Hyperventilation on Hyperinflation?
Posted: May 27, 2009 Filed under: Global Financial Crisis, U.S. Economy 2 CommentsI’ve taken a much needed break from economics and I’m ready to ease back into the research groove. I’m still focused on currency exchange and things related to the monetary policy so I thought I would bring up one of the current global concerns. Will the incredible amount of expansionary Monetary Policy combined with recent stimulus on the Fiscal side lead to a new era of inflation? This actually has been a point of contention for a few months in the econ and finance blogs, but I really haven’t followed it all that closely because the economy has been in such a free fall and I don’t believe we’ve hit a bottom yet. Under those circumstances, a little inflation actually has benefits for an economy. It can send signal to the production market that the demand for goods is higher than the supply which can gin up production and provide some upward momentum to a recovery. Inflation in this sense is just a mild signal to the economy that eventually sends it towards its Full Employment Equilibrium. Some economists are looking way beyond that and believe that the groundwork set in current policy will go on for way too long. This could result in inflation or even hyperinflation.
Hyperinflation is a different animal and is thought to be entirely the result of the overprinting of money by the central authorities. They physically print way too much money and the value of the money declines. There are many historical examples of this; most notably the Wiemar Republic (pre-NAZI Germany). The best 
current example is Zimbabwe.
There’s some pretty wild anecdotes about post World War 1 Germany. Families would have to meet their breadwinners at the factory at noon with wheelbarrows ready to catch the morning’s pay so they could rush and buy the daily dinner before prices could change and they couldn’t afford even a loaf of bread. There are also pictures of people (see the one on the left) burning money in stoves to keep warm in the winter since that was cheaper than using the money to buy fuel for the stove. Hyperinflation is inflation that reaches the triple digits annually. Zimbabwe had to stop calculating its inflation rate once it hit triple digits daily! These are both extremes, but there are examples in Latin America and other African nations that show how disrupted an economy can become when money is poured into an economy that is not producing anything to buy. I had a student from Argentina tell me that his parents tell the story of when they had to ensure they had established a price on dinner before they ate or the price would change during the meal. I’ve also heard similar stories from students from Uganda who returned there over breaks.
A Deadly Unwind
Posted: May 23, 2009 Filed under: Bailout Blues, Global Financial Crisis, Main Stream Media, U.S. Economy | Tags: automobile dealers, bailouts, Chrysler bankruptcy, liquidation Comments Off on A Deadly Unwind
My dad was a small town Ford dealer (Council Bluffs, IA). Dad was fortunate enough to have a very rich mentor that put him into the dealer development program when I wasn’t even walking and so we moved to what I still believe is the middle of no where and put down roots. I don’t know if you’ve got much experience in a small town, but the local car dealers are actually pretty big businesses for them. My dad headed up blood drives and the United Way. He belonged to the Chamber of Commerce. When Dad was younger he volunteered for everything. As he got older, he wrote a lot of checks. He helped my Mom establish a Victorian house museum that still is world-renown. He always bought tons of tickets to the college world series to hand out to every one who walked in the door. He sponsored little league teams and bought advertising in the local newspapers and TV stations. His 50-100 employees were with dad for as long as I can remember. Not only the mechanics and the office folks stayed with Dad, but also the car salesmen. They were my family too. When dad retired in the 1980s after surviving those horrible energy crisis years, I came to look back on how central the car business is to small town America. Actually, Dad also sold a lot of trucks because we lived in farm country.
I’m thinking more and more about this as well as having a lot of discussions with Dad on the unwinding of the great 
American car companies. In a way, it feels like the unwinding of small America cities and a way of living. Chrysler and GM are dumping dealers all over the country. Most of the surviving dealerships are not going to look like the way dealerships developed when cars and the car industry were the most American of all business. I’m sure it’s going to be much more efficient and I am certain that each of the US automakers over franchised, but still, there is something about a small town car dealership that is not going to be replaceable. In many towns, it is one of the biggest employers and also a huge source of charitable donations.
It is odd that the first two articles that grabbed me this morning as I drunk my coffee were two contrasting views on the wind down of Chrysler. The first one was all about the finance and the bankruptcy and is on Salon. It’s called “Who is Screwing with the bankruptcy laws”. The second was on the front page of the business section of the NY Times. It goes to directly to the heart of the dealer closings and is entitled “Chrysler Francisees Make Case Against Closure”. Both show exactly how ugly the Chrysler bankruptcy has become.
