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Real interest rates after inflation vary from negative (parts of Europe) to much more than 1-2%. As long as real interest rates remain negative, it is clearly

Real interest rates after inflation vary from negative (parts of Europe) to much more than 1-2%. As long as real interest rates remain negative, it is clearly self-sustained. Countries that control their own currencies can always negate all debt by printing money (through fractional easing). However, if inflation starts to increase again, printing money is only a short term solution if there is a budget deficit. If the budget is run at a deficit in a high inflation scenario, printing more money will cause Venezuela style hyperinflation. In the case of the US, it would be interesting to see how the government would react if the dollar was put under this kind of pressure. Early austerity would result in mass unemployment and heavily slashed welfare. Looser policies would create high inflation, cutting savings by half or more and also collapsing salaries for public sector employees. Hopefully, the US would be able to avoid hyperinflation, but with the current tendency towards populsm (on both the left and the righ), I don't feel so sure anymore.

pjc50 8y ago
I think hyperinflation is best understood as a forex phenomenon: since you can't print foreign currency, if your economy is importing much more value than it exports (including FDI!), then the value of the local currency declines relative to the rest of the world and you end up with hard currency shortages and people handing over increasingly large bundles of notes to pay for hard currency. Normally the commodities which cause this problem because they have to be imported no matter what the price are the global staples: oil, food, pharmaceuticals. So you'd have to ask exactly how the US could get into this state. It exports all three of those staples. It's a major inward investment destination. It's the owner of the dollar, widely recognised everywhere else as "hard currency". It would take extraordinary mismanagement to lose those advantages. Venezuela's dire situation is mostly because its oil industry has been chronically mismanaged and production has collapsed. One consequence of this is that oil is being imported (bought at global prices in dollars) and sold at local pre-collapse subsidised prices (in worthless Bolivars). Similarly Zimbabwe's collapse was mismanaged "land reform" expropriation of profitable agriculture, and Weimar Germany was ruined by the need to export gold to France for reparations.
- trashtester 8y ago
  Well, hopefully US institutions will be able to prevent mismanagement at the level of Venezuela or Zimbabwe. But imagine the following scenario: 1. Some left- or right- wing populist (worse than Trump) is president, and is backed by congress. 2. A 1929 size crack hits the market. 3. The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. 4. The market for US treasuries collapse, making them almost unsellable. 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. 6. Inflation follows the money supply increase, and then some. 7. Massive strikes/protests hit the country as purchasing power for imported goods and goods created from imported materials. (Think French yellow shirts x3) 8. The government caves in, and increases wages by decree to match the inflation. (Repeat steps 5-8 ad infinitum) What would the inflation be after 5-10 years of such policies? Probably less than 1000%, but quite possibly more than 20%
  - pjc50 8y ago
    4 is a really big stretch - what's safer to put cash in? 5 essentially already happened with QE 7 Americans don't really do this on any scale And finally.... 20% inflation is hardly a nightmare. The US hit 14% in '79. The only thing that can take it back there is an external oil shock.
    - trashtester 8y ago
      4 : Confidence in a currency lasts until it is gone. After it is gone, so is the feeling of safety. When the feeling is gone, the strength of the currency can only be defended by tight fiscal policies. Edit: Just to clarify. Other currencies exist, some may be seen as safer than dollars if a populist government is wrecking the economy there. Also, there is always stocks, real estate, precious metals and possibly crypto. 5 : Yes. So next time the expectation will be that it is ok to do this. Which it is, until the time that confidence is lost. 7 : Watching from the outside, America seems to be radicalizing, as is the rest of the West. New generations no longer seem to understand the risks of fascism or socialism. And finally, I agree, 20% is not necessarily a nightmare. But keep in mind that the US had general growth exceeding the inflation in 79. UK, for instance, had stagflation, which is quite a bit more demanding. In order to reign in the inflation, fiscal tightening is a necessity, or the inflation may become permanent.

pjc50 8y ago

I think hyperinflation is best understood as a forex phenomenon: since you can't print foreign currency, if your economy is importing much more value than it exports (including FDI!), then the value of the local currency declines relative to the rest of the world and you end up with hard currency shortages and people handing over increasingly large bundles of notes to pay for hard currency. Normally the commodities which cause this problem because they have to be imported no matter what the price are the global staples: oil, food, pharmaceuticals. So you'd have to ask exactly how the US could get into this state. It exports all three of those staples. It's a major inward investment destination. It's the owner of the dollar, widely recognised everywhere else as "hard currency". It would take extraordinary mismanagement to lose those advantages. Venezuela's dire situation is mostly because its oil industry has been chronically mismanaged and production has collapsed. One consequence of this is that oil is being imported (bought at global prices in dollars) and sold at local pre-collapse subsidised prices (in worthless Bolivars). Similarly Zimbabwe's collapse was mismanaged "land reform" expropriation of profitable agriculture, and Weimar Germany was ruined by the need to export gold to France for reparations.

trashtester 8y ago
Well, hopefully US institutions will be able to prevent mismanagement at the level of Venezuela or Zimbabwe. But imagine the following scenario: 1. Some left- or right- wing populist (worse than Trump) is president, and is backed by congress. 2. A 1929 size crack hits the market. 3. The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. 4. The market for US treasuries collapse, making them almost unsellable. 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. 6. Inflation follows the money supply increase, and then some. 7. Massive strikes/protests hit the country as purchasing power for imported goods and goods created from imported materials. (Think French yellow shirts x3) 8. The government caves in, and increases wages by decree to match the inflation. (Repeat steps 5-8 ad infinitum) What would the inflation be after 5-10 years of such policies? Probably less than 1000%, but quite possibly more than 20%
- pjc50 8y ago
  4 is a really big stretch - what's safer to put cash in? 5 essentially already happened with QE 7 Americans don't really do this on any scale And finally.... 20% inflation is hardly a nightmare. The US hit 14% in '79. The only thing that can take it back there is an external oil shock.
  - trashtester 8y ago
    4 : Confidence in a currency lasts until it is gone. After it is gone, so is the feeling of safety. When the feeling is gone, the strength of the currency can only be defended by tight fiscal policies. Edit: Just to clarify. Other currencies exist, some may be seen as safer than dollars if a populist government is wrecking the economy there. Also, there is always stocks, real estate, precious metals and possibly crypto. 5 : Yes. So next time the expectation will be that it is ok to do this. Which it is, until the time that confidence is lost. 7 : Watching from the outside, America seems to be radicalizing, as is the rest of the West. New generations no longer seem to understand the risks of fascism or socialism. And finally, I agree, 20% is not necessarily a nightmare. But keep in mind that the US had general growth exceeding the inflation in 79. UK, for instance, had stagflation, which is quite a bit more demanding. In order to reign in the inflation, fiscal tightening is a necessity, or the inflation may become permanent.