I like this comment that Megan Mcardle makes in a recent piece in The Atlantic because it raises some important points:
“But it is not true that loads of debt is just fine as long as you’re borrowing in your own currency, except in the trivial sense that a government which borrows in its own currency can always resort to hyperinflation. This is rather like saying, “Don’t worry about that cancer–you can always shoot yourself!” If you take too much advantage of the benefits of borrowing in your own currency, pretty soon you have trouble borrowing in your own currency, which means that practically, the distinction is not necessarily as strong as some people pretend.”
Now, from an MMT perspective, there’s a lot wrong in this paragraph (and her article in general). But the hyperinflation comments always intrigue me*. It is the default fallback diagnosis for the debt fearing crowd (and still carries a great deal of merit in economic circles despite the persistent predictions over the last 5 years, which, in my opinion, are among the very worst predictions in the annals of economic history).
I am, as far as I know, one of the few economic researchers who has pointed out the fact that hyperinflation is a distinctly different type of death than a debt based “money printing” death (see here for details). This is a fascinating finding because it shows a distinct problem in the process of economic analysis. It appears to me as though the field of economics suffers from an inability to “connect the dots” and properly diagnose the causes of particular economic outcomes. Much of this is grounded in misunderstanding the monetary system and working from a convertible currency perspective. But it’s also skewed by political biases. When we combine this convertible currency myth with political bias we get a toxic stew that leads to very poor conclusions.
We can take the hyperinflation meme as a good example of this. Hyperinflation has very specific causes even though the mainstream has tended to conclude that hyperinflation is just really high inflation. I can’t even tell you how many times I saw charts of the Fed’s balance sheet in 2008/2009 accompanied by “money printing” headlines that concluded with hyperinflation predictions. Of course, this wasn’t inflationary because banks don’t lend reserves, but this myth of the money multiplier coupled with anti government political perspectives concluded that the end result had to be disastrous inflation. Shockingly, we still hear these hyperbolic warnings to this day even though the myth of the money multiplier has been exposed for all to see in recent years….
When I went back to study various historical hyperinflations I found some striking similarities in the cases. Hyperinflation is not merely high inflation or a collapse in confidence, but is actually due to very specific severe exogenous shocks with very real and provable transmission mechanisms. The explosion in money supply is almost always the result of these exogenous shocks. Historically, these events have been:
- Collapse in productivity or lack of economic stability due to lack of productivity.
- Rampant government corruption.
- Loss of a war.
- Regime change or regime collapse.
- Ceding of monetary sovereignty generally via a pegged currency or foreign denominated debt.
The most interesting conclusion from this research is the fact that the monetary phenomenon (what most economists and researchers conclude as the cause of hyperinflation) is actually the response to these exogenous events. The point is, cancer is a very different type of death from a self inflicted gunshot wound. If this were the field of medicine and we were concluding that all deaths are bad because they result in the same outcome, we’d be doing our colleagues and our patients a great disservice by making such an obvious conclusion. The real meat behind such a finding is in discovering its true cause so as to be able to discover and avoid future outbreaks, save lives and generate a more prosperous world for ourselves and our fellow man. But in the field of economics the analysis seems to break down once a preconceived bias has been met and some self interest has been verified. Unlike the field of medicine, the so-called “experts” are acting largely on self interest as opposed to the interests of their patients or fellow man. I guess money has a way of doing that to people. We are, after all, acting in the self interests of ourselves in most economic endeavors. Economics might not be a science, but that doesn’t mean it can’t be approached rationally, objectively and without bias. Self interest need not poison the well we all drink from….
This lack of objectivity has been persistent in recent years and it’s had deeply negative ramifications. I would argue that the diagnosis of our current crisis as a banking crisis in 2008 (and not a household credit crisis) was among the worst in economic history. And this hyperinflation meme has the potential to be equally destructive. You can’t expect to understand the risks to a system if you can’t even differentiate between the potential threats to the system in the first place. And if you can’t differentiate between the various causes of death and what the transmission mechanism is for the ultimate disease then you can’t be expected to diagnose or even aid the patient in avoiding or recovering from the disease in the first place….”Dismal science” indeed. It need not be quite so dismal though. Unfortunately, eliminating biases, politics, self interest and age old mythology is easier said than done….Perhaps even impossible when forced to combine money with the “greater good”….
*I’ve created a new hyperinflation resource page which can be found here.