Inflation

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Are we looking at inflation the wrong way?
If ordinary inflation for countries like Pakistan, Hungary, Iceland and other similar nations, as well as African nations, is up over double digits and we infuse them with tons of debt through IMF programs and the like, wouldn’t they experience hyperinflationary problems first? Assuming the currencies of the above blow up and only gold is used as a medium, wouldn’t the effects be so deflationary to the countries that are not yet hyperinflationary that it would send us into a deflationary spiral?
Its things like this that didn’t exist 80 years ago (IMF, World Bank, G20), that will likely affect our fate. I can’t see how if say, 20 countries’ currencies blow up, that the demand will exist to make ours blow up as well.
 
I’m finding it difficult to follow your logic. I’m not saying that there’s no logic there, it’s just hard for me to untangle it into a process I can analyze.
Usually when the WB and the IMF lend money, it’s denominated in a different currency than the receiving country’s. This is supposed to make it easier for that money to be put to productive use because it generally won’t inflate while it’s waiting to be used and distributed, which is very helpful if there is some kind of phased program.
WB was created to fund reconstruction of Europe after WWII and then was repurposed to do long-term [fixed] capital investment in former colonies, where that money was assumed to be directed through local government agencies. The IMF was created to help with temporary imbalances, sort of like having a credit line to manage cash flow timing issues. The IFC exists primarily because it was recognized that private companies may have “development” goals/impacts and the WB, being designed to interact with governments, wasn’t suited to private financing.
All of these things have generally been good for the international economic system, because they are forums designed to address these kinds of problems, and they didn’t exist before. It may be that the current problem cannot be handled by them, which would definitely be bad.
Now there’s a question about what will happen if all currencies start inflating rapidly. That’s a bit hard to tell, but some things will happen: 1) barter will increase, which also lowers tax revenues and causes budget deficits and encourages printing, 2) gold will be used, 3) other currencies will be used. If all currencies are inflating, presumably the one that is inflating least quickly will be preferred. It is also possible that multiple-currency bonds may be introduced if it is perceived to be a problem, where the coupon and principal are paid either as a basket of currencies, or as an embedded option on which currency to pay in.
So those are some thoughts.
 
bchadwick Wrote:
——————————————————-
> Usually when the WB and the IMF lend money, it’s
> denominated in a different currency than the
> receiving country’s. This is supposed to make it
> easier for that money to be put to productive use
> because it generally won’t inflate while it’s
> waiting to be used and distributed, which is very
> helpful if there is some kind of phased program.
What currency would it often be denominated? USDs? Euros? Yen? Yuan? a mix of all?
Specifically with the recent bailouts: Iceland, Hungary, Pakistan, Latvia..
The idea I have comes from the fact that its is the western countries that prop up non-western countries and basically, all the money that the IMF gives comes directly from the world’s top 10 nations, with the US being a major portion.
2 scenarios:
1) If inflation at home were a true issue, I believe that these countries will stop supplying the IMF with additional funds and if the debt issued by the IMF to the receiver country is in USD or the like, the receiver country’s currency would explode as its debt is denominated in a productive currency but its domestic currency unwanted by the rest of the world. This would destroy any demand in international trade stemming from this country.
Conclusion - deflation in receiver countries leads to decreased demand for lender countries’ goods and causes deflation in lender countries.
2) If the western countries continue to supply the IMF with infinite funds, but the ‘failing’ receiver countries’ currencies are declining relative to these lender’s currencies, inflation should be rampant in the receivers’ countries first as you would be supplying the receiver country with demand and unless we automatically jump-start with them, they are just spending money they don’t have. If the receiver currencies explode b/c of this inflation, demand will halt and western countries will likely see depressed prices before inflation.
Conclusion - hyperinflation in receiver countries leads to decreased demand for lender countries’ goods and causes deflation in lender countries.
 
This is an argument that’s still a little hard to follow in paragraph format. I think what one needs is something like a 3x3 table where you have:
Lending currency (usually USD): Inflating | Stable | Deflating
Receiver country currency
Inflating
Stable
Deflating
And then produce a scenario for each box. Remember though, that the more “links” you have in the causal chain, the more likely it is that “other stuff” will mess up your analysis.
—
I think the crisis would still have to be pretty bad for G7 countries to stop supplying the WB and IMF with funds, particularly since a functioning financial system is in pretty much all countries’ interest.
 
“I think the crisis would still have to be pretty bad for G7 countries to stop supplying the WB and IMF with funds, particularly since a functioning financial system is in pretty much all countries’ interest.”
Assuming that lending is infinite and in USD:
If world then reaches positive growth, hyperinflation for receiver currency.
*hyperinflation for receiver currency before hyperinflation for USD*
If world doesn’t reach positive growth (quick enough), country goes bankrupt indefinitely as other countries cannot demand enough of receiver country’s goods.
And both scenarios are deflationary for the U.S. economy.
Is this correct?
 
Here’s my over simplified thought of the day. If a normal “good” amount of inflation is 3% and we have -6% deflation followed by +9% inflation (which averages to 3% over the cycle) what’s the fricken problem!? I know, I know, we need stability and predicability, blah, blah, blah but do I have a little point here?
 
XSellSide Wrote:
——————————————————-
> Here’s my over simplified thought of the day. If
> a normal “good” amount of inflation is 3% and we
> have -6% deflation followed by +9% inflation
> (which averages to 3% over the cycle) what’s the
> fricken problem!? I know, I know, we need
> stability and predicability, blah, blah, blah but
> do I have a little point here?
yes, that is generally fine if its kept at 9%. they say that if it gets over 20% its uncontrollable. and at that point, its destructive and creates more uncertainty in investment and prices than deflation.
 
MLA, there are a bunch of assumptions and skipped steps in your analysis that aren’t coming through here. I know this will make me sound too academic, but I think you need to restate your problem and reasoning more clearly before any of the rest of us can offer useful input.
 
bchadwick Wrote:
——————————————————-
> MLA, there are a bunch of assumptions and skipped
> steps in your analysis that aren’t coming through
> here. I know this will make me sound too
> academic, but I think you need to restate your
> problem and reasoning more clearly before any of
> the rest of us can offer useful input.
yeah. you’re right. its quite preliminary, i thought about it in bed last night so really haven’t had much time to think it over. I’ll have to think about it and come back to it. Thanks for the input thus far ;D
I guess stating what I’m trying to prove will help it along a bit..
Basically, i’m just trying to say that hyperinflation in the U.S. is impossible considering the fact that most growth comes from areas which are supported by U.S dollar denominated debt, but non-US dollar business activity. Meaning, we will destroy someone else’s currency before destroying our own and this destruction will lower demand for U.S. dollars and exports. We will always see price depression and never see hyperinflation.
 
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