Friday, January 28, 2011

QOTD: The hyperinflation story

Quote of the Day:
The hyperinflation story is, after all, satisfying both intellectually and morally. A weak, spendthrift government can’t limit its spending to match its revenues; it loses the confidence of investors, so it has to print money to make up the difference; and too much money chasing too few goods leads to ever-higher inflation.

Economics teachers love this story; hey, I love it. It’s clear, it’s simple, you can walk through it on the blackboard, and yes, it really does happen. It’s a great set-piece, both for the textbook and for intro macro classes.

But there’s always the temptation to apply the story too widely. Partly this is the drunk-and-the-streetlight effect: you look for dropped keys where the light is brightest, even though that’s not actually where you dropped them. Partly it’s ideology: the hyperinflation story is a comfortable one for people who want to make government always the problem, never the solution.

And the remarkable thing is how many people are determined to Weimarize recent events, even though the actual experience of the past three years has been an object lesson in the fact that sometimes that framework just doesn’t fit. In late 2008 there was, maybe, an excuse for looking at the big rise in the monetary base and thinking that inflation was coming — although not if you had actually looked at Japanese experience. At this point, however, it’s just bizarre to use that obviously failed framework rather than the well-developed theory of the liquidity trap, which has sailed through recent events with flying colors.

But it keeps happening anyway. A few months back, in a dialogue in Korea with Niall Ferguson, I suggested a macroeconomic version of Godwin’s Law: the first person to bring up the Weimar hyperinflation is considered to have lost the debate. He was, um, not happy. And despite all the evidence, a lot of people are obviously determined to keep on partying like it’s 1923. - Paul Krugman

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