Causes of hyperinflation

[IIOII]

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer)

Why? How can we make sure that money is not over-supplied?

Possible solutions:
1) The amount of money in circulation is decreased, never increased or only increased at a very low rate (valid under the assumption that the economy does not shrink).
2) The amount of money increases and decreases exactly in sync with the value of all newly produced or devalued economic goods and services.

(1) is the case of Bitcoin, (2) is the hypothetical ideal of  the current central bank model (which is not implemented and may be impossible to implement in reality).

[semaforo]

  I have been looking for an up to date chart of US money supply- I think this is the most accurate one I have found. I guess M2 and M3 include the money created by banks- or do they? It seems the more I learn about this subject, the less I understand.

[RoadTrain]

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer)

Why? How can we make sure that money is not over-supplied?

Possible solutions:
1) The amount of money in circulation is decreased, never increased or only increased at a very low rate (valid under the assumption that the economy does not shrink).
2) The amount of money increases and decreases exactly in sync with the value of all newly produced or devalued economic goods and services.

(1) is the case of Bitcoin, (2) is the hypothetical ideal of  the current central bank model (which is not implemented and may be impossible to implement in reality).

Do you really think the amount of money is the only thing that matters?
Why does everyone forget about money velocity? These two parameters don't really have any economic sense regarding price inflation without each other.

The main principle of modern monetary policy is that economic activity can't be controlled directly. Central banks try to influence it indirectly instead through changing 'the cost of money'.
That may or may not be the best approach, but it seems to work well if done properly.

But considering senseless QEs it really looks like that central bankers don't have an idea about how their own monetary mechanism works.

[IIOII]

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer)

Why? How can we make sure that money is not over-supplied?

Possible solutions:
1) The amount of money in circulation is decreased, never increased or only increased at a very low rate (valid under the assumption that the economy does not shrink).
2) The amount of money increases and decreases exactly in sync with the value of all newly produced or devalued economic goods and services.

(1) is the case of Bitcoin, (2) is the hypothetical ideal of  the current central bank model (which is not implemented and may be impossible to implement in reality).

Do you really think the amount of money is the only thing that matters?
Why does everyone forget about money velocity? These two parameters don't really have any economic sense regarding price inflation without each other.

I think the amount of money in circulation is the foundation of money velocity: If money is scarce it is more likely to be hoarded (deflation), because it will not loose value, if there is an oversupply it is more likely to be spend fast (inflation), because it might be less valuable in future. There may be other factors that influence velocity, but I think these are rather temporary.

[counter]

having a currency backed by nothing, over printing the currency and unregulated derivative banking policies.

[twiifm]

Oversupply of money is the necessary precondition (which is also the definition of the term "inflation" which I prefer)

Why? How can we make sure that money is not over-supplied?

The main principle of modern monetary policy is that economic activity can't be controlled directly. Central banks try to influence it indirectly instead through changing 'the cost of money'.
That may or may not be the best approach, but it seems to work well if done properly.

But considering senseless QEs it really looks like that central bankers don't have an idea about how their own monetary mechanism works.

QE isn't working because Central Bankers can't force banks to lend that money to the private sector. But you already said that in your post.

I think the main reason for QE how Bernanke is doing it.  He's buying MBSs.  He's doing this because banks can't unwind these toxic assets.  He's trying to un trap liquidity but the banks just use the money to trade instead of lending to the private sector.  If they aren't allowed to prop trade, then perhaps they would lend out the money.  The other problem is private sector isn't really borrowing because they don't see a recovery. 

[billysweird]

It is hard to say when.

To bring this back to bitcoin, I think we have seen it go from $10 to $1000 because it is a very effective and public absorbent of central banker's inflation.

[RoadTrain]

Do you really think the amount of money is the only thing that matters?
Why does everyone forget about money velocity? These two parameters don't really have any economic sense regarding price inflation without each other.

I think the amount of money in circulation is the foundation of money velocity: If money is scarce it is more likely to be hoarded (deflation), because it will not loose value, if there is an oversupply it is more likely to be spend fast (inflation), because it might be less valuable in future. There may be other factors that influence velocity, but I think these are rather temporary.

Money in circulation, as well as money velocity are dependent on economic activity, with money velocity a lot more responsive to changes in economy.
Just look at how central banks try to pump money into economy with little to no success, and how money velocity is tumbling. That's because they have no power over economic activity, instead the economy should be stimulated by government. But then we have those silly republicans trying to cut the deficit

I think the main reason for QE how Bernanke is doing it.  He's buying MBSs.  He's doing this because banks can't unwind these toxic assets.  He's trying to un trap liquidity but the banks just use the money to trade instead of lending to the private sector.  If they aren't allowed to prop trade, then perhaps they would lend out the money.  The other problem is private sector isn't really borrowing because they don't see a recovery.  