Social Security: Reform, Refund, or Opt Out? (Part 4)
Posted: May 19, 2009 Filed under: U.S. Economy | Tags: Social Security, Social Security Privatization, Social Security Reform Comments Off on Social Security: Reform, Refund, or Opt Out? (Part 4)
The aging burden is upon us and solutions are required quickly. People are living longer. There are three responses households face: consume less and save more when young, consume more and have lower monthly benefits when older, or work longer. They should make these decisions with a combination of their own savings and employer savings plans. They should plan retirement based on their preference to work and their health. They should also be able to rely on a minimal public pension plan so that no one fears dying a bag lady.
Government should respond when the public pension system is out of balance. There should be a mandated cycle of revision. The plan should be evaluated at least every five years and changes should be recommended by professionals to policymakers. Responses include: cutting benefits, raising taxes or contributions, subsidizing the program from general revenues or by issuing some form of debt, and generating a higher rate of return on the Trust Fund’s assets. There is still the question of generational risk-bearing and redistribution answered by the pre-funded or PAYG choice. Will the bigger burden lie with future generations or current generations? It appears we must deal with the PAYG choice made during the depression years one way or another.
Social Security: Reform, Refund or Opt-Out? (Part 3)
Posted: May 18, 2009 Filed under: U.S. Economy | Tags: Chile, Japan, Pension Plan Reform, SERPS, Social Security, Social Security Privatization, Thatcherism, UK pension Comments Off on Social Security: Reform, Refund or Opt-Out? (Part 3)Lessons from the World
One of the most interesting things about the large number of countries 
reforming their public pension programs is how dissimilar many are to the United States. A large number are in Latin America or are Asia countries that are not experiencing the demographic challenges faced by the United States. Instead, they reform their systems because the old systems have lost their store of value function. Privatization is required because the trust between recipients and their governments has broken down. Chile (1981), Columbia (1993), Peru (1993), Mexico (1997), Bolivia (1997), El Salvador (1998) and Kazakhstan (1998) have the least future demographic problems, are not developed countries, and have had the largest reforms.[1] The expected retirement benefits in these countries are now derived from the income produced by an asset portfolio in individual accounts.
The most moderate reforms have happened in countries with high per capita incomes and severe demographic problems. These countries include Switzerland (1985), the United Kingdom (1986), Denmark (1990), Australia (1992), Argentina (1994), China (1995), Uruguay (1996), Hungary (1998), Sweden (1998) and Poland (1999). These developed countries have adopted systems that blend defined contribution accounts with a defined benefit. Germany and Japan have serious demographic problems. They are also highly developed countries. They—like the United States—have passed minor reforms. These countries have less suspicion that their government will not provide secure retirement resources somehow. Traditional PAYG systems require a “social contract.” Trust between workers of different generations is higher developed countries than in developing countries. Trust between households and government is also higher.
Social Security: Reform, Refund or Opt-out? (Part 2)
Posted: May 18, 2009 Filed under: U.S. Economy | Tags: Pay as You Go, Privatization of Social Security, Public Pensions, Social Security Comments Off on Social Security: Reform, Refund or Opt-out? (Part 2)
Public Pension Concepts and Alternatives
Social Security reform combines three basic possibilities. It can raise contributions or it can cut benefits sometime in the present or future (pre-funding or pay-as-you-go (PAYG)). It can be private or public. It can be diversified or undiversified. The current system is public, has no diversification and is not pre-funded (PAYG). It features forced savings in that income cannot be spent before retirement. It pools social risk so that it can provide insurance against earnings loss, disability, inflation, and longevity. It redistributes income from high to low lifetime earners. The Social Security System is controlled and administered by the U.S. government and is a defined-benefit plan (DBP) .
“Pre-funding” is a plan to reduce the sum of the system’s implicit and explicit debt. As alluded to previously in the discussion of the vulgar error, the current system has inherited or legacy debt. This is something many politicians either willfully forget or ignorantly omit. Any analysis and reform must include provisions for the cost of inherited debt or it is a truly disingenuous and misleading discussion. Omitting taking care of this unfunded liability (which is estimated at around $10 trillion) is the vulgar error committed by the many politicians who compare returns from strictly switching to other assets. They do not mention deducting this debt from the alternate assets’ internal rates of returns (IRRs) to the IRRs of Social Security. The IRRs of the Social Security Trust fund for future generations account for the legacy debt.
The earliest cohorts received very high IRRs in real terms. An anecdotal and extreme example is that of my grandfather who worked for the Federal Reserve System which did not become part of the social security system until six months before his retirement in the mid 1960s. He actually deferred his retirement six months to buy into the social security system and qualify for benefits. He, and for awhile my grandmother, received nearly 15 years of monthly benefits for six months of his contributions. A truly amazing IRR and one for which his progeny will be paying for years to come.
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