Monday, March 31, 2014

Did Austrians Never Predict Hyperinflation?

I read libertarian blogs frequently, and one thing I have noticed of late is how some Austrian economists and vulgar Austrians who comment on Austrian/libertarian blogs and are now so embarrassed by the prior predictions of hyperinflation that they deny that Austrians ever made any such predictions.

So is this new denial really true? Did no Austrian economist or Austrian pundit predict hyperinflation?

Of course, when confronted with the evidence that a number of them did indeed predict this, Austrians will quickly slip into the no true Scotsman fallacy, fallacy of equivocation, or the moving the goalposts fallacy.

Often the argument will run like this:
Austrian: No Austrian predicted hyperinflation!

Critic: But person x – an Austrian – predicted hyperinflation.

Austrian: But person x is not a genuine Austrian! [no true Scotsman fallacy].

Critic: But person x supports Austrian economics and uses it in economic analysis and self-identifies as an Austrian.

Austrian: But he is still not a genuine Austrian economist with a degree in Austrian economics! [fallacy of equivocation].

Critic: Well, person y is recognised as an Austrian economist with a degree in that field under another prominent Austrian economist and he predicted hyperinflation too.

Austrian: but person y did not predict hyperinflation as 100% certain, he only said it might happen! [fallacy of equivocation and moving the goalposts fallacy].
Of course, the argument may hinge on the meaning of “predict.” The ordinary dictionary definition of “predict” is to “announce something as an event that will occur in the future” or “say that something will happen”: this could mean either that
(1) the person says the event absolutely will happen with a 100% certainty (in a given time frame), or (more probably)

(2) the prediction that something will happen (in a given time frame) is probable or highly probable and contingent on given conditions (if x and y continue to occur, then z will result).
These are the meaningful senses of the word “predict,” but, as it happens, we have evidence that Austrians predicted hyperinflation in both senses.

We need only look at these examples:
(1) Marc Faber predicted that hyperinflation in the US was 100% certain in 2009

Mark Faber is a Swiss investor, publisher of the Gloom Boom & Doom Report, and director of Marc Faber Ltd (an investment advisor and fund manager).

But it is clear from this that Faber does not dispute that he uses the Austrian School of thought in economics analysis.

But there he is on the record predicting that hyperinflation was 100% certain, and he said the same thing here in this interview published on May 27, 2009.

Of course the absurd thing is that Faber gave no time period for his prediction in the video (was it supposed to be within 1 year? 2? 3? 6? 10? 50? 100?), and one need hardly point to how absurd it is for anyone to claim that he is predicting something, but then spectacularly fail to give a time period to limit the prediction and allow it to be tested.

Nevertheless, the context would suggest that Faber was thinking of a short to medium time frame, perhaps 10 years at the most. As of this day, his prediction has failed.

And we should note that in the same video, Peter Schiff made a conditional, probabilistic prediction of hyperinflation too.

(2) Peter Schiff in 2008
In this interview from April 21, 2008:
[sc. Interviewer]: What is your long-term, 20 year outlook on the health and durability of the American economy as a whole? Will the combination of new regulations, welfare liabilities and inflationary pressure create a prolonged recession similar to what Japan has undergone since the early ’90s?

Peter [Schiff]: I am not sure. The road ahead will be filled with many potholes and include some important forks. Since I do not for sure which ones we will follow, I prefer to invest abroad until our path is more certain. As it stands now, we are headed to a hyperinflationary depression. I hope we will choose a different path before we actually get there.”
Tim Swanson, “Interview with Peter Schiff,” Mises Economics Blog, April 21, 2008.
In the full interview, Schiff explicitly states that he supports Austrian economics (he says: “Austrian economics is economics, period!”). Although Schiff’s time frame was in the context of a 20 year period, what is interesting here is that this was before the turn to QE in about December 2008: already around April 2008 Schiff was predicting hyperinflation in a probabilistic sense.

Still more interesting evidence is that Peter Schiff’s Euro Pacific Capital newsletter in its April 2009 issue contained an article by James Turk who predicted that hyperinflation in the US was “imminent.” Did Schiff agree with this article? If so, we have evidence that Schiff thought hyperinflation was highly probable in the short term, not just in a 20 year time frame.

And we have already noted that Peter Schiff made a conditional, probabilistic prediction of hyperinflation too in 2009 in the video above.

