Comments on: Will New Fed “Tools” Avert Hyperinflation? http://dailyreckoning.com/will-new-fed-tools-avert-hyperinflation/ Covering the economy, global markets and world politics. Sun, 22 Nov 2009 09:36:11 -0600 http://wordpress.org/?v=2.8.4 hourly 1 By: tony bonn http://dailyreckoning.com/will-new-fed-tools-avert-hyperinflation/#comment-6250 tony bonn Thu, 23 Apr 2009 03:24:30 +0000 http://dailyreckoning.com/?p=15124#comment-6250 finally some intelligent analysis of fed bloat but the economy is still not healthy enough to propagate those excess dollars in an expansionary way....i do think that ultimately the monetary inflation will lead to greater price inflation across all asset classes but in a contracting economy that mechanism is not obvious to me yet. as i have argued elsewhere, the monetary inflation will play out differently with different asset sectors - commodities, real estate, equities, debt, economic transactions et. al. at least in the short to intermediate term. however, i would take mr murphy to great task for analyzing only the growth in the size of the debt as a % of gdp and of gnp of which it is even larger. THIS IS NOT THE STORY! the story is the marginal productivity of debt and i argue that it is negative. thus with the avalanche of new debt, it will absolutely crush the economy - not because it is large but because of its marginal effects..... and of course mr murphy blithely ignores the capital misallocation problem entirely. even if mpd were positive the ruling junta has no basis for determining that its capital allocation decisions are good, optimal, or plain butt stupid just as indeed they are. just as marginal tax rates are critical to understanding tax policy, so marginal productivity of debt is critical in considering the contracting of new debt. in a debt based economy with debt based currency this cannot be ignored. finally some intelligent analysis of fed bloat but the economy is still not healthy enough to propagate those excess dollars in an expansionary way….i do think that ultimately the monetary inflation will lead to greater price inflation across all asset classes but in a contracting economy that mechanism is not obvious to me yet. as i have argued elsewhere, the monetary inflation will play out differently with different asset sectors – commodities, real estate, equities, debt, economic transactions et. al. at least in the short to intermediate term.

however, i would take mr murphy to great task for analyzing only the growth in the size of the debt as a % of gdp and of gnp of which it is even larger. THIS IS NOT THE STORY! the story is the marginal productivity of debt and i argue that it is negative. thus with the avalanche of new debt, it will absolutely crush the economy – not because it is large but because of its marginal effects…..

and of course mr murphy blithely ignores the capital misallocation problem entirely. even if mpd were positive the ruling junta has no basis for determining that its capital allocation decisions are good, optimal, or plain butt stupid just as indeed they are.

just as marginal tax rates are critical to understanding tax policy, so marginal productivity of debt is critical in considering the contracting of new debt. in a debt based economy with debt based currency this cannot be ignored.

]]>