes up the cost of everything else goes up. So the prices of everything goes up when they print more money, just with different delays.

          • Robert Rice says:

            Sure, demand-pull inflation on oil can lead to cost-push inflation on just about everything else. This however doesn’t address my argument on whether monetary creation and dissemination has an intrinsic inflationary effect or my argument that inflation in the context of money printing/dissemination is a psychological phenomenon caused by businesses pursuing greater profits.

            You’ve basically made an argument that there is a need for better energy policy, of which we agree.

            • Oil acts like an international currency that nobody can print. So it is, like gold, one of the first things to increase in price when people start printing lots of money. As MMT writers have noticed, once oil goes up then other prices will follow.

              However, there is no “energy policy” that could keep prices from going up when money is printed. If nobody in the US used any oil, there would be then be some other transmission mechanism such that an increase in the money supply eventually caused prices to go up. It always happens eventually. It is just a question of how it happens and how long it takes (maybe years). Lots of studies have been done. History is clear on this point. MMT/MMR has their head in the sand when they think increasing the money supply does not cause prices to go up.
              http://pair.offshore.ai/38yearcycle/#delay

              • I’ll do the hyperinflation prediction today over at longbets.org

                Economists have define hyperinflation as 50% MoM inflation, not 50% YoY inflation, according to wikipedia.

                http://en.wikipedia.org/wiki/Hyperinflation

                I’ll be extremely generous and give you 6% MoM inflation 3 months in a row. This is just over 100% inflation annualized. At 6% MoM inflation, prices will just more than double in 1 year. Annual inflation would be 101.2% with a full year of 6% MoM inflation.

                Let’s use the BPP numbers.

                http://bpp.mit.edu/usa/

                The prediction will extend for the next 4 years. This will be over 7 years after the massive increase in the money supply which happened in 2008.

                http://research.stlouisfed.org/fred2/series/BASE

                • So if we get 5% inflation per month and 80% inflation per year you won’t be willing to concede that we have hyperinflation? Really? I think you are silly but I will still accept your terms.

                  • From Wikipedia:

                    “Economists usually follow Cagan’s description that hyperinflation occurs when the monthly inflation rate exceeds 50%.[2]”

                    Nope. 5% monthly is not hyperinflation, just really, really bad inflation. We won’t see either.

                  • Prices doubling in 1 year has a nice ring to it. And the IASB definition is too vague to use as criteria for a wager.

                    Here’s the exact verbiage:

                    “The United States will not experience hyperinflation (defined by 3 consecutive months of 6% Month over Month inflation according to the Billion Prices Project measurement of MoM inflation from April 17th 2012 to April 17th 2016. ”

                    Do you agree with this? I can put it in anytime.

                • Has there ever been a case of hyperinflation where the country’s debt was in a currency it controlled?

                  Germany’s post-WWI reparations were indeed payable in marks— but at an exchange rate set by the allies (who had the option of demanding payment in pounds, francs, lira or dollars if they chose) . Zimbabwe’s debts were payable in dollars all along.

                  • Cullen Roche says:

                    I’ll give Vince’s argument some minor credence given the Zimbabwe example. But what happened there was a very unusual collapse in production in an economy based on mainly one export. And I think we all agree that hyperinflation becomes a real risk any time production craters and the govt prints thinking that will fix it. But to compare the situation of Zimbabwe to the USA is just crazy. They’re apples and oranges. From the foreign debt to the corruption to the lack of production….

                    • Are there any MMT/MMR people who have read the Bernholz book on hyperinflation? Is there any book anyone likes better than Bernholz? You guys really need to look at more than a couple examples to generalize correctly. Bernholz has done this. He says it is debt over 80% of GNP and deficit over 40% of government spending that best predicts hyperinflation.

                    • Cullen Roche says:

                      Even with his confused understanding of monetization Bernholz has not been predicting hyperinflation in the last few years….

                      “But does this mean that inflation may evolve into a hyperinflation in the United States? I believe not. Though it is true that budget deficits with government expenditures covered by 40 percent or more through credits have historically led to hyperinflation, it has been stressed in Monetary Regimes and Inflation that it is not only the size of these credits but also their composition that is important. This is noted in the book thus: “It will be demonstrated by looking at 12 hyperinflations that they have all been caused by the financing of huge budget deficits through money creation“ (p. 70 ). This expresses the fact that only credit extended directly or indirectly by the monetary authorities to the government leads to the creation of money, that is, an increase of the monetary base. This is not true for borrowings taken up in the capital markets if they are not resold to the Fed. Looking from this perspective at the U.S. deficit, by far not all of the credits borrowed by the government were financed by the Fed. According to preliminary and rough estimates, not 40 percent but “only“ about 13 percent of U.S. expenditures are presently financed this way. Moreover, in discussing this problem it has to be taken into account that about two-thirds of dollar bills are estimated to circulate abroad. This—together with the fact that incredibly huge holdings of dollar assets are owned especially by the central banks of China, India, and the Gulf States—may pose other and later dangers. But these dangers will be, except for a return of the dollar bills and a purchase of foreign-owned dollar assets by the Fed, of a different nature. Inflation may rise more or less strongly during the next years, but there is presently no danger of a hyperinflation in the United States.”