(3) Doug French in 2009
In this Mises Daily article:
“So instead of allowing the market to provide a healthy cleansing deflation, the Fed, the Treasury, and bank regulators are fighting valiantly to keep the fractional-reserve-bubble machine operating, with the ultimate result likely to be inflation and possibly hyperinflation.
Doug French, “Store ’em If You Got ’em,” Mises Daily, August 17, 2009.
Doug French is clearly an Austrian economist (he received a master’s degree under Murray N. Rothbard at the University of Nevada).

Even though his statement about hyperinflation is far less strident and only a possibility, one must question how he could have mentioned it as a serious possibility without at the same time thinking it was at least probable.

(4) Gary North in 2012
Gary North raises hyperinflation as one of two possibilities, presumably both of which he thought were probable:
“The Federal Reserve and its allies — virtually the entire intellectual class — use this fear to maintain its position as the quasi-public bureaucracy in charge of America’s money. It lured the nation into the lobster trap of debt — debt undergirded by Federal Reserve fiat money and congressional deficits — and the country cannot see a way to get out on a pain-free basis. There is no pain-free escape, as we will find over the next two decades: hyperinflation or the Great Deflationary Default or both.

The government’s debt and the monetary inflation cannot go on indefinitely. Either the dollar dies or else the debt is repudiated. Maybe both.”
Gary North, “How to End the Fed, and How Not To,” Mises Daily, September 10, 2012.
North is clearly a strong supporter of Austrian economics.

(5) Ron Paul in 2011
Details in this article here. In an interview from 2011, Paul predicts the collapse of the US dollar and hyperinflation, presumably in a probabilistic sense.

Nobody can doubt Paul’s credentials as a supporter and advocate of Austrian economics:
“Paul is a proponent of Austrian School economics; he has authored six books on the subject, and displays pictures of Austrian School economists Friedrich Hayek, Murray Rothbard, and Ludwig von Mises (as well as of Grover Cleveland) on his office wall.”
So from (1) to (5) above we have predictions of hyperinflation as a 100% certainty (Faber in no. 1), to hyperinflation (apparently) as a serious probability (no. 2, no. 4 and no. 5) to hyperinflation at least a serious possibility (3).

The idea that Austrians never predicted hyperinflation in any sense is outrageous, mendacious and contemptible rewriting of history.


  1. Schiff is still selling this line. This is from this week.

    1. Yes, but they're on the back-heel these days. Here's one to deconstruct if you feel up to it. I know that Graeber would appreciate it if you did.

    2. I can't see much of an argument there by Schlichter. One of his chief complaints appears to be that, well, the system is still a fractional reserve system, in the sense of operating on reserves that are a fraction of the total money value owed to depositors.

      Well, yes, but so what? I do not think Graeber denied that, did he?

      Also, he misunderstands (as I far I see) Graeber's views on the origins of money.

      The rest seems to be standard guff about how we need a gold standard and private money and balanced budgets, blah, blah, blah.

      I left a few comments there, but they've not appeared yet.

    3. Well, yes. And he might want to check out Canada as it is zero reserves.

      Anyway, feel free to engage. Graeber wanted me to look into it. But the Austrians make me cry. I don't have the patience.

  2. What I do not understand is why Austrian inspired economists do not jump the 'endogenous money' bandwageon: the amount of money (as well part of its essence) at least partly as a result of the interplay of individual households, banks and companies... Same thing for 'payables', which are debts which spring into existence as a legal way of paying for goods and services negotiated between individual companies/households and which clearly have quite a degree of 'moneyness'.

    Merijn KNibbe

    1. Austrians and monetarists recognize the importance of banks and individual depositors in the determination of the money supply.

      In "A Program for Monetary Stability" (pp. 65-71), Milton Friedman advocated a 100% legal reserve requirement to prevent individual depositors and banks from influencing the money supply. According to Friedman: "The currency-deposit ratio and the deposit-reserve ratio are always experiencing changes that tend to produce perturbations in the behavior of the stock of money" (p. 68).

      Like the Austrians, Friedman recognized that a 100% legal reserve requirement would prevent individual depositors and banks from causing large changes in the money supply.

      The deposit-reserve ratio is 1 in a 100% reserve system, so banks would not affect the money supply. Under a 100% reserve standard, changes in the currency-deposit ratio would not impact the money supply.

      The 100% legal reserve requirement advocated by Hume, Ricardo, Fisher, Mises, Knight, Mints, Simons, Friedman, and Rothbard solves the problem of how banks and depositors affect the money supply.

  3. Austrian economists want to make radical changes in the American monetary system. They know on some level that people would reject these changes if they thought about them calmly, so the Austrian economists have tried to impair their audience's judgment by frightening them first with their ignorant propaganda about the U.S. will experience hyperinflation, national bankruptcy and economic collapse by not doing what the Austrian economists want.

