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I guess because they believe in fiscal dominance theory of hyperinflations.
by Sargon on Sun Jun 19th, 2011 at 05:20:58 AM EST
[ Parent ]
Sure, but why do we have to countenance it?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 10:04:48 AM EST
[ Parent ]
Because it might be true, perhaps?
by Sargon on Sun Jun 19th, 2011 at 01:12:37 PM EST
[ Parent ]
Inflation is clearly influenced by fiscal policy.

Hyperinflation, however, has never actually been observed outside of a currency collapse or wholesale destruction of a government's ability to control its jurisdiction.

Inflation and hyperinflation are two completely different beasts, and are only superficially related. An important clue that a central bankster has no idea what he's yammering about is that he talks about Eurozone hyperinflation, something that is patently not possible (barring a really messy breakup).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 01:45:36 PM EST
[ Parent ]
OK, good, not only we read NK Macro differently, we also read historical record differently. Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

Fine, but I think I'm stopping here - marginal product of this discussion became zero for me.  

by Sargon on Sun Jun 19th, 2011 at 01:59:33 PM EST
[ Parent ]
Sovereigns always "finance" their operations through seigniorage. Spending creates demand, taxes destroy demand.

Obviously, if you generate demand in excess of what your economy can honour, you get inflation. But that is a different beast from Weimar, Brazil, Argentina and so on.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 02:16:04 PM EST
[ Parent ]
But the point we're arguing here is that whether seigniorage leads to inflation or hyperinflation depends on whether the government is attempting to fund domestic or foreign (or index-linked) liabilities.

Lacking academic Neoclassical Economics credentials, let me quote someone who does have them... An analysis of the consequences of seigniorage 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 (because it is not runaway - a characteristic of hyperinflation is that once it gets started the rate of inflation snowballs out of control).

Also, as argued a long time ago by BruceMcF:

Also note that the [Weimar] Republic ...

... was not "the [Weimar] Republic" of Faith-Based Monetary Theory either.

The hyperinflation of the [Weimar] Republic followed, as Keynes in part predicted in "The Economic Consequences of the Peace", from the collapse of the economies in Germany's former major export trade zone, combined with an increased structural dependency on imports with the French occupation of the Rhineland industries.

Combine that balance of payments position with a demand that the [Weimar] Republic hand over regular reparations payment, and it is quite like a badly governed African nation that has to pay the debts to the World Bank and other transnational corporations incurred with no expectation by the lending agencies that the result of the projects funded would be sufficient foreign exchange earnings to pay off the loans.

It is, of course, possible to interpret both theory and the historical record differently, but then we're in the realm of economics as just-so stories because if you have more than one economist with academic credentials not accepting each other's models then they will characterise each other's readings of the historical record as just-so stories.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 05:01:34 PM EST
[ Parent ]
There is an important difference between hard and soft currency.

Any economic model that does not explicitly account for the difference between hard and soft currency is prima facie suspect.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:11:33 PM EST
[ Parent ]
could you explain the difference (again?!) between the two?
can you have both at once or is it a strict binary decision?

2 syllables good, one syllable better ;)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Jun 21st, 2011 at 01:34:59 PM EST
[ Parent ]
Soft currency is your own currency (where "you" are the government of the country in question). Hard currency is everyone else's currency.

You need hard currency to buy stuff other people make, unless they want to give you their stuff for free, as China wants for the US (well, not really for free, since the quid-pro-quo is that China gets the US' capital plant in return).

The neoclassicals treat all currency as being commodities. So when your currency is dropping like a rock, they advise you to destroy some of it, and not print as much of it.

The problem with that advice is that people don't buy your currency because it's shiny. People buy your currency because it lets them buy your stuff. Which means that the reason your currency is losing value is either that you have higher inflation than your trading partners or that you are unable to meet your hard currency obligations.

In the former case, trying to defend the exchange rate is stupid - it will make your companies move to other countries. Eventually you will become unable to defend your exchange rate because you've lost your industries, and then you'll have neither the strong currency nor your industries.

In the latter case, you cannot defend your currency by rationing it. If you have less hard currency than you owe, Mr. Soros and his friends can always squeeze you. Now, there are two possible reasons why you might find yourself in that sort of bind. The first is that you took leave of your senses and borrowed hard currency in order to gamble with it. Like Ireland.

The second possibility is that your economy went tits-up, and that crashed your ability to make stuff to sell to foreigners for hard currency. In that case, you want, seemingly paradoxically, to print more money, because getting your economy running again is the only chance you have of producing enough stuff to cover your hard currency obligations.

