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I've
been talking about various approaches that a government can take in the midst
of economic difficulties.
August 5, 2008: Tax Cuts are the Solution to
Everything
September 14, 2008: Depression Economics
We
also talked about the typical response of governments, which is a sort of
simultaneous application of both "austerity" and
"stimulus," two apparently contradictory impulses.
November 10, 2008: "Austerity"
November 3, 2008: "Stimulus"
Today's
economists seem to think they are being very daring and original with their
"austerity" and "stimulus" ideas. They are really just
doing the same as their grandfathers, and their grandfathers' grandfathers.
We concluded that "austerity" usually means tax hikes, and maybe
some spending cuts, which tend to be rather minor and focused on those things
-- the library, the food bank, and other small-scale aids to the
disadvantaged -- which are irrelevant to overall spending levels and often
appreciated most in a recession. "Stimulus," on the other hand,
usually means enormous spending on abject waste. The effect of all this is
that the tax hikes make the recession worse, and the effects of the
"stimulus" spending dissipate about 15 minutes after the money
stops flowing. The result is a worse economy, and more debt and deficits, and
thus more incentive to raise taxes more, and "stimulate" the
economy more with big spending projects, and try to goose the economy with
cheap money. To summarize:
"Austerity" = more taxes and "Stimulus" = more spending.
If
economics has a purpose besided providing entertaining commentary to
reasonably competent readers, it is to aid politicians and bureaucrats in
producing positive outcomes, or, at the very least, keep them from blowing
things up. This is a rather more difficult task, and I find that it helps to
reduce things to the point at which it could be taught by a purple dinosaur.
And ...
I
think I have it.
"Austerity"
= Less Spending
"Stimulus"
= Lower Taxes
By
less spending, I mean a lot less -- like 30% less. Cut the big stuff, like
the military and corporate subsidy, and on the state and municipal level,
excessive salaries and benefits. This will free up enough resources that you
can actually increase the food bank budget, which will need it, fund your
existing unemployment insurance and food stamp programs, and keep some public
clinics open, and still end up with a sizeable budget downsizing.
The
lower expenditures will help ease the political process towards lower taxes,
which is much more stimulating than spending programs. The improved economy,
brought about by the lower taxes (at the very least, improved compared to
what it would be with higher taxes), will help increase revenues, which will
allow still more tax cuts in the future.
Taxes
low
And less outflow
Is all you need to know
To be a he-ro
To the pee-po'
"Sounds
fine to me, as long as we can tax the rich people more and also spend more
money."
I've
suggested making the first $50,000 or so of income tax-free. Plus, you can
add the $1000 or so "payroll tax rebate." Why not. This has a sort
of Democrat flavor, and I do think it would help more than a plan to
"create four million jobs" through the intense application of
wishful thinking. The Republican-style tax cuts (capgains, dividends,
inheritance) were the focus the last time around, so maybe it is time to
balance things out a bit. In the 1950s and 1960s, you had to make more than
the median income to pay income taxes at all. This practice of income taxes
falling on incomes below today's $30,000 equivalent is really a result of the
"bracket creep" of the 1970s. U.S. tax brackets weren't indexed to
inflation (even the government's lying CPI) until around 1986 if I recall.
Plus, payroll taxes were a lot lower in those days.
Hey,
let's throw in a gold standard while we're at it. There is one example of a
country, with a floating currency, in dire economic condition, and disastrous
government finances, that applied this sort of a solution. They instituted a
gold standard, slashed taxes, and prohibited government debt issuance by law.
It was Japan in 1950.
The
interesting thing about this solution is that it doesn't cost a cent -- which
was good, because in those days, they didn't have a cent. A gold standard is
just a rule change. "Slashing taxes" seems like it costs money, but
actually that is just a rule change too. And, banning debt issuance is the
opposite of costing money. (You will notice that my bank recapitalization
plan, making use of debt-equity conversions, is a sort of rule change too,
that doesn't cost the government a cent.)
But
that couldn't work again, right? Of course not. That would be ... it would be
...
Too
easy.