    I find it interesting how this seems to mirror the propaganda tactics of the people who promote the global warming apocalypse.

    1. The American monetary system has already been radically changed since 2008. Total bank reserves were $45.8 billion in August 2008. Total bank reserves were $2,650 billion in February 2014.

      Bank reserves increased by 94 billion between January and February 2014. This monthly increase in bank reserves is more than double total bank reserves in August 2008.

      These are facts, not ignorant propaganda. Do you really believe that this type of radical monetary expansion will have no negative consequences?[1][id]=TOTRESNS#

    2. You have the burden of proof for "negative consequences." Austrian economists have no credibility as forecasters of hyperinflation, though that hasn't stopped them because they depend on new generations of suckers who don't know about their previous nonsensical doomsaying.

    3. No, the advocate of a dangerous policy has the burden of proof.

      If I told you that jumping off the Golden Gate Bridge would be good for your health, who would have the burden of proof?

  4. Rothbard's most in-depth treatment of hyperinflation is in "The Mystery of Banking" (pp. 66-74). According to Rothbard, the typical inflation has 3 phases:

    Phase 1: Prices do not rise in proportion to the money supply because the demand for money also rises and thereby offsets some of the inflationary impact on prices.

    Phase 2: The public's deflationary expectations turn to inflationary ones. The demand for money stops increasing, so the price level begins increasing in proportion to the money supply.

    Phase 3: Prices rise faster than the money supply. If the central bank stops printing, then inflationary expectations are reversed and hyperinflation is avoided. If the central bank continues printing, the demand for money will eventually fall precipitously resulting in a hyperinflationary "crack-up boom".

    Every country in the world has a printing press. Here is an important question for Keynesians: if printing money creates wealth, then why is there any poverty in the world?

    1. "Here is an important question for Keynesians: if printing money creates wealth, then why is there any poverty in the world? "

      That is not the Keynesian position.

      You're just mouthing caricatures, Anonymous.

      If real wealth is goods and services, then of course production creates real wealth.

      But businesses need demand for the product to sell it and induce them to produce it. New money as new income can create new demand and induce new production and more wealth.

    2. "New money as new income can create new demand and induce new production and more wealth."

      I am not mouthing caricatures. You didn't answer the question.

      If new money as new income can create create new demand and induce new production and more wealth, then why is there any poverty in the world?

      If new money as new income can create create new demand and induce new production and more wealth, then why is counterfeiting illegal?

      A counterfeiter produces new money. The counterfeited money is new income. Why doesn't this new money create new demand and induce new production and more wealth?

    3. (1) you are mouthing caricatures, and

      (2) "If new money as new income can create create new demand and induce new production and more wealth, then why is there any poverty in the world? "

      That most of the world's population is in the developing world with low per capita GDP does not contradict the reality that in market societies -- especially the most developed ones -- demand drives production and employment . No Keynesian ever claimed that this reality would mean that all poverty would suddenly disappear or that there would be no poverty in the world.

      (3) As to counterfeiting, it is the legal prerogative of government to create and destroy high powered money for the good of the community so that its quantity can be controlled and so that the community has confidence in the ability of the government to manage it.

      And there is no contradiction in saying that new income and new demand drives production and saying that government alone should have the legal right to create high powered money (the highest form of money in the community and legal tender) and nobody else.

      Also, private sector agents like banks and businesses issuing debt instruments are able to create credit money in our society!

      Credit money creation by banks (= demand deposit money) is a fundamental activity of the banking system with both positive and negative effects. But banks and private sector agents are regulated in their money creation activities, so even here there is a public check on money creation. The story of Western economic history since the 1970s has been one of poor regulation induced by the rise of the revived neoclassical economic theories, however.

      (3) "Why doesn't this new money create new demand and induce new production and more wealth?"

      New money creation via credit by private sector banks does have that effect but we rightly regulate their activities to check deleterious effects. Ideally, we should have a stronger system of regulation, but this is another issue.

      And new money creation by the state in some circumstances can induce new production and employment too, but there is simply no contradiction between this and the view that government alone should have the legal right to create high powered money and nobody else.

    4. (1) "it is the legal prerogative of government to create and destroy high powered money for the good of the community so that its quantity can be controlled and so that the community has confidence in the ability of the government to manage it"

      If printing money creates wealth, then why does the quantity of money need to be controlled?

      (2) "Credit money creation by banks is a fundamental activity of the banking system with both positive and negative effects ... we rightly regulate their activities to check deleterious effects"

      You admit that money printing has negative and deleterious effects. What are these deleterious effects?