                  • The normal hyperinflation case is where the debt is in the currency they print. Debt in another currency is usually defaulted on (unless as in Germany’s case the French are willing to invade to try to collect). Usually what seems to happen is that people stop wanting to hold their bonds and get cash as the bonds come due. If you count bonds as money, then what happens is the velocity of money shoots up as bonds are turned into cash and prices go up. If you don’t count bonds as money, then as they are converted to money the quantity of money shoots up and prices go up.

              • Robert Rice says:

                Any energy policy which increases the supply of energy would counteract an increase in the price of energy. So yes, there is an energy policy which would achieve what I indicated.

                If oil is “like” a currency, you have to admit it’s ironic that increasing its supply is deflationary.

                Sort of set yourself up for that one.

                Vincent, to address my argument you’re not simply going to have to demonstrate prices will rise ceretis parabis (as I would argue that is merely a function of poor energy policy and not the intrinsic effect of money creation), you’ll need to demonsrate that by printing’s very nature they have to rise.

                • I think the historical record proves that over the long term (maybe even more than 4 years) printing money drives up prices. I think the velocity of money also matters, but that over a long period of time increases in the money supply dominate changes in the velocity of money. Can you find any study of long term historical data that shows that printing money does not cause prices to go up?

                  • Vincent, you should look up this fellow John Maynard Keynes, he didn’t believe money was neutral in either the short run or long run. Paul Davidson has written about this issue frequently.
                    “Keynes notes that it is the non-neutrality of money (due to the attributes of any assets that possess liquidity) in both the short and long runs, and not to any degree of monopoly or other imperfection on the supply side of product or labor markets, that is the fundamental cause of persistent unemployment in the entrepreneurial economy in which we live.”
                    http://books.google.com/books?id=PJvxe1XCNIsC&pg=PA18&lpg=PA18&dq

                    • Keynes believed that printing money caused inflation. His big plan for increasing employment was to print money and inflate prices while wages were fixed so that people got a pay cut in real terms. This he figured would make it easier to hire people and so reduce unemployment. Really. It is like page 6 in his book.

                    • From page 9 of Keynes “The General Theory” we read, “Now ordinary experience tells us, beyond doubt, that a situation where labour stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case. Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods.”

                      In effect he is saying that when the demand for labor shifts lower it is easier to trick labor by reducing the value of money than to lower peoples nominal wages.

                    • Oh brother. You really should have kept reading past p. 9. Its like thinking Star Wars is about two robots and their search for Obi-Wan Kenobi. Keynes didn’t get down to brass tacks until Chapter 19.

                      “Whilst no one would wish to deny the proposition that a reduction in money wages accompanied by the same aggregate effective demand as before will be associated with an increase in employment, the precise question at issue is whether the reduction in money wages will or will not be accompanied by the same aggregate effective demand as before measured in term of money, or, at any rate, by an aggregate effective demand which is not reduced in full proportion to the reduction in money-wages”.

                      http://webcache.googleusercontent.com/search?q=cache:8q9M1jeHhFAJ:econ.as.nyu.edu/docs/IO/8801/DavidsonKeynesMonetary.pdf

                  • Robert Rice says:

                    Why do I need any more than good theory? Granted empirical data would corroborate the theory, but more to the point is, where’s my mistake in reasoning?

                    It isn’t enough for you to have some data which is consistent with your thesis, because it does not follow that this data is therefore inconsistent with my thesis. My thesis also accounts for this same empirical data. Not only this, but my thesis accounts for money creation without subsequent inflation, which yours cannot. All I have to prove is that under some conditions money can be created and desseminated into the hands of spenders without prices rising in any substantive manner. I’d be thrilled if we could set up that experiment as there is no question in my mind we would all benefit.

                    However we really don’t even need to set that up for our purposes. Think of this in terms of necessary and sufficient conditions. You believe money creation is a sufficient condition to cause inflation in all scenarios. This is what it means for money creation to be by its very nature inflationary. I don’t agree. In reality not even you agree, as you’ve acknowledged velocity can counteract money creation’s alleged inflationary effect on prices. Your theory is thus inconsistent.