Academic
economists really, really hate solutions that are easy. They prefer to make
things sound insurmountably difficult. I figure that helps make their track
record of constant failure a little less embarassing.
This
generation of leaders sure seems like it is going to go down messy. I suppose
I am really speaking here to the next generation, the Vladmir Putins of the
future, who inherit the scorched earth of their predecessors' failings. (In
1949, the earth in Tokyo really was scorched.) Once today's gallery of clowns
gets broomed, the next group may have the will to set things straight. Now
they know the way to go with their will.
* * *
The
Anglo countries (U.K., U.S., Australia, New Zealand, Canada) got through the
20th century without too much inflation, although the 1970s were pretty bad
for a while there. That is why the world financial system has an Anglo
flavor.
Actually
it has a Jewish flavor, as the financial system has had since they were
changing money in the temple lo these many years ago, but the Jews speak
English today. For a thousand years, roughly 400AD to 1400AD, Christians were
prohibited from lending at interest, but Jews had no such restrictions.
Muslims are still prohibited from lending at interest.
Most
everywhere else in the world, developed and developing, had a hyperinflation
at some point during the century. It's good to keep in mind what other
countries have experienced, and why I say so often that a sound currency is
the foundation of a sound economy and successful government.
This
list is not complete. The Wikipedia list has more, including Japan and
Germany, but even that does not include some examples I know of. What about
India, or Italy, or France?
Wikipedia:
examples of hyperinflation
(source:
Jesse's Crossroads Cafe)
Presented
here is a summary of the major instances of inflation post World War II.
Although
each country had its particular set of conditions and triggers for their
painful experience of monetary inflation, the most common thread seems to be
unpayable debts due to war or civil and societal dislocation.
Particularly
strong labor union movements or protectionist policies against offshoring and
imports do not appear to be common factors.
An
expanded list with additional countries including the pre WWII era can be
found at Wikipedia.
Although
not uncommon for a short term (less than one year) after unusual and intense
monetary expansion, normally referred to as deleveraging or disinflation, a
true deflation is a relatively rare phenomenon, especially in fiat currency
regimes, usually attributable to a protracted series of policy errors or
intentional actions to contract the money supply by a nation's monetary
authority. The most familiar instances of a significant deflation are the
Great Depression, particularly in the United States, and Japan during the
1990's.
Inflation
is the common condition of a fiat monetary system. Hyperinflation is a much
less common outcome normally associated with some outlier event in the
political sphere or a series of policy errors by a monetary authority.
Hyperinflation is more common when associated with an external monetary
standard, but this is not a prerequisite.
Angola:
Angola went through its worst inflation from 1991 to 1995. In early 1991, the
highest denomination was 50,000 kwanzas. By 1994, it was 500,000 kwanzas. In
the 1995 currency reform, 1 kwanza reajustado was exchanged for 1,000
kwanzas. The highest denomination in 1995 was 5,000,000 kwanzas reajustados.
In the 1999 currency reform, 1 new kwanza was exchanged for 1,000,000 kwanzas
reajustados. The overall impact of hyperinflation: 1 new kwanza = 1,000,000,000
pre 1991 kwanzas.
Argentina:
Argentina
went through steady inflation from 1975 to 1991. At the beginning of 1975,
the highest denomination was 1,000 pesos. In late 1976, the highest
denomination was 5,000 pesos. In early 1979, the highest denomination was
10,000 pesos. By the end of 1981, the highest denomination was 1,000,000
pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000
pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos
argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000
australes. The overall impact of hyperinflation: 1 (1992) peso =
100,000,000,000 pre-1983 pesos.
Belarus:
Belarus
went through steady inflation from 1994 to 2002. In 1993, the highest
denomination was 5,000 rublei. By 1999, it was 5,000,000 rublei. In the 2000
currency reform, the ruble was replaced by the new ruble at an exchange rate
of 1 new ruble = 1,000 old rublei. The highest denomination in 2008 was
100,000 rublei, equal to 100,000,000 pre-2000 rublei.