Yes, he's basically transferring those risks from the banking system onto Fed hoping that it will increase lending. But lending does depend on presence of creditworthy borrowers rather than on banks balance sheets.
And overall this ZIRP only results in misallocation of capital and bubbles.

[painlord2k]

   I understand that the loss of confidence can cause hyperinflation- I guess my main question is what is the role of the velocity of money in this process? Somehow I think this is key to determining why the inflation rate remains low.


Can low money velocity result in deflation which counterbalances inflation?

What you are seeing in the chart is the first reaction of common people to inflation (prices increase).
They see prices increase and reduce spending because they think the prices increase is an anomaly and not normal . So they act like people using bitcoin do when bitcoin exchange rate go down: they reduce spending and increase saving. They consider the supply of money inelastic.
The same happen when people have too much debt and they are forced to save more and spend less to be able to pay back the debt.

Hyperinflation happen when people start believing the prices increases will never stop in the foreseeable future. Then, instead of saving money they try to get rid of money.
Like people stopping to save and increasing consumption because there is no point to save to pay back a debt, if they believe the debt can not be paid back anyway.

[sana8410]

The problem is the average person can't balance a checkbook, let alone understand the economy

[Swordsoffreedom]

The problem is the average person can't balance a checkbook, let alone understand the economy

True enough, part of the blame is that they don't really teach children the importance of finance from a young age just some abstract algebra lol.

[johnyj]

Banks can decide the money flow. For example, currently majority of the QE money is sitting at FED doing nothing, that is the reason we are not seeing any significant inflation even FED has increased base money supply by 4 fold since 2008

In another word, if I'm central bank, I will make sure there will be no inflation by limiting those money so that they don't enter circulation. Or, at least do not enter the market that will affect the CPI (I will let money flow into housing market to support the house price, but will not let them flow into supermarket to drive up the milk price since latter is in CPI)

And even if they enter circulation, there is Cantillon effect: Those who first get the new money will enjoy its full purchasing power while those who last receive the new money will take the loss through inflation. This usually takes a long business cycle

So banks really have lots of tools to deal with hyperinflation, since majority of the money are in bank's hand, they will control it very well. But if there is a competing currency, they will lose their control, people can use alternative currency instead of their currency, thus the demand for their money is no longer unique, that might cause hyperinflation

[r34tr783tr78]

Op you seem in the right track.
The relevance of the velocity of money on inflation has divided schools of economics: neo-Keynesians say it's relevant because changes a lot, neo-classics say it's stable, therefore of little importance.
The main aspects are the volume of M1 and M3. The increase of M1 isn't enough, as the recent explosion of the M1 on the USA shows, if the banking multiplier works badly. Because the increase of M1 didn't end up on an increase of M3: banks limited the banking money supply by limiting credit.

[keithers]

A huge cause is continuing to print more and more money (that is backed only by promises), to finance war after war

[Swordsoffreedom]

A huge cause is continuing to print more and more money (that is backed only by promises), to finance war after war

Well unless the war is a tiny war then the US has a bunch of those going now and then with ROI every few decades

[RoadTrain]

Banks can decide the money flow. For example, currently majority of the QE money is sitting at FED doing nothing, that is the reason we are not seeing any significant inflation even FED has increased base money supply by 4 fold since 2008

That's true.
Then what do you think is the point of QE?

[r34tr783tr78]

Without the QE, there would be a crunch on the M3 and, probably, open deflation and a real depression.

[RoadTrain]

Without the QE, there would be a crunch on the M3 and, probably, open deflation and a real depression.

That's probably true for QE1 when Fed removed a lot of toxic MBS from banks balance sheets.

But what's the point of the next two rounds which mainly involved buying treasuries?

[r34tr783tr78]

Freeing some banking money stocked on bonds in order to incentive banks to lend more to "the real economy", corporations, consumers, etc., and thus promote aggregate demand. I think Bernanke did a remarkable job (I'm not american, my opinion has nothing to do with politics).

[RoadTrain]

Freeing some banking money stocked on bonds in order to incentive banks to lend more to "the real economy", corporations, consumers, etc., and thus promote aggregate demand. I think Bernanke did a remarkable job (I'm not american, my opinion has nothing to do with politics).

Banks don't need spare money to lend. All they need is collateral in case they need to comply with reserve requirements, with treasuries being perfect collateral.

Thus virtually all money Fed created is locked as excess reserves at Fed. It barely helped, banks didn't want to lend out like crazy again.
That's why monetary policy is ineffective economically while fiscal policy is much more powerful. Because gov't can decide where money goes while Fed cannot.