Time: Printing money does not lead to hiper-inflation, lower taxes do

[hugolp]

Im speechless. All I can say is the propaganda was better before.

http://curiouscapitalist.blogs.time.com/2010/11/10/will-sarah-palin-and-the-tea-party-cause-hyper-inflation/

Nonetheless, inflation, so far. Not so much. Palin herself seems to have missed the fact that prices in the past year or so have barely budged. So for the past few months, Leeper and Davig and another of Leeper's colleagues Todd Walker have been looking into why. Turns outs that it is very unlikely the Fed would cause hyper-inflation. That's why near zero interest rates and the Fed's early efforts to drive down long-term interest rates have done little to boost inflation. The real threat of inflation comes from tax policy, namely lower taxes. Lower taxes and the government will have a harder time paying back its debt. Investors run from our bonds and currency. Inflation ensues.

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[JohnDoe]

At least it looks like more and more people are able to see through the bs now, judging by the comments.

[Bimmerhead]

Wow, that was one incoherent article.  Either Time is getting desperate for readership and will print any scandalous story to bring people in, or the lamestream media is in panic mode trying to derail the Tea Party express.

Anywhere in the history of the planet has hyperinflation ever been created by the lowering of taxes?

I do find it curious though that almost everybody is worried about hyperinflation.  Why are all the economists, analysts and pundits (including Tea Partiers and Ron Paul, whom I otherwise respect) saying hyperinflation is just around the corner?  The only guy I know of who thinks the real threat is deflation is Robert Prechter, and I tend to agree with him.

Credit and assets are being destroyed much, much faster than the Fed is 'printing' money.  Therefore the money supply has contracted dramatically over the last couple years, and is likely to continue doing so.

[hugolp]

Wow, that was one incoherent article.  Either Time is getting desperate for readership and will print any scandalous story to bring people in, or the lamestream media is in panic mode trying to derail the Tea Party express.

Anywhere in the history of the planet has hyperinflation ever been created by the lowering of taxes?

I do find it curious though that almost everybody is worried about hyperinflation.  Why are all the economists, analysts and pundits (including Tea Partiers and Ron Paul, whom I otherwise respect) saying hyperinflation is just around the corner?  The only guy I know of who thinks the real threat is deflation is Robert Prechter, and I tend to agree with him.

Credit and assets are being destroyed much, much faster than the Fed is 'printing' money.  Therefore the money supply has contracted dramatically over the last couple years, and is likely to continue doing so.

I had this discussion endless times. It is true that a contraction of credit is deflationary, but the banking system is not the only way the new money can go into the economy. Monetizing government debt injects money into the market skipping the banking system. And there has been a big amount of monetization during this crisis, and Bernanke just announced more. So if you look only at the credit you are missing part of the equation.

Also, I respect Pretcher but he has been dead wrong during this crisis. If you followed his advice and shorted gold and stocks and bought dollars you must be completely ruined right now.

[FreeMoney]

I'm not going to read the article, which I'm sure is a strange piece of work. But I can see a way that the conclusion could be correct.

Drop taxes to zero, the bottom reason people need dollars is to pay taxes and fees everything is built off of this, dollar falls out of use, goods not bidding on dollars = hyperinflation.

Okay, if you don't buy the tax/fee thing, it's still correct because the dollar is just a shit money and people will leave and nothing can be done because there is no money for enforcement.

[MoonShadow]

Wow, that was one incoherent article.  Either Time is getting desperate for readership and will print any scandalous story to bring people in, or the lamestream media is in panic mode trying to derail the Tea Party express.

Anywhere in the history of the planet has hyperinflation ever been created by the lowering of taxes?

I do find it curious though that almost everybody is worried about hyperinflation.  Why are all the economists, analysts and pundits (including Tea Partiers and Ron Paul, whom I otherwise respect) saying hyperinflation is just around the corner?  The only guy I know of who thinks the real threat is deflation is Robert Prechter, and I tend to agree with him.

Credit and assets are being destroyed much, much faster than the Fed is 'printing' money.  Therefore the money supply has contracted dramatically over the last couple years, and is likely to continue doing so.

I had this discussion endless times. It is true that a contraction of credit is deflationary, but the banking system is not the only way the new money can go into the economy. Monetizing government debt injects money into the market skipping the banking system. And there has been a big amount of monetization during this crisis, and Bernanke just announced more. So if you look only at the credit you are missing part of the equation.

Also, I respect Pretcher but he has been dead wrong during this crisis. If you followed his advice and shorted gold and stocks and bought dollars you must be completely ruined right now.

Mish has been saying deflation is baked in since q2007, and he was right.  If I had listened to anyone else, I would have lost a small fortune out of my 401k.  As it stands, I did listen and lost very little during the crash.  Mish has been less of a deflationist as of late, but still contends that hyperinflation not a realistic threat, because as bad as QE is for the dollar, 600 Billion isn't a drop in the bucket against the deflationary forces at play, and black swans don't fly in from the direction that the majority are watching.  If so many in mainstream media are talking about hyperinflation, then hyperinflation would be avoided; even if some inflation is not.