Can a currency be both hard and soft? Yes and no. In principle it can't. In practise, the way the BuBa treats the €-Mark is making a pretty convincing case that it can be. In fact, the whole "independent central bank" scam is all about making your soft currency behave like hard currency. Which is stupid, of course. But makes a lot of sense if you are operating in a mental model where all currency behaves as hard currency by assumption.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:25:11 PM EST
[ Parent ]
thanks Jake... much appreciated.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Tue Jun 21st, 2011 at 06:10:58 PM EST
[ Parent ]
Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

What happened is exactly what Keynes predicted in The Economic Consequences of the Peace. The treaty was designed by the French to cripple Germany and it did. The reparations were, essentially, unpayable, requiring, as they did, that Germany export over 1/3 of her annual coal production. As Germany had been, at best, self sufficient in coal this shut down at least a third of her manufacturing, and when Germany became sufficiently in arrears, France sought to act as a "debtor in possession" by occupying the Ruhr. This destroyed the rest of the manufacturing, by design, as France's goal was more to hamstring Germany, than to receive reparations. Having huge foreign obligations and nothing to export to obtain foreign currency was the classic cause of the ensuing hyperinflation.

All of this leads me to wonder if the current policy of Germany towards Greece, Ireland and Portugal is an example on an international level of what Freud referred to as "the repetition-compulsion neurosis", which usually involved a perceived need to do unto others what has been done unto oneself. Of course the French denied that hamstringing Germany was their goal, just as Germany denies that the austerity measures on which they insist are designed to push the countries on which these policies are foisted into a debt deflation death spiral. After all, we all want to think well of ourselves, regardless of the mental contortions required, and the easiest and most effective emotional defense is denial.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 05:54:48 PM EST
[ Parent ]
As far as repetition-compulsion goes, and harming others, hasn't Germany already done enough?

It's a shame that Freud never came up with a reciprocal theory that would analyze how more virtuous actions, say the Marshall Plan, were likewise reciprocated.

by Upstate NY on Mon Jun 20th, 2011 at 09:04:32 AM EST
[ Parent ]
See one of his followers, Melanie Klein's Love, Guilt and Reparation and Envy and Gratitude. My wife bought these back in '75 - '76 and I could not but read them myself. Unfortunately, Freud's hermeneutic approach gets no respect these days.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 02:42:50 PM EST
[ Parent ]
As far as repetition-compulsion goes, and harming others, hasn't Germany already done enough?

My sense would be that there is never "enough" of a compulsion until either the physiological basis and/or the process is brought into consciousness and is deliberately controlled by the one experiencing the compulsion. Ideally, both would be brought about in treatment.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 02:48:11 PM EST
[ Parent ]
Something's changed. As anyone who stayed in Germany a while and met many Germans of the 80s and 90s can affirm, there was a great deal of self-consciousness, maybe suffocatingly so where hardly a conversation could be had without referencing the political. Jazz, cars, food = politics.
by Upstate NY on Mon Jun 20th, 2011 at 03:51:35 PM EST
[ Parent ]
there was a great deal of self-consciousness, maybe suffocatingly so where hardly a conversation could be had without referencing the political.

I suspect that self-conscious discussions involving political choices was part of what I described above as bringing the pattern of compulsion into consciousness and placing it under rational control. If that process has noticeably decreased, as you suggest, it could indicate a return to conscious repression of awareness of the compulsion, which would allow the compulsion to operate more noticeably.

Part of this may be generational. Even former German leaders have noted that the current leadership has lost sight of common European interests and that the current political situation has little tolerance for actions and expenditures that do not benefit Germany itself. This goes hand in hand with recent economic policy, which has asked sacrifices from the German working class in the name of "competitiveness". So much of the German electorate feels, with some justification, that that they have made sacrifices and now it is time for others to do the same.

Of course there is no discussion of sacrifices by German business elites, who have greatly benefited from German labor's sacrifices, as it is easier to blame the peripherals. Nor is there any appetite to look at the consequences of neo-liberal policies or, especially amongst the media and politicians, for understanding that it was banks in the "virtuous" trade surplus countries that took imprudent risks with loans to the peripherals, that for the surplus countries to have their surpluses there have to be deficit countries or that EU and ECB policies have favored Germany at the expense of the interests and needs of the deficit countries that are now unable to pay the loans that they took on in better times. Nor is there any recognition that the pain that is being inflicted on the peripheral countries far exceeds anything that Germany has itself experienced since WW II and its immediate aftermath.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 04:44:49 PM EST
[ Parent ]
The American Novelist Walter Abish (an American of German Jewish descent) described his trips to Germany as a matter of showcasing a repression of German history in plain sight. This was seen from the early postwar German days as new towns were built over some with bad histories, literally over the bones. But a perfect example may be Paul Celan's Todesfuge which describes a concentration camp. Celan disowned the poem when he realized that German children were discussing and reciting the poem in school in the national curriculum. To be fair to Germany, this is an immensely difficult and monumental task, to put the past in context, commemorate it, and at the same time build a future. Given the 20th century, it seems an incredible task for one to undertake. A pyschoanalytical approach may be one of the last things that's applied to the task itself, and it comes almost as a luxury.

And by the time it comes, we're ready for it to happen again.

by Upstate NY on Mon Jun 20th, 2011 at 05:54:58 PM EST
[ Parent ]
A pyschoanalytical approach may be one of the last things that's applied to the task itself, and it comes almost as a luxury.

And by the time it comes, we're ready for it to happen again.

