Wednesday, June 3, 2009
Faber Getting Carried Away on Hyperinflation
Bloomberg (HT2LRC) reports that Marc Faber is predicting Zimbabwe for the US economy:
I have been warning of severe price inflation for some time, and when people ask me "hyperinflation?" I respond, "What do you mean by 'hyper'?" Recently someone coaxed a number of 25% annual inflation out of me, since I think Bernanke will do what needs to be done to bring it down to the maximum acceptable level, which I somewhat arbitrarily put at about 25%. (Of course the true increase in CPI will probably be more like 35%, but the official press releases--if you have a gun to my head and force me to pick a number--I'm picturing around 25%.)
I'm not going to bother running through the numbers, but there's no way you would see the kind of numbers Faber is talking about, absent a nuclear attack somewhere. The last time I did back-of-the-envelope calculations, I concluded that Bernanke had pumped in enough new reserves to fuel a tenfold increase in the quantity of money.
Now let's suppose that that leads to a tenfold increase in prices, because Bernanke sits back and watches it happen. OK fine. On top of that, assume people around the world dump their dollars, such that the demand drops by 99%. (I'm speaking loosely.)
OK so now we're talking a 1000-fold increase in prices. Let's assume the government needs the Fed to print up a bunch more money to fund the deficit at those ridiculous price levels. OK fine, assume that doubles inflation again; a 2000-fold increase in prices.
We're still only at 200,000%, less than 1/1000th of Zimbabwe's levels.
I grant you, once we got up into the 1000%+ range, all bets are off, since we're obviously not dealing with normal institutional arrangements anymore. Maybe the international bankers who give Bernanke "suggestions" would decide to go for one last hurrah before switching everything to Asia.
But I don't think Faber has a complicated, subgame perfect scenario in mind. I think he has realized the corner into which Bernanke has painted himself, and concludes, "Zimbabwe!"
The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.
Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
I have been warning of severe price inflation for some time, and when people ask me "hyperinflation?" I respond, "What do you mean by 'hyper'?" Recently someone coaxed a number of 25% annual inflation out of me, since I think Bernanke will do what needs to be done to bring it down to the maximum acceptable level, which I somewhat arbitrarily put at about 25%. (Of course the true increase in CPI will probably be more like 35%, but the official press releases--if you have a gun to my head and force me to pick a number--I'm picturing around 25%.)
I'm not going to bother running through the numbers, but there's no way you would see the kind of numbers Faber is talking about, absent a nuclear attack somewhere. The last time I did back-of-the-envelope calculations, I concluded that Bernanke had pumped in enough new reserves to fuel a tenfold increase in the quantity of money.
Now let's suppose that that leads to a tenfold increase in prices, because Bernanke sits back and watches it happen. OK fine. On top of that, assume people around the world dump their dollars, such that the demand drops by 99%. (I'm speaking loosely.)
OK so now we're talking a 1000-fold increase in prices. Let's assume the government needs the Fed to print up a bunch more money to fund the deficit at those ridiculous price levels. OK fine, assume that doubles inflation again; a 2000-fold increase in prices.
We're still only at 200,000%, less than 1/1000th of Zimbabwe's levels.
I grant you, once we got up into the 1000%+ range, all bets are off, since we're obviously not dealing with normal institutional arrangements anymore. Maybe the international bankers who give Bernanke "suggestions" would decide to go for one last hurrah before switching everything to Asia.
But I don't think Faber has a complicated, subgame perfect scenario in mind. I think he has realized the corner into which Bernanke has painted himself, and concludes, "Zimbabwe!"
Comments:
Marc Faber is the man.
He has a ponytail. A ponytail!
And he has like the best accent ever.
He has a ponytail. A ponytail!
And he has like the best accent ever.
# posted by 
: June 3, 2009 at 2:07 PM
: June 3, 2009 at 2:07 PM
It does seem ridiculous to think that Bernanke is going to sit around and inflate like Zimbabwe did. But it also seems ridiculous to think that Zimbabwe would have done it, either.
So how does a country like Zimbabwe or Yugoslavia end up in a situation like that?
So how does a country like Zimbabwe or Yugoslavia end up in a situation like that?
# posted by : June 3, 2009 at 2:39 PM
: June 3, 2009 at 2:39 PM
Faber actually backed off the "inflation like Zimbabwe" claim on Glenn Beck's TV show. He still thinks there will be hyper inflation, just not Zimbabwe-like hyper inflation.
I backpacked through Zimbabwe in 1992. There were severe shortages. Official corruption was everywhere. Nothing seemed to have been repaired or maintained since Ian Smith was booted out. Business owners with luxurious houses could barely afford imported television sets. "Land reform" was switching gears with the passage of the Land Acquisition Act.
If you had looked into a crystal ball and told me hyperinflation was coming within the next fifteen years, I would have shrugged and wondered what was going to take them so long.
We are not Zimbabwe. Not yet.
If you had looked into a crystal ball and told me hyperinflation was coming within the next fifteen years, I would have shrugged and wondered what was going to take them so long.
We are not Zimbabwe. Not yet.