[hugolp]

Mish has been saying deflation is baked in since q2007, and he was right.  If I had listened to anyone else, I would have lost a small fortune out of my 401k.  As it stands, I did listen and lost very little during the crash.  Mish has been less of a deflationist as of late, but still contends that hyperinflation not a realistic threat, because as bad as QE is for the dollar, 600 Billion isn't a drop in the bucket against the deflationary forces at play, and black swans don't fly in from the direction that the majority are watching.  If so many in mainstream media are talking about hyperinflation, then hyperinflation would be avoided; even if some inflation is not.

Im glad you saved money. But Mish was not the only one who saw the deflationary effects of the credit crunch. F.e. Marc Faber predicted it as well. But if you check the data prices did not go down almost despite the contraction on credit. And the reason is because they were compensated by the monetization. And as the Fed keeps monetizing debt without the presures of the credit crunch, prices will rise.

EDIT: Mish webpage is down. It seems gone. Do you know something about it?

[MoonShadow]

Mish has been saying deflation is baked in since q2007, and he was right.  If I had listened to anyone else, I would have lost a small fortune out of my 401k.  As it stands, I did listen and lost very little during the crash.  Mish has been less of a deflationist as of late, but still contends that hyperinflation not a realistic threat, because as bad as QE is for the dollar, 600 Billion isn't a drop in the bucket against the deflationary forces at play, and black swans don't fly in from the direction that the majority are watching.  If so many in mainstream media are talking about hyperinflation, then hyperinflation would be avoided; even if some inflation is not.

Im glad you saved money. But Mish was not the only one who saw the deflationary effects of the credit crunch. F.e. Marc Faber predicted it as well. But if you check the data prices did not go down almost despite the contraction on credit. And the reason is because they were compensated by the monetization. And as the Fed keeps monetizing debt without the presures of the credit crunch, prices will rise.

EDIT: Mish webpage is down. It seems gone. Do you know something about it?

Inflation and deflation have very little direct effect on the prices of individual things, or even entire vertical markets.  The prices of energy and food have risen somewhat over the past year, but in 2009 they were certainly down from 2008.  That said, the real estate market is *way* down, and that ovepowers everything else at the moment.  You would have to have some huge rises in food & energy before you overtake that 15% drop in land values over and entire nation.  If QE II does anything noticable at all, it's most likely to funnel that extra $600 billion dollars directly into markets dependent upon human needs, and not into the stock market or the real estate market as is likely their intent.  Food is a higher order need than clothing, and heat a higher order need than personal space.  IT's true that if anyone can cause hyperinflation in the US in thenear future, it's Congress; but if it doesn't happen in the next two months, I can't see how it would happen in the next two years.  Ron Paul will be the chairmean of the house finacial services committe (technicly in charge of the Federal REserve's charter) so the Fed is going to have shackles thrown upon it in two months time.

Mish's website is back up, apparently a hack attempt.

[ShadowOfHarbringer]

At least it looks like more and more people are able to see through the bs now, judging by the comments.

>90% of people are still completely unaware of what we are talking here.
They will only understand it once it is too late.

[RHorning]

At least it looks like more and more people are able to see through the bs now, judging by the comments.

>90% of people are still completely unaware of what we are talking here.
They will only understand it once it is too late.

I find the level of basic economics education for most people to be somewhere between lousy to awful, even when you have people attending formal classes in economics.  What is taught in public schools is particularly awful.

A good example is asking the simple question:  What is a dollar?  Getting past the cheap reply answers (something with the picture of George Washington on the front) it usually gives a really good yardstick to determine the level of economic education that somebody has.

A good but simple answer is a dollar represents my ability to buy a loaf of bread.  On the other hand, I've seen people who look at me like I just asked the question "What is God?", thinking that some divine being came down from on high to bestow dollars upon everybody in the first place also thinking that God, "the government" or "The Bavarian Illuminati" are either separately or together responsible for the value of the dollar or any other monetary unit.

While government policy certainly does influence the money supply and hence add to inflation or deflation concerns, that is mainly due to the size of the government compared to the economy as a whole.  That may be considered good or bad depending on your political philosophy.

[Anonymous]

 13 years of government propaganda and brainwashing is most to blame for the inability of people to see clearly.

[kiba]

13 years of government propaganda and brainwashing is most to blame for the inability of people to see clearly.

More like a lack of economic education and the ability to resist economic education. Teaching why free trade is good is like trying to convince creationist that evolution is a true theory.

[ShadowOfHarbringer]

13 years of government propaganda and brainwashing is most to blame for the inability of people to see clearly.

Actually, it's more like 97 years of propaganda and brainwashing...
1913 - creation of FED.

http://en.wikipedia.org/wiki/Federal_Reserve_System#History

As long as the FED lobbysts and propagandists exist, i wouldn't expect the situation to change. They just have too much power.

[Bimmerhead]

13 years of government propaganda and brainwashing is most to blame for the inability of people to see clearly.

More like a lack of economic education and the ability to resist economic education. Teaching why free trade is good is like trying to convince creationist that evolution is a true theory.