Well, by now, it is largely considered an unscientific curiosity, as the hermeneutics based approach is rejected. Fortunately, brain science is beginning to reestablish significant parts of what was lost and on firmer foundations. The Skinnerian Stimulus-Response based psychology, which was mostly what was left, really could not resolve the differences between a rat and a man, so it was not too useful for analyzing higher level functions.                          

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 02:50:50 PM EST
[ Parent ]
The Skinnerian Stimulus-Response based psychology, which was mostly what was left, really could not resolve the differences between a rat and a man, so it was not too useful

Well - er - actually... :)

The Freudian stuff diverged off into psychodynamic theory, attachment theory and various sort-of-hand-wavey theories of personality.

They're not all completely wrong - some of them make useful predictions - but it's not obvious how formally scientific they are.

The problem for all psychology is that objectively, all you can look at is behaviour. Conscious and unconscious motivations are much more difficult to judge.

But the DSMs are mostly behavioural, and work on the basis that if someone does a lot of A,B,C and D, it's not a surprise if they also do E and F.

I've said before that none of this has worked its way into politics or economics in any useful way.

The Marxists turned Freudianism into a weird intellectual fetish object that was almost completely disconnected from real actions, and completely undermined any contribution it could have made to public debate.

I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

Although it's not obvious, the DSMs are all about moral behaviour, and the fact that certain illnesses cause individuals to act in a maladjusted (immoral) way.

Obviously you can debate that, but it would be better to have that debate than it is to live with the current situation, where personal and social morals have almost no connection at all to practical political and economic morality - but almost everyone assumes they're very similar.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 21st, 2011 at 03:27:31 PM EST
[ Parent ]
I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

Hope springs eternal! Come the day. And I certainly do not deny that there were abuses by some and bizarre forays by others out of that tradition, but is was far better than nothing but Skinner.

I think a combination of brain science and hermeneutics is essential to the future development of the field. We have to accept that there will be a higher level of uncertainty about human psychology than about many physical sciences. But my inner cynic suspects that it has been very convenient to have most psychological disciplines under a cloud. What remains or has become respectable mostly are approaches that generate cash flows and promote social control. We need to do better.

 

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 03:54:10 PM EST
[ Parent ]
As someone in literature, I am not at all bugged by the a-paradigmatic things we study. That we lack empirical data points to the phenomena studied. I'm fascinated by brain and cognitive science (I'm actually "The Power of Music" right now by Elena Mannes) and I think it's very worthwhile but its going to have a great deal of difficulty accounting for a field that is difficult to even describe, never mind touch and measure.
by Upstate NY on Tue Jun 21st, 2011 at 08:52:34 PM EST
[ Parent ]
Hermeneutics is the basis for almost all art and literature, so, when it is dismissed, so are all of the "humanities".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 11:13:12 PM EST
[ Parent ]
Well, Freud and the Freudians did not do themselves any great favours by fudging their research data and generally defending themselves against criticism in the manner of a fundamentalist sect...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:00:52 PM EST
[ Parent ]
ThatBritGuy:
I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

I just fear it will land in marketing.

by generic on Tue Jun 21st, 2011 at 05:11:31 PM EST
[ Parent ]
Psychology is already heavily used in marketing and advertising.  Go to any Marketing department, start pontificating about "rational consumers" and watch them explode into laughter.  Psychology will only enter Economics in a big way when Economists decide to stop farting around and study how an economy actually functions.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 22nd, 2011 at 08:35:32 PM EST
[ Parent ]
That is a pity. I think discussions about essentials assumption would help. And I think historical examples and case studies are important to answer questions like what causes hyperinflation. Modern economics of all schools don't take historical experience serious enough.

So it be valuable to discuss German from 1919 to 1923 (or 1914 to 1923) or Brazil in the eighties or Zimbabwe in the last few years.

From all I know about Germany during the great inflation, I think the reparation narrative then popular in Germany and now popular among some posters here is wrong.

You on the other hand seen to think that the hyperinflation of the twenties and the somewhat high inflation rates of the western countries in the seventies are qualitatively the same. That isn't right but perhaps I misunderstood you.

by IM on Mon Jun 20th, 2011 at 03:21:47 AM EST
[ Parent ]
The current US incarnation of "mainstream economics" does not really include economic history or history of economics, as several ET contributors and many economic historians have noted. Cynics, myself included, have suggested that this is to reduce the cognitive dissonance that teaching both history of economic thought and economic history would provoke in economics grad schools.

For a scholarly critique of the factors that molded economics in the US from the late 19th century through the '40s see Henry George and Neo-Classical Economics. It is based on a referenced monograph by Mason Gaffney: Neo-classical Economics as a Stratagem against Henry George

A sample from Gaffney:

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realize to what degree the founders of Neo-classical economics changed the discipline for the express purpose of deflecting George and frustrating future students seeking to follow his arguments. The strategem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. "Nothing pleases a ...single taxer better
than ... to use the well-known economic theories ... [therefore] economic doctrine must be recast" (Patten, 1908: 219; Collier, 1979: 270).'


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 03:27:48 PM EST
[ Parent ]

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