                    • Not only is my theory of the delay from when money is added to when price inflation consistent it is backed up by data.
                      http://pair.offshore.ai/38yearcycle/#delay

                      And my theory of hyperinflation has solid math behind it as well.
                      http://pair.offshore.ai/38yearcycle/#hyperinflationmath

                      MMT/MMR has the attitude that if the currency fails then the government must be corrupt or something external to the government went wrong. Because they count bonds as money but don’t use bonds as part of the velocity of money they don’t see a problem with paying off bonds with cash. But in the real world, where cash has a far higher velocity than 30 year bonds, when a government monetizes lots of debt they get inflation. You guys don’t have one single historical example of a government monetizing a large part of a big debt without any inflation in the following 5 years. There are many many examples of governments monetizing a large part of a large debt and getting lots of inflation. Every case of hyperinflation (like over 100) is an example of the second type. Yet you guys still think monetizing debt is not inflationary. Wow.

              • Cullen Roche says:

                “MMT/MMR has their head in the sand when they think increasing the money supply does not cause prices to go up.”

                We don’t really say that. We know that flooding the system with net new financial assets will likely cause inflation….but the key point you seem to keep missing is that there’s two sides to that coin. There’s a production side also. Not just a money supply side. If you print in excess of productive capacity then yes, you’ll cause inflation….

                • Cullen, I stumbled over something interesting hbl wrote last summer. The whole post (with all sorts of nifty graphics) is worth reading, but to summarize:

                  “Quantitative Easing as practiced so far (targeting quantities rather than prices) has had no meaningful effect other than on sentiment. QE truly was a placebo… money is always debt and can NOT be modeled like a commodity. Its quantity is extremely dynamic and subject to the portfolio desires of the private sector… the private sector can work to “undo” the change in money supply imposed by QE, without having to alter its borrowing desires… To “shed” unwanted broad money supply, the private sector changes its borrowing composition, using less bank credit.”
                  http://www.thoughtofferings.com/2011/06/visual-guide-to-endogenous-money-and.html

                • Productive capacity is going up like 1 or 2% per year. If the increases in the money supply were limited to such small numbers then I agree there would be no price inflation. In the last 3 years the money supply has gone up much more than 2% per year.

  10. Robert Rice
    If oil is “like” a currency, you have to admit it’s ironic that increasing its supply is deflationary.
    Sort of set yourself up for that one.

    You are not thinking about this right. If the supply of the oil currency goes up while the supply of the dollar currency stays the same then the value of the oil currency in terms of the dollar currency goes down. This same logic works for any pair of currencies. After the value goes down the prices of things in terms of the oil currency will be higher. So if we look at how many barrels of oil it takes to buy an ounce of gold, it will take more if there is a big increase in the supply of the oil currency. So this would be “inflation in the oil currency”. Understand?

    • Robert Rice says:

      No, no, no…

      …you cannot assume ceretis parabis, and you gave us the reason why. What’s the effect of oil “currency printing” on the price of other goods and services denominated in the dollar? You noted yourself if oil prices go up, prices of all other goods and services denominated in the dollar will also go up. So if oil prices go down, will not prices denominated in the dollar also go down? Hence an increased supply of oil has a deflationary effect on prices denominated in the dollar.

      That’s ironic, all things considered.

  11. Cullen Roche
    Even with his confused understanding of monetization Bernholz has not been predicting hyperinflation in the last few years….

    After hyperinflation has started the Fed will of course be funding the full deficit as nobody else will want to buy bonds. But for predicting who will get hyperinflation it is just the deb/GDP and defict/total-spending rations that matter, not how much is currently covered by the central bank. So Bernholz is putting a spin on his own data so as not to scare people.

    • Cullen Roche says:

      Well, I don’t know what to say Vince. My findings show that hyperinflation tends to occur under very specific circumstances that generally involve loss of war, production collapse, loss of monetary sovereignty, regime change or other unusual and extraordinarily stressful exogenous events. So I guess we’ll just have to shake hands, part ways, and revisit our conclusions in a few years. And trust me, if I’m wrong I’ll be the first to admit it….Until then, arrivederci.

      • But production collapse and regime change can happen because government spending/taxing/printing gets out of control. It is part of the picture. The trick is to be able to predict it. If you look close you will notice that almost everything in the stores now does not say “made in America”. The problem is that the USA can export treasuries and import oil or goods from China. So the US did not need production of goods, they had production of the world’s reserve currency. So production has shifted overseas.

