Flipping the Line: We didn't get hyperinflation in 2008; we won't get it now
Flipping the Line: We didn't get hyperinflation in 2008; we won't get it now
We should be more worried about low economic growth than inflation
The Line welcomes angry rebuttals and responses to our work. The best will be featured in our ongoing series, Flipping the Line. Today, Matthew Alexandris replies to Meaghie Champion’s fears about inflation and money supply.
In Meaghie Champion’s recent article at The Line, “Caution: Inflation Ahead,” she warns that both Canada and the U.S. are at risk of hyperinflation due to governments running up extraordinary debts in response to COVID-19.
Champion argues that increases in each country's money supply, which are much higher than in previous years, can potentially overheat their economies in the coming months to the point that they may resemble the inflation crisis seen in Venezuela.
This type of inflation fearmongering was commonplace in the response to the 2008 Great Recession. It proved to be false. But as Champion rightfully points out, the deficits governments are running in the response to this crisis are much larger than the ones after the Great Recession.
However, the problem with Champion’s article is that her forecast relies on the same oversimplified and outdated economic theories that fell flat years ago.
For example, Champion argues that we should be concerned about the action taken by the central banks to purchase government bonds — a practice known as quantitative easing (QE) — because it adds new money into the economy. She goes as far as to call it “the recipe for hyperinflation.”
But the reason why the Bank of Canada and the Federal Reserve have embraced QE is to respond to the health and economic crisis created by COVID-19. The pandemic and repeated government lockdowns created an economic environment of high unemployment, falling GDP, and fear for investors. Under these dire economic conditions, Canada and the U.S.’s economy were facing economic contraction rather than growth; inflation rates fell below or near the bottom of our inflation rate target.
That’s why the Bank of Canada has embraced QE; it wanted to give the economy the boost it needs to help inflation remain stable and counter the risk of deflation.
There is little reason to believe that embracing QE will inevitably lead to spiralling inflation rates, let alone hyperinflation. Central banks in Japan, the U.S., Europe and Britain all struggled to get inflation back up to their two per cent targets despite an influx of billions into the economy over the past decade or so.
When a country is in recession, like what Canada and the U.S. are experiencing now, an economy’s output of goods and services declines, meaning that the actual output is less than what an economy could produce at full capacity. The difference between the actual output of the economy and its potential output is referred to as the output gap. COVID-19 caused supply and demand shocks that created a negative output gap. Under these conditions, we should expect that prices will begin to fall to reflect weak demand. Since 2007, the output gap in the U.S. has repeatedly been revised downward to reflect lagging economic growth.
Although Champion does not argue this specifically, it needs to be emphasized that just because central banks have printed massive amounts of money, it does not mean that they have begun to embrace Modern Monetary Theory (MMT).
Both Tiff Macklem and Jay Powell have criticized MMT. Macklem said last September that, “[w]hen you look at MMT, there’s really no evidence in history that it’s worked,” while Powell put it more harshly saying, “MMT is just flat-out wrong.”
While printing money to finance deficits will surely scare monetarists, it should not. QE is a monetary policy tool, albeit an unconventional one, used to keep prices stable in the face of an economic standstill. Keynesian economists have pushed governments to employ a large fiscal and monetary response to stabilize the economy after a period of crisis, like the one caused by COVID-19, for nearly a century.
The crux of Champion’s argument concerns the relationship between money supply and inflation. According to Champion, recent surges in money supply in Canada and the U.S. over the past year (as well as an influx of U.S. currency back to U.S. shores) could cause inflation to spiral.
Yes, Canada and the U.S. have taken on much more debt and printed much more money responding to COVID-19 than the Great Recession. However, that does not necessarily mean that these countries are on the verge of hyperinflation.
There were several reasons why that proved to be the case in 2008, and why it will not be the case now.
The Line is Canada’s last, best hope for irreverent commentary. We reject bullshit. We love lively writing. Please consider supporting us by subscribing. Follow us on Twitter @the_lineca. Fight with us on Facebook. Pitch us something: lineeditor@protonmail.com
This is reasonable article, and I'm glad that it was written.
But I think that having a debate whether or not hyperinflation will happen is missing the mark. There are critics who think that current policies may lead to higher than normal inflation (ie 1970's style), but I don't think anyone serious will argue that hyperinflation (ie Weimar Germany, Zimbabwe, Venezuala) is a threat.
And while we're debating what might happen with core inflation, it certainly looks like there is some specific instances of asset inflation being exacerbated by all this easy money (as noted in Daniel Tencer's April 21 piece). Ultimately I think this is the great concern for most readers of this newsletter.
The carbon tax alone has caused and will continue to cause inflation on every good we transport and it will be priced higher and higher to which the consumer alone will pay. The consumer may receive some money back from the Government for what they pay in fuel but its peanuts compared to the inflationary ability that the tax causes on everything we buy. So as the carbon tax continues to rise and the new clean fuel standard comes into effect it will be a double the tax on carbon and the consumer will be hit with it all. So to say that hyper inflation will not occur as they continue to print money we don't need, to stimulate an economy that we have had for a long time, is ludicrous. They will be printing and spending money to give away as subsidies to get green projects built to which will be of little benefit to Canadians or their pocket books, now or anytime in the future. As our debt continues to grow, so shall taxation and therefore inflation. Who would want to invest in Canada when we are uncompetitive and unfriendly in every way to business. Even our own banks invest their money anywhere but Canada. Its a losing proposition. So what happens when you hold massive debt and no investment? I don't care what new and funky monetary system anyone uses, it wont end well. If we don't get hyperinflation, its irrelevant, as we will see inflation to the point of making life unaffordable to live in this cold country. When you find you have more people unemployed than employed, and you have an economy that is as stale as 6 month old bread and no investment due to horrendous policies and regulation, then perhaps Canadians will catch on. Until then we must suffer the adolescent spending sprees of the government of Canada and pay for it out of our pockets.