Wednesday, October 28, 2015

Should Austrians Cool It With the Hyperinflation Forecasts?

Of course, they should.

The possibility  of price inflation accelerating significantly in 2016 is very strong in my view, But that could mean inflation of "only" 5% to 7%. That's not hyperinflation.

When you have a system whereby a central bank can print money at will, the technical apparatus to create hyperinflation does exist, but it doesn't mean a central bank will go to that extreme. It depends upon who is in charge of the money printing and the economic environment at a given time. Matt McCaffrey gets this. A more regular threat to the economy is the central bank created boom-bust business cycle (Which is not always in bust mode!).

Austrians really need to get their act together in understanding the very complex nature of the economy and the many phases that an economy can go through, and not always forecasting imminent doom.

I expect things to be much worse on the price inflation front next year, but this doesn't mean I expect the world to end next year.-RW

There’s More to Money than Hyperinflation
By Matt McCaffrey

Critics of Austrian macroeconomics often resort to strawmen when trying to challenge arguments against central banking, fiat money, and expansionary monetary policy. For example, it’s common to paint Austrians as doom-and-gloom prophets of economic collapse, with little to offer besides paranoid predictions of hyperinflations and monetary collapses lurking around every corner.
Unfortunately, even readers of Austrian economics fall into the trap of believing that the central problem with government money monopolies is that they’re always on the slippery slope to immediate catastrophe. This kind of thinking can be harmful because it encourages us to think only about obvious and extreme consequences of public policy, while ignoring more urgent, underlying issues.
The fear of hyperinflation is a good example. Hyperinflations do occur, and when they do, they give us a good look at the ultimate consequences of monetary central planning. However, hyperinflation is only one possible outcome of bad macroeconomic policy, and a rare one at that. Poor monetary institutions produce many other subtler and more pressing problems worthy of our attention.
For instance, the destruction wrought by monetary expansion is great even when inflation is slow, consistent, or numerically small. We should therefore be careful to see the damage caused by expansion for what it is: an ongoing and systemic problem that consistently produces distortions in the economy. However, as bad as it might be, it won’t necessarily result in complete economic collapse tomorrow.
As always, it’s vital to focus on the unseen effects of monetary policy, and that means considering how monetary expansion influences the price system and the behavior of entrepreneurs. The thing is, we don’t need Weimar-style money printing to redistribute wealth and encourage bubbles: even small credit expansions produce inequalities and malinvestments, whether hyperinflation eventually happens or not. Mises and other Austrians have been arguing this point for decades.
The problems run deeper than the threat of total disaster. In fact, that’s the whole point: if bad monetary policies always produced immediate catastrophe, people would long ago have seen the failings of central banks and done something to replace them. But because the distortions caused by monetary expansion seep slowly and discontinuously through the economy, their true origins remain unseen, even when the bubbles they create become obvious to the world.
Austrians are not in the business of predicting inflation, and constant warnings of impending disaster run contrary to both good theory and effective strategy. That is, economics teaches us to be humble when making predictions, if we make any at all. And strategically, we undermine the reputations of economists like Mises when we invoke them to predict disasters that never materialize. We’re better off carefully studying their ideas and using them to think about the very real problems that already lie beneath the surface of our economy and its institutions. The end of the world can wait.

The above originally appeared at


  1. "At some point the new money will start to circulate and for a while everyone will say "What we're we all so worried about?" A year or so later we'll find out." - senior economist at Casey Research

  2. These are incredibly good points. Of course, the Fed has actually created enough new money to cause hyperinflation already. It, fortunately, is sitting idle as excess reserves. A "doom-and-gloom prophet", as McCaffrey called them, could point to this as a potential cause of a crack-up boom. But even that is not the case. If the banks started creating new loans based on these excess reserves, the Fed could always increase the reserve requirements on the banks (sopping up the excess, and turning them into required reserves).

    As RW likes to point out, the Fed is never out of options.

  3. Chapwood index had cost of living up 9.9%. This is huge. The avg wage earner and small business owner is being crushed by design. This is pure evil.

  4. We should also consider that high inflation has, in a way, already set in, but is RELATIVELY hidden due to increased efficiency and productivity attempting to lower prices (healthy deflation).

  5. I can't believe the whole thing hasn't collapsed already.