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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Professor Bill Mitchell on inflation

Posted by WARREN MOSLER on June 20th, 2010

Zimbabwe for hyperventilators 101

A very good read. Today’s hyper inflation fears due to ‘money printing’ are pure fear mongering.

My comment to Bill in support of his article:

Russia in 1998 is an example of how much the flat earth economists are wrong in what determines the value of a currency

Russia had a fixed fx rate of 6.45 rubles to the US dollar going into the August crisis.

At the end, rates on gko’s went to over 200% until there was no interest rate where holders of rubles did not want to cash them in at the CB for dollars. Dollar reserves were depleted, and no more dollars could be borrowed to support the currency.

Instead of simply floating the ruble and suspending conversion the CB simply shut down the payments system and the employees all walked out the door.

It was several months before the payments system was restarted.

There was no confidence, no faith, and no expectations of anything good happening.

The ruble went from 6.45 to about 28 or so in what has turned out to be a one time adjustment.

There was no hyper inflation, and not even much inflation as per Bill above, just a one time adjustment.

Pretty much the same for Mexico when it’s fixed fx regime blew up in the mid 90′s. The peso went from about 3.5 to 10 in a one time adjustment.

These are two examples of stress far in excess of whatever the US, Uk, and Japan could possibly face, yet with no actual inflationary consequences, as defined.

8 Responses to “Professor Bill Mitchell on inflation”

  1. beowulf Says:

    Today’s hyper inflation fears due to ‘money printing’ are pure fear mongering.

    Says you and Bill, House minority whip Eric Cantor says otherwise. Let’s see how that’s working out…
    According to his 2009 financial disclosure statement, House Minority Whip Eric Cantor is betting hard against U.S. Treasury bonds. The Wall Street Journal reports that Cantor bought up to $15,000 in shares of ProShares Trust Ultrashort 20+ Year Treasury ETF, an exchange-traded fund that “takes a short position in long-dated government bonds… Cantor bought the shares in December. According to the Washington Independent’s Annie Lowrey, “the fund is down 31 percent this year.”
    http://www.salon.com/news/politics/war_room/2010/06/18/cantor_bets_against_america/index.html

    Now that’s a man who should read Warren’s book. :o)

    Reply

    Tom Hickey Reply:

    Glad to see guys like this putting their money where their mouth is. Just maybe they’ll learn something. But I suspect that they’ll blame their loses on the “socialists” anyway.

    Reply

  2. Dave Begotka Says:

    BUTTTT……With an administration who does not understand the monetary system anything is possible…..

    Reply

  3. Matt Franko Says:

    It seems like the common thread was the tremendous fall in output, martial takeover of the Ruhr Valley and govt seizure of previously productive farmlands in Zimbo. In both cases, politics was the force that brought on the destruction of output and hence the ‘inflation’.

    Here in the US, its hard to see how such a fall in output could take place from a political perspective on the level that occurred in these two cases.

    The only thing I can think of that perhaps could really cut US output would be another oil embargo (would be another ‘external’ political act), this is another good reason to develop serious/meaningful alternatives to petroleum based vehicular fuels/energy. Resp,

    Reply

  4. Rinaldo Says:

    This essay just confirms the simple argument price inflation appears when to much money is chasing too many goods. Assuming that demand has basically no limits the start of inflation only depends on how much money is being created and how fast capacity can be expanded …

    Reply

  5. Rinaldo Says:

    correction to my comment – of course it should read “This essay just confirms the simple argument price inflation appears when to much money is chasing too few goods.”

    Reply

  6. davver Says:

    6.45 to 28 isn’t a big deal? I’d be a little upset if my currency depreciated like that.

    When my friend visited Russia at that time he had to use jeans and cigs for currency, people wouldn’t take rubbles. Doesn’t sound like something I’d want.

    Reply

    Tom Hickey Reply:

    Davver, the Fed targets about 2% inflation a year. Compound it. It doesn’t take long to erode savings. This is for a reason. Saving is basically hoarding. The economic purpose of money is to circulate. The modest inflation requires people to invest rather than save. Unfortunately, speculation in financial assets has overtaken productive investment. That should be discouraged with tax incentives for productive investment and disincentives for speculation.

    Reply

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