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Vincent Cate  

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  • How We Know High Inflation Is Coming [View article]
    The other big thing is that governments get very harsh on taxes when hyperinflation gets close and people respond by going underground or black market. When your plumber asks to be paid in cash it is not just that he does not want to wait for the check to clear, he does not want to pay taxes. As you go into hyperinflation more and more of the economy goes black market. Cash is king for black market.
    Aug 28, 2014. 06:20 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    I believe the velocity of money depends on both the inflation rate and the interest rates. Basically it makes no sense to keep money under your mattress if inflation rates and/or interest rates are high. If there is high interest rates you want to put it into the bank fast, where it will move on. If there is high inflation then you buy things fast before the prices go up more. Either way it is against your interest to sit on cash.

    If it takes a week for a check to clear then as inflation gets higher people move to cash. Really the bank is too slow for the speed that people want to move their money at. A merchant will charge you much more if you want to pay by check and there is high inflation, since it will be awhile before he can spend the money. So going into hyperinflation there will be less excess reserves and more physical cash.
    Aug 28, 2014. 06:18 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    It is true. If neither the central bank nor anyone else buys the government bonds, then they can not run a deficit.

    When hyperinflation is a threat the deficit is "not fixable". The mandatory expenses are higher than taxes or politically there is no solution. So if hyperinflation is a danger there will be a deficit.

    In the US the central bank is buying so many bonds that the Treasury has not had a problem so far. Japan is in the same situation but a bit further along. A year ago other people were still buying JGBs but not really any more.

    If the Fed stopped making new money and either loaning it to banks or buying bonds, then interest rates would shoot up. And as interest rates shoot up, the velocity of money would shoot up. So inflation would shoot up. And higher inflation makes for higher interest and higher velocity. There could be a positive feedback loop. It is not certain if the US would spiral out of control or not at this point.
    Aug 28, 2014. 06:08 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    Imagine inflation starts going up in Japan but nobody else wants to buy JGBs. What do you think the central bank will do? What should it do?

    1) Let interest rates go up till other people are funding governments huge deficit?
    Interest is already 1/4 of taxes when at 0.5%. If Japan gets to 2% then all the
    taxes just covers the interest. Do you think there would be buyers of the bonds
    at 2%? At 4% and interest is double the taxes, will there be buyers at 4%?
    Between now and the hyperinflation there never will be private buyers of JGBs
    again.

    2) Keep buying JGBs even though this requires making new money and adding to
    inflation pressure?
    Aug 28, 2014. 05:58 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    When you are getting close to hyperinflation the fiction that central banks are independent goes out the window. One of the reasons Japan seems close is that the politicians have replaced the head of the central bank with their guy who is a "print print print" type of guy.
    Aug 28, 2014. 05:51 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    If the government is running a deficit that means it is spending more than it gets in taxes. If nobody else buys their bonds, the central bank must or they can not run a deficit. They always get the central bank to buy their bonds (the government makes the laws, appoints the people to run the bank, have the guns, etc and the central bank would fail if the government fails). So it is not like the central bank can just stop playing and sit on their hands. It gets to where they have to keep buying or the government collapses and the government never collapses because they can't get the central bank to buy their bonds. When looking at hyperinflation it is really about debt and deficit.
    Aug 28, 2014. 05:48 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    Let us imagine they reduced money printing to the level of growth in the GNP and that we want a gradual return to a normal velocity of money that keeps inflation under 10%. How many years would it be?

    Aug of 2008 the monetary base was $848 billion.
    Aug of 2014 it is $4,073 billion

    This is 4.8 times as large.
    If we simply had a 10% for 16 years we would have 4.6 times.

    So the question is, does anyone think it can be done more gradually than 16 years?
    Has everyone factored in 10+% inflation for a long time?
    Aug 28, 2014. 05:38 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    I really think that nearly all of my explanations apply to each case of hyperinflation. They are mostly different ways of looking at the problem.

    As for predicting a future case of hyperinflation, I think Japan has the setup for hyperinflation and just needs a trigger. My guess is they get a trigger in the next 2 years. I think they are too big for the IMF or World Bank to save. A group of central banks from other countries might be able to save Japan but at the risk of triggering high inflation in their own countries. If they get high inflation they won't be able to save Japan from it. By high inflation or hyperinflation I really mean 100% over 3 years or 26% compounding for 3 years. I think Japan will get this.
    Aug 28, 2014. 05:15 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    Look at Japan. Nobody else is buying bonds, only the central bank. The inflation rate over the last 12 months is 3.6% (partly due to increased taxes, but still). The 10 year bonds are paying 0.5%. If they tried to unload at anything near the pace they have been buying, the bond prices would crash and interest rates would shoot way up.
    Aug 28, 2014. 02:17 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    And today, if the government balanced its budget then the Fed would again be able to unwind their portfolio. Do you think the government will balance its budget? If not, then it is not the same situation and may not have the same outcome.
    Aug 28, 2014. 02:11 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    At the end it says:
    Now on to Hyperinflation

    Once you understand the above examples of positive feedback loops
    you should then read the different ways of explaining the positive
    feedback loops in hyperinflation.

    If you click that you would get to:

    http://bit.ly/15SicSd

    Which does describe many different ways to view hyperinflation as a positive feedback loop.
    Aug 28, 2014. 01:52 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    Also, if you went to my blog you would find a link to Bernholz book in PDF form on the right.
    Aug 28, 2014. 01:45 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    And even happier if someone would find a real flaw in my arguments/ideas.
    Aug 28, 2014. 01:43 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    That historically money printing causes inflation is not "my idea to defend". No matter how much time I spent typing in cases from books, I doubt it would convince you. And I just don't care enough to do that. You can read books on your own.

    My main ideas are in posts like "Hyperinflation FAQ"
    http://bit.ly/Xrsxgw

    Or "Positive Feedback Theory of Hyperinflation":
    http://bit.ly/1tDYaE6

    And I am more than happy to defend my ideas/arguments in these posts.
    Aug 28, 2014. 01:42 PM | Likes Like |Link to Comment
  • How We Know High Inflation Is Coming [View article]
    I think most of the Japanese debt is held in retirement funds. Even if the government defaults on the bonds, the voters will still hold them responsible for taking care of these retired folks. So it is not clear that defaulting would really buy the government much.

    I can not find a single case where a government had debts in a currency that it could print but decided to default on the debt. I really doubt Japan would default on any debts in Yen.
    Aug 28, 2014. 01:28 PM | Likes Like |Link to Comment
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