Bolivia:
Bolivia went through its worst inflation between 1984 and 1986. Before 1984,
the highest denomination was 1,000 pesos bolivianos. By 1985, the highest
denomination was 10 Million pesos bolivianos. In 1985, a Bolivian note for 1
million pesos was worth 55 cents in US dollars, one-thousandth of its
exchange value of $5,000 less than three years previously. In the 1987
currency reform, the Peso Boliviano was replaced by the Boliviano at a rate
of 1,000,000 : 1.
Bosnia-Herzegovina:
Bosnia-Hezegovina
went through its worst inflation in 1993. In 1992, the highest denomination
was 1,000 dinara. By 1993, the highest denomination was 100,000,000 dinara.
In the Republika Srpska, the highest denomination was 10,000 dinara in 1992
and 10,000,000,000 dinara in 1993. 50,000,000,000 dinara notes were also
printed in 1993 but never issued.
Brazil:
From
1986 to 1994, the base currency unit was shifted three times to adjust for
inflation in the final years of the Brazilian military dictatorship era. A
1967 cruzeiro was, in 1994, worth less than one trillionth of a US cent,
after adjusting for multiple devaluations and note changes. A new currency
called real was adopted in 1994, and hyperinflation was eventually brought
under control. The real was also the currency in use until 1942; 1 (current)
real is the equivalent of 2,750,000,000,000,000,000 of those old reals
Chile:
Beginning
in 1971, during the presidency of Salvador Allende, Chilean inflation began
to rise and reached peaks of 1,200% in 1973. As a result of the
hyperinflation, food became scarce and overpriced. A 1973 coup d'état
deposed Allende and installed a military government led by Augusto Pinochet.
Pinochet's free-market economic policy ended the inflation and except for an
economic depression in 1981 the economy has recovered. Overall impact of the
inflation: 1 current Chilean Peso = 1,000 Escudos.
China:
The
Republic of China went through the worst inflation 1948-49. In 1947, the
highest denomination was 50,000 yuan. By mid-1948, the highest denomination
was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold
yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than 1
year, the highest denomination was 10,000,000 gold yuan. In the final days of
the civil war, the Silver Yuan was briefly introduced at the rate of
500,000,000 Gold Yuan. Meanwhile the highest denomination issued by a
regional bank was 6,000,000,000 yuan (issued by XinJiang Provincial Bank in
1949). After the renminbi was instituted by the new communist government,
hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.
Georgia:
Georgia
went through its worst inflation in 1994. In 1993, the highest denomination
was 100,000 coupons [kuponi]. By 1994, the highest denomination was 1,000,000
coupons. In the 1995 currency reform, a new currency lari was introduced with
1 lari exchanged for 1,000,000 coupons.
Israel:
Inflation
accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979.
From 133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984,
threatening to become a four-digit figure within a year or two. In 1985
Israel froze all prices by law. That same year, inflation more than halved,
to 185%. Within a few months, the authorities began to lift the price freeze
on some items; in other cases it took almost a year. By 1986, inflation was
down to 19%.
Madagascar:
The
Malagasy franc had a turbulent time in 2004, losing nearly half its value and
sparking rampant inflation. On 1 January 2005 the Malagasy ariary replaced
the previous currency at a rate of one ariary for five Malagsy francs. In May
2005 there were riots over rising inflation, although falling prices have
since calmed the situation.
Nicaragua:
Nicaragua
went through the worst inflation from 1987 to 1990. From 1943 to April 1971,
one US dollar equalled 7 córdobas. From April 1971 to early 1978, one
US dollar was worth 10 córdobas. In early 1986, the highest
denomination was 10,000 córdobas. By 1987, it was 1,000,000
córdobas. In the 1988 currency reform, 1 new córdoba was
exchanged for 10,000 old córdobas. The highest denomination in 1990
was 100,000,000 new córdobas. In the 1991 currency reform, 1 new
córdoba was exchanged for 5,000,000 old córdobas. The overall
impact of hyperinflation: 1 (1991) córdoba = 50,000,000,000 pre-1988
córdobas.
