Daily Archives: August 30, 2012

Flash Point: How to Spot Hyperinflation

We maintain that hyperinflation is not just a case of large-scale price inflation but essentially, a loss of confidence in the currency causing holders of currency units to immediately convert them into hard assets. This creates a positive feedback loop that exacerbates the runaway price problem (our use of the term ‘positive feedback’ is the correct usage and counter to how most pundits use the term. See Negative Feedback, theTragedy of the Commons, and Complex Systems).

The economic measure of this is called the “velocity of money” or the number of times it changes hands in the economy. If the velocity grows sharply then we should become concerned that we may be on the edge of hyperinflation. So where does the US stand? Consider the following graph:

Figure 1. Velocity of the M2 money stock. Click to open in a new window.

For the broadest measure of the money supply, M2’s velocity has been decreasing since the late 1990s and is currently at record lows for the period the available data covers. Velocity is a calculated rather than a measured quantity and is the ratio of nominal GDP to M2. The interpretation is that the money supply has been growing faster than GDP since the late 1990s. Or in the interpretation of velocity, the rate of circulation of available money in the economy has been slowing. Should this begin to show a large sharp increase (upturn in the graph) then we would want to look for signs that hyperinflation might be emerging.

The Dilemma of the Impatient Trader

In this essay, we want to argue a result of any market that individuals trade in. We recognize that such markets are dynamic or complex adaptive systems and as such we lack the tools to effectively determine quantitative results. We use a very simple case to derive our arguement from but we feel that contained within the simplicity is a kernel of truth. Our argument is that in any market, impatience costs money.

Flash Point: A Point No One Is Making

In 2005, Katrina, a category 5 hurricane devastated new Orleans. A primary cause of the damage was the fact that many of the levees protecting the city were breached. Seven years later, New Orleans is hit by Isaac which appears to be either a tropical storm (not a hurricane) or a category 1 hurricane at most. Yet we read: Hurricane Isaac: waters top levee near New Orleans.

The point we haven’t heard made is that after seven years of preparation, New Orleans still cannot take even a category 1 hurricane without levee problems. The questions this raises are when will it be able to withstand a hurricane of any size and will it ever be able to?

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