        As the dollar collapses the central government in the USA will lose power very similar to how the central government in the USSR lost power. You will say “the hyperinflation is due to the regime change” and I will say “the regime change is because the currency lost power”. We will both be right. But I will have seen it coming and you will be surprised by events.

  12. hangemhi says:

    i don’t think someone who links to a site called “howfiatdies” has any interest in learning something that would change his view. He’ll just keep grasping for the next straw hoping we’ll see the light, rather than noticing that all his past arguments died in flames.

  13. hangemhi
    i don’t think someone who links to a site called “howfiatdies” has any interest in learning something that would change his view. He’ll just keep grasping for the next straw hoping we’ll see the light, rather than noticing that all his past arguments died in flames.

    It is strange that a theory of money thinks it is absurd that fiat money can die. Most fiat money last less than 50 years. So there is over a 2% change on a random year that a currency will fail, statistically. MMT/MMR people can’t fit this into their theory so they just say it is external to the currency. Wow.

    • Cullen Roche says:

      1. MMR is not MMT. They’re very different even though we both understand the basics of fiat money.

      2. I have never said the USD could not die. In fact, I know it will die. I just don’t think your timeline is right….

    • hangemhi says:

      if it makes you feel any better I’ll agree, like Cullen just did, that the USD will eventually die. But the sun will also burn out and humans will go extinct. The big money is predicting when and why. To me, the biggest threat is not understanding the monetary system – so we have that in spades.

      But our misunderstanding is CURRENTLY (and in the past) leading us to not enough spending and/or malinvestment in what the gov has spent. It has also led to speculative bubbles the Gov had no idea what to do with, and to our current economic malaise, which the Gov has no idea what to do with.

      Hyperinflation won’t be coming on some statistically flip of a coin. It will come because of a great famine, a great war, or other great productivity killing shock that is met, instead of by fixing, by money printing. Not the Fed kind, the Congress kind. Or it will come if we finally get to full employment and Congress decides to run massive deficits in a booming economy.

      Our low productivity now is with idle productivity sitting on couches waiting to be put to work. Smart Gov spending (or tax cuts) would get them off their sofas and we’d be off to the races with NOT hyperinflation

  14. Cullen Roche
    The Russian default and hyperinflation is nothing like the USA.

    The US timeline is far behind, clearly. But after it is finished it will look very similar. When China and the Arabs no longer take newly printed pieces of paper as payment for real goods, you will see the US get into debt in non-dollar currency so they can get oil and stuff. Then you will say the hyperinflation was from that. But the truth is deeper. The printing of money has gutted the US economy since they could just buy stuff from the rest of the world. When Spain brought back gold money from the New World their economy ended up gutted in a very similar way.

    The ability to print dollars or Treasuries and get supertankers full of oil has long term side effects that are not healthy for an economy.

    • Cullen Roche says:

      Sure, when we stop being the world’s best customer for goods and services then you might be right. Until then, your theory is like Wal-Mart telling the US consumer that they don’t want their dollars anymore. Don’t bet on it.

  15. Robert Rice
    No, no, no…
    …you cannot assume ceretis parabis, and you gave us the reason why. What’s the effect of oil “currency printing” on the price of other goods and services denominated in the dollar? You noted yourself if oil prices go up, prices of all other goods and services denominated in the dollar will also go up. So if oil prices go down, will not prices denominated in the dollar also go down? Hence an increased supply of oil has a deflationary effect on prices denominated in the dollar.
    That’s ironic, all things considered.

    Ok. I see what you mean. In the last 40 years even when oil prices went down other prices did not. But this is because they are always printing dollars. If they did not print dollars and oil prices went down I do agree that other prices should go down as well. And that is a bit ironic.

    • Robert Rice says:

      I appreciate the conversation. Makes us all reflect on these important matters.

  16. Cullen Roche
    Sure, when we stop being the world’s best customer for goods and services then you might be right. Until then, your theory is like Wal-Mart telling the US consumer that they don’t want their dollars anymore. Don’t bet on it.

    Your theory is that when productive capacity goes down you risk hyperinflation. The US productive capacity is down. Sure the US can be a good customer as long as suppliers take newly printed pieces of paper as payments. But if the US had to export as much as they import they would not be such a good customer.

  17. Cullen Roche
    1. MMR is not MMT. They’re very different even though we both understand the basics of fiat money.
    2. I have never said the USD could not die. In fact, I know it will die. I just don’t think your timeline is right….

    They both don’t understand the math for hyperinflation. :-)

    Not you, but several times other people have made comments like the one above. They sort of imply that because I think fiat currencies can die I am some kind of nut. Given the real history of fiat money dying this seems really strange to me.