Tuesday, August 31, 2010

The "D-word" continues to appear

This time it's the Globe and Mail:
What’s a depression anyway? Basically, a depression is a very long recession.

You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.

The economy is in a depression when the banks are sitting on $1.3-trillion (U.S.) of cash and yet there is no lending going on to the private sector. It’s called a liquidity trap.

Depressions, usually, are caused by a bursting of an asset bubble and a contraction in credit, whereas a “plain-vanilla” recession is typically caused by inflation and excessive manufacturing inventories.

You tell me which fits the bill today.

It could be a long time before this settles down. But surely this will at least prevent the hyperinflationary scenario, right? Well, maybe not:
A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.
From Gonzalo Lira, via ThePythonicCow in this iTulip thread. I'm not entirely sure what to make of this; it has a ring of plausibility to it, to be sure, though hyperinflationary scenarios are a favourite bugbear of the right and should thus be taken with sizeable quantities of salt.

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