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But that is not the contention. I was objecting to Jerome's complaint that a currency cannot simultaneously be in crisis and overvalued. My retort is that a currency can only be in crisis when it is overvalued.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 3rd, 2011 at 06:38:27 AM EST
[ Parent ]
Fine. But the Reichsmark between 1920 and 1923 was undervalued and in crisis.

An extreme example (hyperinflation not that common), but that is apossible crisis too.

by IM on Fri Jun 3rd, 2011 at 06:50:16 AM EST
[ Parent ]
by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 06:58:57 AM EST
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  1. Hyperinflation can only occur in a currency collapse.

  2. Whether the Reichsmark was undervalued or not is a philosophical question - there was no exchange rate at which Weimar Germany could have achieved structurally balanced current accounts, given the Versailles reparations.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 3rd, 2011 at 07:03:07 AM EST
[ Parent ]
That is neither here nor there. The reparations, I mean. The war debt alone would have made inflation tempting.

And you need a "currency collapse" for a hyperinflation is a bit tautological; a currency collapse is surely a currency crisis.

And there are other hyperinflation examples, so it is a possibility to get a currency crisis without overvaluation.

by IM on Fri Jun 3rd, 2011 at 09:26:43 AM EST
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You're confusing inflation with hyperinflation.

The war debts could be inflated away with mild inflation and that wouldn't have caused runaway inflation.

War reparations was external debt denominated in foreign currency. You cannot pay that by inflating, and attempting to do so can lead to runaway inflation.

Hyperinflation crises always have to do with trying to inflate to pay debts that cannot be inflated away, be it because they debt is itself inflation-indexed (a relatively recent but dangerous development) or because it is denominated in foreign currency.

In the 1980s there were at least two Eastern European countries which had currency crises as a result of too much foreign debt. Romania went the route of imposing a depression domestically in order to pay the debt, Yugoslavia went the hyperinflation route.

Debt in your own currency can never cause hyperinflation.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 09:39:17 AM EST
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Migeru:
Hyperinflation crises always have to do with trying to inflate to pay debts that cannot be inflated away, be it because they debt is itself inflation-indexed (a relatively recent but dangerous development) or because it is denominated in foreign currency.

Hm, does the French revolution inflation and the US revolution inflation fit this pattern? My assumption would be that the weakness of the states caused it, and rightfully so as fiat money backed by a defeated state in general becomes worthless.

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by A swedish kind of death on Sun Jun 5th, 2011 at 01:14:53 PM EST
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A very readable summary of how hyperinflation can come about is contained in Can Central Banks Go Broke? by Willem Buiter. On page 8, there's
even if the resources needed to recapitalise the central bank are less than the maximum amount that can be appropriated through seigniorage (given by the peak of the seigniorage Laffer curve at A in Figure 1), the extraction of these resources may involve an unacceptably high rate of inflation.
Up to here we're talking about politically unacceptable inflation, but still inflation.
Worse than that, even the maximum amount of real resources the central bank can extract though seigniorage may not be enough to close the central bank insolvency gap. This could happen if the central bank had a large stock of foreign-currency denominated or indexlinked liabilities. In that case, without a capital injection from outside the central bank, the central bank cannot meet its funding needs from its own resources. The result would be hyperinflation and/or central bank insolvency.
Weimar experienced hyperinflation because it had unsustainable debt reparations to pay in foreign currencies (or in gold, which under a gold standard regime amounts to the same thing). Domestic debt can always be paid through seigniorage, albeit at a possibly politically unacceptable rate of inflation falling short of hyperinflation.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 09:47:55 AM EST
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the EU is in crisis, not the euro. At the end of the day, the euro will still be there... EU institutions, we don't really know.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri Jun 3rd, 2011 at 07:02:22 AM EST
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"But the currency was sound" will be the EU's epitaph.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 07:15:59 AM EST
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Well, with a little IMF/central bank help, it can be in crisis even when it is no (more) overvalued: by choking the economy with expensive credits and cash-strapped consumers after an initial devaluation. (This was the standard route to high inflation in former East Bloc countries.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Jun 3rd, 2011 at 05:06:33 PM EST
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