Hyperinflation: Countering Matthew O’Brien

Matthew O’Brien contended in an article in the Atlantic that the US can’t face hyperinflation like the Weimar Republic did.

Considering my previous post on hyperinflation, I have to critique O’Brien’s analysis.

Right now getting the markets to buy our debt isn’t the problem.

Right now. Sort of. It is true that investors, rather than the Fed, are mostly buying Treasuries directly. But the Fed is lending to the mortgage markets. Those with good credit are refinancing their mortgages. Some of the same people are buying treasuries.

If the Fed reduced its lending to mortgage markets, then fewer investors would have the money to buy Treasuries. The Fed’s QE still helps the government borrow money.

And there’s the “right now”. Yes, some investors are buying dollars because they don’t see a better alternative. But smart investors will sooner or later see that they’re losing money by buying dollars, as the author notes – they’re paying us to borrow. What happens when they wake up?

Second, the United States isn’t really printing money. At least not like post-war Hungary. Quantitative easing is usually described as “money-printing” but it’s not really. QE involves the Fed buying longer-term bonds from banks. It simply swaps one asset for another — in this case, cash for longer-term bonds. Unlike Hungary, the Fed isn’t directly paying the Treasury’s bills. This is a hugely important distinction.

As I noted in my previous blog post the M1 money supply has nearly doubled in a short time. If that’s not printing money then I don’t know what is.

And “the Fed isn’t DIRECTLY paying the Treasury’s bills.” No, but the Fed is lending to the private sector (mainly through mortgages and/or banks), and some of those borrowers turn around and buy Treasuries. Why does it matter whether it’s direct or indirect?

Whatever money the Fed “prints” is stuck in the banks. That money isn’t inflationary as long as the banks don’t lend it out. What if the banks do start lending at a faster clip? The Fed can still effectively pay the banks not lend by, for example, raising the interest on excess reserves or require the banks to set aside more money. It would be shocking for the Fed not to pursue one of these options.

If the Fed is printing money and it’s “stuck in the banks”, then why bother printing the money? This paragraphs lacks common sense.

Third, the most important difference between us and post-war Hungary or Weimar is that our roads haven’t been razed to the ground and half the country isn’t striking. It’s very difficult to have hyperinflation when you still have a functioning economy. Almost all examples of hyperinflation result from huge economic shocks that devastate an economy so much that leaders think printing money is the only solution to growth. As bad as the Great Recession has been, our GDP is already back to and above its all-time pre-recession high. As bad as unemployment is, more than 80 percent of the labor force is working. In Zimbabwe, 80 percent of the population was unemployed.

Argentina had a functioning economy.

Huge economic shocks? O’Brien wrote this before Hurricane Sandy, but the northeast just got hit with a massive hurricane. Our roads haven’t been razed to the ground? Maybe not but we keep hearing about how our bridges are in terrible condition.

… more than 80 percent of the labor force is working. In Zimbabwe, 80 percent of the population was unemployed.

Notice how O’Brien used two different statistics for the two countries. He didn’t say what percent of the US population is employed or unemployed – he said “of the labor force” while with Zimbabwe he used the entire population. Only 46% of US population (311 million) is employed (142 million), with the latter stat from the US Bureau of Labor Statistics.

Ultimately, nothing O’Brien says counters the problem of our runaway debt. He seems to think that people will continue buying our debt forever, even if they’re losing on the investment because of inflation. He says nothing to address the problem of the growing burden of interest payments.

One Comment

  1. Good analysis Warren. I’m with you. The phrase “Fed BUYs longer-term bonds” is such a misused phrase. Where does the Fed get money to “buy” these bonds? Educate me, but isn’t the ONLY source of the “Fed’s Dollars” printing? Maybe not, since presumably the Fed is paid back money that was lent out in previous bouts of printing (“Quantitative easing”). I’d be curious to know the ratio of lent money that is printed vs. “re-lent-but-previously-paid-back” dollars in any given year, but your money supply graph I think spells this out, although one would have to subtract the effects of “real” growth (greater population and/or/workers) from the money supply growth.

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