That's funny because I would have used the same analogy, but in reverse.  (You must find it confusing that most creationists in North America are free enterprisers, while all communists are evolutionists by definition ).

It's easy to complain about 'the people' not understanding economics.  But what is really appalling is that most of the economic and political establishment also don't understand economics.  Hence our current situation, and hence the reason a mere 20 years after the reunification of Germany - a 40 year side by side experiment of communism versus partial free enterprise- we still see political leaders that actually think they can plan our way to prosperity.

[wumpus]

Well I'm almost starting to believe that the US government can print as much money as they want without any adverse impact on the dollar. The government issues bonds, the fed buys op bonds. It can go on forever, it's like that snake eating its own tail.

Physically spoken it'd never work. Then again, economy is not an exact science... it's more like a branch of psychology.

[Bimmerhead]

Well I'm almost starting to believe that the US government can print as much money as they want without any adverse impact on the dollar. The government issues bonds, the fed buys op bonds. It can go on forever, it's like that snake eating its own tail.

Physically spoken it'd never work. Then again, economy is not an exact science... it's more like a branch of psychology.

Privately created credit is imploding faster than publicly created currency is being printed.  The money supply is shrinking.

Plus, the Europeans have possibly botched things up worse than the Americans.  You don't have to be good for your currency to appreciate, you just have to be less incompetent.

[hugolp]

Well I'm almost starting to believe that the US government can print as much money as they want without any adverse impact on the dollar. The government issues bonds, the fed buys op bonds. It can go on forever, it's like that snake eating its own tail.

Physically spoken it'd never work. Then again, economy is not an exact science... it's more like a branch of psychology.

Monetary policy is slow. It can take years for the effects of money printing to show to the consumer.

Just sit tight and see it happening. Nothing is free. Everything has consequences.

[joe]

The study is right but the link to the tea party is wrong.

The study is right because, if all other factors are held constant (i.e., government spending), then a reduction in taxes means the government will necessarily be climbing into debt faster, taking out more loans against the fed. This creates a devaluation of the government's debt and, therefore, of the U.S. dollar, which is currently backed roughly 80% by U.S. debt, the other 20% being gold.

However, if the tea party really takes control, they would work not only to cut taxes but also to cut government spending. So the cash flow from government revenue to pay off outstanding debt is not expected to change one way or another without more specific and reliable information from tea party leaders on their plan with respect to the debt. If anything, a smaller government will be more trusted to retain control over its citizenry and pay off its debts in the long run.

[jgarzik]

Tax revenue -- that is, money coming into government treasury -- is largely predicated on economic growth, rather than tax rates.

Lowering tax rates does not necessarily reduce money coming into government.  Raising tax rates does not necessarily increase money coming into government.

Life isn't that simple.  Don't listen to Democrats and Republicans that want to paint you such a simplistic picture.

[RHorning]

Tax revenue -- that is, money coming into government treasury -- is largely predicated on economic growth, rather than tax rates.

Lowering tax rates does not necessarily reduce money coming into government.  Raising tax rates does not necessarily increase money coming into government.

Life isn't that simple.  Don't listen to Democrats and Republicans that want to paint you such a simplistic picture.

There is of course the Laffer Curve that suggest there is a point in taxation past which there are diminishing returns.  In theory you can point this out clearly where nobody would be willing to earn anything if income taxes and other forms of taxation were at 100%, hence giving no taxes to the government  The converse is also true where a complete elimination of taxation is likely to not bring income into the government. I say likely not because there are some people who even now perversely do name the IRS and various governmental organizations in their wills and want the government to take all of their wealth as a deliberate and intentional act.  Good for them, as it would be interesting to see what would happen if the government used a PBS model of fundraising with telethons and pleas for donations.  But that doesn't deal with the topic at hand.

Some politicians do talk about maximizing the revenue into the government, where perhaps lowering taxes might encourage more economic activity and thus increase the amount of taxes raised.  There are also many who are advocating higher taxes which are being suggested not to increase revenue but instead for some kind of political advantage or for pure political control.  Perhaps to "right a wrong" or something else, but it certainly isn't to raise revenue for the government.

The debate even if you take the premise that the goal is to maximize revenue to the government is to decide what that rate might be.  Over time people adjust their spending habits, so what might have been a good point in the past to set at a maximum revenue might be different today.  Other laws might show up that are indirectly a tax that also influences this, for example environmental protection laws or occupational safety laws which can increase the cost of doing business.  Even that cost isn't directly obvious and with occupational safety laws might even save a business in the long run too, but it does add some short-term costs that are real... to give an example.

I agree that you shouldn't listen to 15 second sound bites and certainly should distrust a politician who is overly simplistic in their explanation of economic policy.  A politician that says the answer is complex is being much more truthful.  A politician who votes to raise taxes on the premise that the tax increase is going to increase revenue may very likely discover reduced revenue instead and get into a vicious feedback loop as well trying to keep raising taxes with even further reductions of revenue and failing to admit the whole process of raising taxes might have been a mistake.