Peru: Peru
went through its worst inflation from 1988 to 1990. In the 1985 currency
reform, 1 inti was exchanged for 1,000 soles. In 1986, the highest
denomination was 1,000 intis. But in September 1988, monthly inflation went
to 132%. In August 1990, monthly inflation was 397%. The highest denomination
was 10,000,000 intis by 1991. In the 1991 currency reform, 1 nuevo sol was
exchanged for 1,000,000 intis. The overall impact of hyperinflation: 1 nuevo
sol = 1,000,000,000 (old) soles.
Poland:
Poland went through its worst inflation between 1990 and 1993. The highest
denomination in 1989 was 200,000 zlotych. It was 1,000,000 zlotych in 1991
and 2,000,000 zlotych in 1992. In the 1994 currency reform, 1 new zloty was
exchanged for 10,000 old zlotych.
Romania:
Romania
is still working through steady inflation. The highest denomination in 1998
was 100,000 lei. By 2000 it was 500,000 lei. In early 2005 it was 1,000,000
lei. In July 2005 the leu was replaced by the new leu at 10,000 old lei = 1
new leu. Inflation in 2005 was 9%. In 2006 the highest denomination is 500
lei (= 5,000,000 old lei).
Russia:
In
1992, the first year of post-Soviet economic reform, inflation was 2,520%,
the major cause being the decontrol of most prices in January. In 1993 the
annual rate was 840%, and in 1994, 224%. The ruble devalued from about 40 r/$
in 1991 to about 30,000 r/$ in 1999.
Turkey:
Throughout
the 1990s Turkey dealt with severe inflation rates that finally crippled the
economy into a recession in 2001. The highest denomination in 1995 was
1,000,000 lira. By 2005 it was 50,000,000 lira. Recently Turkey has achieved
single digit inflation for the first time in decades, and in the 2005
currency reform, introduced the New Turkish Lira; 1 was exchanged for
1,000,000 old lira.
Ukraine:
Ukraine
went through its worst inflation between 1993 and 1995. In 1992, the
Ukrainian karbovanets was introduced, which was exchanged with the defunct
Soviet ruble at a rate of 1 UAK = 1 SUR. Before 1993, the highest
denomination was 1,000 karbovantsiv. By 1995, it was 1,000,000 karbovantsiv.
In 1996, during the transition to the Hryvnya and the subsequent phase out of
the karbovanets, the exchange rate was 100,000 UAK = 1 UAH. This translates
to a hyperinflation rate of approximately 1,400% per month. And to this day
Ukraine holds the world record for most inflation in one calendar year, which
was set in 1993.
Yugoslavia:
Yugoslavia
went through a period of hyperinflation and subsequent currency reforms from
1989 to 1994. The highest denomination in 1988 was 50,000 dinars. By 1989 it
was 2,000,000 dinars. In the 1990 currency reform, 1 new dinar was exchanged
for 10,000 old dinars. In the 1992 currency reform, 1 new dinar was exchanged
for 10 old dinars. The highest denomination in 1992 was 50,000 dinars. By
1993, it was 10,000,000,000 dinars. In the 1993 currency reform, 1 new dinar
was exchanged for 1,000,000 old dinars. But before the year was over, the
highest denomination was 500,000,000,000 dinars. In the 1994 currency reform,
1 new dinar was exchanged for 1,000,000,000 old dinars. In another currency
reform a month later, 1 novi dinar was exchanged for 13 million dinars (1
novi dinar = 1 German mark at the time of exchange). The overall impact of
hyperinflation: 1 novi dinar = 1027 pre 1990 dinars. Yugoslavia's rate of
inflation hit 5 * 1015 percent cumalative inflation over the time period 1
October 1993 and 24 January 1994.
Zaire (now
the Democratic Republic of the Congo): Zaire went through a period of
inflation between 1989 and 1996. In 1988, the highest denomination was 5,000
zaires. By 1992, it was 5,000,000 zaires. In the 1993 currency reform, 1
nouveau zaire was exchanged for 3,000,000 old zaires. The highest
denomination in 1996 was 1,000,000 nouveaux zaires. In 1997, Zaire was
renamed the Congo Democratic Republic and changed its currency to francs. 1
franc was exchanged for 100,000 nouveaux zaires. The overall impact of
hyperinflation: 1 franc = 3 * 1011 pre 1989 zaires.