    5. (1) already explained.

      (2) unregulated FR banking systems can cause financial instability and bank runs. That is why they need central banks and regulation to promote stability.

      Secondly, unregulated or poorly regulated systems can also fuel asset bubbles.

    6. You've proven Hoppe correct:

    7. On the contrary, Hoppe's spouting straw man nonsense.

  5. "Here is an important question for Keynesians, if printing money creates wealth, then why is there any poverty in the world? "

    Well, Keynes himself already did give the answer:

    "The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigididly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the U.S. today your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money which is only a limiting factor, rather than the volume of expenditure, which is the operative factor".

    John Maynard Keynes

    ( letter to Roosevelt, 1933 )

    1. Thanks for the quote. I've never seen that quote and it's interesting.

      Unfortunately, that quote predates the General Theory. Therefore, that quote is not a satisfactory response to my question.

    2. Because your question is an idiotic one and no Keynesian ever claimed that Keynesian policies would result in the disappearance of poverty overnight or even a few short years.

      Your question is akin to saying that, if free trade policies were tried in the 19th century, then why wasn't the world's poverty abolished overnight or in a few years?

      If you can grasp how stupid that question is, you can grasp how stupid yours is.

    3. (1) "no Keynesian ever claimed that Keynesian policies would result in the disappearance of poverty"

      Keynes claimed Keynesian policies would result in the disappearance of poverty in one generation:

      "A properly run community ... ought to be able to bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation" (GT, p. 220)

      “it will still be possible for communal saving through the agency of the state to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce” (GT, p. 376).

      (2) "if free trade policies were tried in the 19th century, then why wasn't the world's poverty abolished overnight or in a few years?"

      Free traders never claimed that free trade can abolish scarcity. Free traders only argue that free trade will promote production. Even with free trade, scarce factors of production still must be combined to produce consumer goods. Even with free trade, the scarcity of the factors of production (capital) limits the production of consumer goods. Even with free trade, an increase in the factors of production is required for an increase in production.

      In contrast, Keynesians argue “there are no intrinsic reasons for the scarcity of capital” (GT, p. 376). Furthermore, Keynesians claim that money printing creates wealth, i.e. alleviates scarcity. Money is not a factor of production. By claiming that money printing increases production, Keynesians are arguing that an increase in production can be accomplished without an increase in the factors of production.

      If an increase in production can occur without an increase in the factors of production, why is there any poverty in the world?

    4. My last comment on this thread: here is what Keynes actually said about the problem of scarcity in "The Economic Possibilities for Our Grandchildren" (1930):

      "Now it is true that the needs of human beings may seem to be insatiable. But they fall into two classes –those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still are they. But this is not so true of the absolute needs-a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.

      Now for my conclusion, which you will find, I think, to become more and more startling to the imagination the longer you think about it.

      I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not-if we look into the future-the permanent problem of the human race.

      Why, you may ask, is this so startling? It is startling because-if, instead of looking into the future, we look into the past-we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race-not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most
      primitive forms."


      (1) Keynes recognised that our demand for non-basic fashionable articles of consumption is probably insatiable, but

      (2) demand for "necessities" given a limited population is not necessarily insatiable.

      Keynes speculated that technological progress and proper management of the economy could lead to the abolition of scarcity -- "scarcity" in the sense of insufficiency of supply relative to demand -- for necessities of life, but perhaps in 100 years or (alternatively) perhaps it would be in sight within a hundred years (but not attained).

      Keynes wrote this in 1930: in 2030, we can judge whethrr he was right.

      Furthermore, from the context, his remarks on this subject do not necessarily apply to the developing world at all, but to the advanced capitalist nations.

      And certainly since the advent of modern macroeconomic management of advanced economies, we have seen remarkable increases in real per capita output, production of basic necessities, and falls in poverty.

      Keynes' predictions were not far off the mark for the developed world, though we still face serious problems of distribution, inequality of income and slower growth because policy has sadly neglected Keynesian economics.

  6. Saying its possible hyperinflation will occur is different than saying it will happen.

    Saying all Austrians predicted hyperinflation is different than saying some Austrians predicted hyperinflation.

    Do you have any posts regarding what caused hyperinflation in the Weimar Republic and what the differences are to now?

  7. I agree with Austrian economics and I predict hyperinflation for Japan in the next couple years.

  8. Annnnddd... If you tell them Hayek favored Single Payer, the response will be "Hayek was not a Libertarian." D'oh!