Thursday, July 03, 2008

Natural Limit To Inflation

In one of his interviews recently, investment superstar Jim Rogers, said something which I thought was quite funny. When explaining why he thought everyone should aviod U.S. dollar-denominated assets, he said it was because Bernanke is a crazed inflationist and that "he's gonna print money until he runs out of trees".

Again, I thought that was quite funny and figuratively speaking that is largely true, although it is not likely true in a literal sense. Shortage of trees is unlikely to be an obstacle for Bernanke because first of all most money in America is deposit money rather than paper money, secondly because there are quite a lot of trees available in the world and thirdly because he could always add more zeroes on the notes in the unlikely event such a shortage would occur.

Now, it seems that Zimbabwe's hyperinflation (currently at least 165,000%, with some arguing that it could be as high as a million %) could possibly be contained by a shortage of physical paper. The German company which has so far supplied the Mugabe regime with the paper they need for the money they print, now says it will stop these shipments. So unless the Mugabe regime quickly finds some other supplier, shortage of paper could actually be what stops Zimbabwe's hyperinflation. While Bernanke won't be stopped by shortage of trees and paper, another even more extreme inflationist could be stopped by that.


Anonymous Anonymous said...

What do you think about the argument some people have that you actually increase inflation when you raise interest rates because ordinary people's loans become more expensive and thereby increases costs of living

5:03 PM  
Anonymous newson said...

echoes the swiss dinar episode after gulf war I.
i think tsarist bonds served as money long after the russian royal family was murdered in the bolshevik revolution.

4:40 AM  
Blogger stefankarlsson said...

Anonymous: that's why it makes sense for inflation targeting central banks to exclude such effects from any inflation target.

More generally though it doesn't make any sense because 1)The big problem is monetary inflation, not the symptom of price inflation. And higher interest rates will all else being equal lower monetary inflation as it lowers the rate of credit expansion. and 2) Although borrowers will face a higher price when they borrow, investors will be able to buy at a lower price.

7:56 AM  
Anonymous pinus said...

At the risk of being called a stickler, the most important reason why Bernanke can't run out of trees is that U.S. money is actually not printed on paper. It is a blend of linen and cotton, with some silk - thus it is rather a fabric (fabric money doesn't sound so nice, though). :-)

6:14 AM  

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