Wednesday, 27 May 2009

Measuring hyper-inflation Marc Faber style

What do we mean by hyper-inflation? Is it realistic to talk about different levels of hyper-inflation? Surely at some point it becomes an exercise in spurious precision to attempt to measure the precise degree of deterioration in what, in effect, is a cataclysmic breakdown in the faith of a currency. But apparently this is not the view of Doctor Doom (no, not Nouriel Roubini). In a recent interview with Bloomberg, Marc Faber made the half-witted statement that future US inflation could come "close to" that of Zimbabwe.

Apart from the obvious desire to get headlines with this remark, when one stops and thinks about the US dollar being vulnerable to a similar kind of trashing as the Zimbabwean dollar, it seems to be the ultimate in sophistry and equivocation to add the qualification that it will almost approach that of Mugabe's regime. If the US dollar is going to collapse, and let's hope it doesn't happen, there will be little purpose in econometricians trying to measure the extent of the collapse to two decimal places. A collapse in the global reserve currency would be a systemic collapse, and unlike recent bailouts for vulnerable banks, if the US Treasury and Federal Reserve start wobbling uncontrollably, it is hard to imagine who will come to its rescue

My contention is that hyper-inflation is not susceptible to classification or calibration in terms of precise orders of magnitude. Even academic economists can fall victim to this fallacy as illustrated in this quote from Steven Hanke Senior Fellow at the Cato Institute and Professor of Economics at Johns Hopkins University.
Zimbabwe is the first country in the 21st century to hyper-inflate. In February 2007, Zimbabwe’s inflation rate topped 50% per month, the minimum rate required to qualify as a hyperinflation (50% per month is equal to a 12,875% per year). Since then, inflation has soared.
The last sentence from the distinguished professor seems laughably redundant.

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