CNBCrazy

One of the first things that I noticed when I started working in the financial industry was that every trading floor has TVs on the walls and everyone has CNBC on - but no one admits to taking anything they say seriously.  It is like financial info-tainment.  Jim Cramer might be entertaining to watch but his stock picks don't actually do that well (see here and here and here) although you would expect that they might just on the basis of self-fulfilling prophecy.  Larry Kudlow still dishes out messianic supply side advice - he may be the only remaining believer in the Laffer Curve.  But like Cramer his economic predictions are not so accurate (see here here here).  And then there is Rick Santelli.  Santelli is a local institution in Chicago reporting from the floor of the CBOT on every bounce in the futures markets and dispensing his views on economic policy.  He is also (in)famous for launching the Tea Party movement with this 2009 rant .

Like Kudlow & Cramer, Santelli is entertaining but his economic policy advice is also suspect...Last week while walking past a wall mounted TV I heard this Santelli gem called Inflation Vacation Or Inflation Gestation.   His basic contention can be summarized by this passage

"...If you look at the Wiemar Republic in their hyperinflation  It was in the early 20s.  It didn't happen overnight.  I have used the analogy it's a lot like soybeans.  Ya plant em.  You wait. Conditions take some time.  You need some sun.  You need some water.  But ultimately things start to grow.  And are we in that phase or not?"

So from this passage I take away that Santelli believes that 

• there is a gestation period between initial monetary stimulus and latter (hyper)inflation
• this was what happened during the German Weimar hyperinflation of the 1920s
• the US could be facing a similar situation.  At least there is enough of a possibility to discuss it.

The first point stems from the traditional monetary theory of Hume / Mill / Fisher / Friedman & Schwartz.  If you push money into peoples hands it initially results in increased demand for final goods.  Increased demand for final goods increases the equilibrium quantity of final goods while slowly bidding up the price of final goods.  As the quantity of final goods increases so does the demand for input factors including labor.  Eventually the price of input factors are also bid up.  And you have inflation. 

The above is the general case but not always the case.  Sometimes for whatever reason people become afraid of the future and the demand for safe assets (such as currency) increases relative to the demand for final goods.  That means people value holding currency more and value buying goods less. If prices were fully flexible we would see the relative price of safe assets (including currency) increase and the relative price of goods fall (ie deflation).  However nominal prices of goods tend to be sticky and nominal wages tend to be very sticky.  If the relative prices of goods versus safe assets do not equilibrate then we end up with excess demand for safe assets (including money) and excess supply of goods (ie recession).  In this case increasing the money supply (somewhat) does not lead to inflation it just sets the relative values of currency and goods back to the levels where supply for goods is fully employed.  In this case we can see a build up of money supply which does not result in inflation.

How about Santelli's second point.  Did the Wiemar hyperinflation start with monetary stimulus which gestated over time before blooming into full fledged hyperinflation - as Santelli contends?  I would argue that it did not.  Rather the initial moderate monetary expansion led to moderate inflation.  The latter hyperinflation was due to a later geometric expansion of the money supply.

Data on Wiemar Germany is from Thomas Sargent The Ends of Four Big Inflations.  Below is plotted the

• monthly growth rate of notes in circulation (M)
• monthly growth rate of Marks Per Dollar
• monthly growth rate of Wholesale Price Index (WPI)

These figures are not annualized so when one of the series hits 100% it means that in that month the value of the series doubled.  For example in November 1922  Marks Per Dollar broke through 100% meaning the Mark lost just over half of its value in that month.

If Santelli is correct we expect to see high rates of money growth then a period of gestation and then a burst of inflation.  But that is not what the data shows.  Rather when the money supply was growing (relatively) slowly so was inflation.  And when we observe extreme inflation we observe it in parallel with extreme rates of money growth.  The other point to notice is how huge the rates of money growth in fact were.  By late 1922 the Wiemar Republic was doubling their money stock every two months.  By late 1923 they were increasing their money stock by a factor of five each month.  Just to be clear what that means 1, 5, 25, 125, 625....that is hyperinflation




To put the scale of note issuance into perspective.  The below chart shows for every 1 unit of currency in circulation as of January 30, 1921 how many units were in circulation as of other dates.

Date	Ratio
Jan-21	1.0
Jun-21	1.1
Dec-21	1.7
Jun-22	2.5
Dec-22	19.0
Jun-23	256.4
Dec-23	7,363,633,658.3
Jun-24	16,274,039,587.0
Dec-24	28,793,230,909.3

So as to Santelli's third point that the US may or may not be in for significant inflation as a result of high rates of monetary growth.  The first point to notice is that the scale of money issue is just entirely different.  Below is chart of growth rates of the Monetary Base (MB), M1, and M2 with the graph set to the same scale as the Wiemar graph.  It looks pretty similar doesn't it?



Now let's add prices CPI and 1/Dollar Index so we can observe the inflation rate



Just like the Wiemar Germany right?  Ok obviously its a ridiculous comparison.  But I was not the one who made the comparison - that was Rick Santelli.  I am just pointing out how bad a comparison it is.  Before we leave this topic - for completeness lets look at a pair of graphs in which each series is divided by its value as of December 2004 so we can see the aggregate amounts of growth over the past eight years. Today the Monetary Base (MB) is 3.5 times what it was in December 2004 as the Fed expanded its balance sheet.  However M1 and M2 have only grown by about 50% over 8 years and prices are only up by about 20% over 8 years.



 

So why do I care?  Because there is very little attempt at serious economic analysis on TV.  And the one place that does purport to run serious economic analysis all day long (CNBC) runs ridiculous economic analysis - yet it passes for serious economic analysis because it is just TV.  Hey they are just entertainers right?  Wrong. CNBC has enormous ability to influence the discussion relative to other platforms.  Put it this way; if all day you hear that cutting taxes for the wealthiest 1% will lead to an economic boom (Kudlow) and no one disputes it then eventually it might sound like a rational view.  Or if you keep hearing about how the US "could" face huge inflation (Santelli) then that idea becomes part of the policy discussion as well - even if it is ridiculous.  Don't believe me?  See here