# posted by : June 3, 2009 at 3:07 PM
: June 3, 2009 at 3:07 PM
Isn't hyperinflation due to the self-perpetuating "oh no my money is becoming useless so I better stock up on everything and anything" followed by "oh no now everyone else did the same so the money is worth even less" ?
What is the highest recorded rate of inflation that hasn't collapsed into hyperspace? I remember hearing somewhere that the UK was heading for something like 40% in the worst years before the Thatcher administration, but I may be mistaken.
I do however think that once you hit over 50% - you are going to have a high risk of things spiralling away.
Furthermore, if the dollar was to take a real dive, it will probably not only be the rest of the world trying to dump dollars - any sane american will try to do so too, which may be the worst factor in the equation.
So while Mark Faber may be premature, I think the threat is real, but maybe not for a while yet. Must feel horrible for any american that realizes that his economic future is now in the fumbling hands of a raving lunatic.
What is the highest recorded rate of inflation that hasn't collapsed into hyperspace? I remember hearing somewhere that the UK was heading for something like 40% in the worst years before the Thatcher administration, but I may be mistaken.
I do however think that once you hit over 50% - you are going to have a high risk of things spiralling away.
Furthermore, if the dollar was to take a real dive, it will probably not only be the rest of the world trying to dump dollars - any sane american will try to do so too, which may be the worst factor in the equation.
So while Mark Faber may be premature, I think the threat is real, but maybe not for a while yet. Must feel horrible for any american that realizes that his economic future is now in the fumbling hands of a raving lunatic.
# posted by : June 3, 2009 at 4:40 PM
: June 3, 2009 at 4:40 PM
Not sure where this data comes from, but one of my econ teachers claimed that an economy can survive inflation rates of up to about 40% annually. Stay safely below 40%, and you can probably survive, go above it, and you will probably blow up everything.
That's not axiomatic, merely a historic observation.
That's not axiomatic, merely a historic observation.
# posted by : June 3, 2009 at 5:51 PM
: June 3, 2009 at 5:51 PM
Ive seen Faber speak many times on tv and in videos linked online and my reading of what he means when he says that the US will experience "Zimbabwe" inflation is that the value of the dollar will drastically plummet. He's not saying that as though the US dollar will lose value on par with Zim dollars, just that in the eyes of the holders of the US dollar it will be about as preferable as a Zim dollar.
I'm pretty sure I'd be near indifferent to holding a monetary unit one year from today (or one week--the time period doesn't really matter here) that was worth 10,000x less than one that was worth 100,000x less. Despite the former effectively being 10 times more valuable.
Faber is referencing the relative effect of Bernanke's money pumping rather than the absolute effect. At least that's my interpretation.
I'm pretty sure I'd be near indifferent to holding a monetary unit one year from today (or one week--the time period doesn't really matter here) that was worth 10,000x less than one that was worth 100,000x less. Despite the former effectively being 10 times more valuable.
Faber is referencing the relative effect of Bernanke's money pumping rather than the absolute effect. At least that's my interpretation.
# posted by : June 3, 2009 at 7:41 PM
: June 3, 2009 at 7:41 PM
I hear deflationists argue that the destruction of credit due to bankruptcies, defaults on mortgages, and defaults on credit card debt far outweighs the pumping that the Fed is doing, especially since the banks are just hoarding the money. Forgive me for asking what may seem an amateur question, but does it really work as neatly as that?
"I'm pretty sure I'd be near indifferent to holding a monetary unit one year from today (or one week--the time period doesn't really matter here) that was worth 10,000x less than one that was worth 100,000x less."
Really?! Please contact me, and I will happily set up some currency trades with you.
Really?! Please contact me, and I will happily set up some currency trades with you.
Layman,
for now the banks are holding large cash reserves. But once they start lending out again, all bets are off. It's going to be hard for the Fed to take all this money back out of the system.
for now the banks are holding large cash reserves. But once they start lending out again, all bets are off. It's going to be hard for the Fed to take all this money back out of the system.
Bob, I bet you've never heard anyone tell you this, but: I'm not as optimistic as you are!
The reason I think Zimbabwe is a real possibility is simply that the monetary authorities, economists and media are all in the insane state-of-mind where printing money solves all the problems of life.
Now they are cheering on for printing money, and when this turns to inflation, they will continue to cheer for more printing to combat the excessive inflation.
With people like Krugman, all of life's problems can be solved by printing money. So inflation will continue to be fought with printing money until Zimbabwe is a reality.
At which point, of course, Krugman, DeLong and the rest will produce best-selling books about how this was all a market failure and how if only Bernanke had printed more earlier we would all be fine.
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The reason I think Zimbabwe is a real possibility is simply that the monetary authorities, economists and media are all in the insane state-of-mind where printing money solves all the problems of life.
Now they are cheering on for printing money, and when this turns to inflation, they will continue to cheer for more printing to combat the excessive inflation.
With people like Krugman, all of life's problems can be solved by printing money. So inflation will continue to be fought with printing money until Zimbabwe is a reality.
At which point, of course, Krugman, DeLong and the rest will produce best-selling books about how this was all a market failure and how if only Bernanke had printed more earlier we would all be fine.
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