Zimbabwe: At
Independence in 1980, the Zimbabwe dollar was worth about USD 1.25. Since
then, rampant inflation and the collapse of the economy have severely
devalued the currency, causing many organisations to favour using the US
dollar or South African rand instead.
* * *
Cold
Snap: It's brushing zero fahrenheit up here in the
Northeast. Our various alternative heating schemes are being put to the test.
In general, they're working out well, and our overall heating costs are
coming in around $100-$125 a month, compared to $500-$1000 for most people
around here. This is about $50 electric and $50 propane.
Using
propane in 20lb tanks has proven to be disadvantageous. It's great for quick
warmups, used with a 28,000btu heater. (When you're getting out of the
shower, you don't want to cower around some dinky electric heater.) However,
buying propane in small sizes is about twice the cost ($4/gal instead of
$2/gal) of bulk propane. The overall cost is in line with electric, so in the
end you might as well use that. Another option for many people would be an
unvented kerosene heater. This is very common in Japan. They have a large
kerosene ("heating oil") tank that is filled a few times a year,
and then go from that to smaller heaters such as this one:
Keroheat CV2230
My
wife grew up with this sort of thing. They used to cook stew on top. Kerosene
is cheaper than propane on a btu basis. However, it does have a
characteristic smell when used with an unvented heater.
The
kotatsu desk is working out, but I could use a bit more oomph for those cold
mornings. 250W doesn't cut it, but 500W is quite toasty. Either is radically
below the 5000 or so watts that would be necessary to heat this room using
the traditional methods. (I suppose someone is now going to tell me that I
should invest $30,000 in a ground-source heat pump so that it only takes 2500
watts. Har.)
For
you woodstove fans, I learned recently that a cord of wood has the heating
equivalent of about 175 gallons of kerosene.
October 19, 2008: Keeping Warm for (Almost) Free
When I
lived in Vermont, everyone had a woodstove, but around here people don't seem
to like them. For one thing, whenever I mention a woodstove, people
invariably think of some sort of outside "boiler" or wood-fired
central heating unit, maybe using pellets. Both of these systems are
grotesquely wasteful and cause air quality issues, so it is no surprise
perhaps that people don't like them. When I used a woodstove, we used about
three cords of wood for a three-bedroom house. Once, I was in a three-story,
six-bedroom house, with two humungous woodstoves side by side. They were
rather old and leaky, and tended to burn hot and fast. When it was cold and
we had them both going, it was like the engine room of the Titanic! I think
we burned six cords that year. Still, six cords for seven people is not so
horrible really. I'm hearing that some of these "boiler" type
systems go through 24 cords or more per year, which is pure insanity if you
ask me. Not to mention that just cleaning the ash would be a tiresome chore.
(For you city types, 24 cords of wood is a stack four feet high, sixteen feet
wide, and forty-eight feet long.)
It
appears that many of the classic pre-1914 houses around here actually had
central heat. This is quite intriguing to me, as I have wondered what the
history of central heat was. In those days, they burned wood or coal. Can you
imagine how much wood it would take to warm a 4000sf uninsulated wood
building? I guess they had servants feed it day and night. If you're looking
to the past to find some sort of earth-friendly lifestyle, you aren't going to
find it. People were into extreme consumption back then too. By 1900 the
whole Northeast had pretty much been denuded of trees. They have grown back
somewhat, in part because people switched to horribly wasteful oil-fired
central heat instead of horribly wasteful wood-fired central heat. That is
probably why people have so much difficulty thinking about these things
today.
You
wouldn't think woodstove technology could advance much, but it has. Today's woodstoves
are much more efficient and burn much cleaner than the ones I used almost
twenty years ago (which were probably ten years old at the time). Some of the
better ones have efficiency of 80% or greater! Maybe we would use two cords a
year now, instead of three.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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