This is the sort of stuff you have to read when you have a perma-search going on “quantitative easing”.

“Weimar inflation is on the way, warns top-ranked bond manager”

weimarcash

Now, let us see.   How much was Weimar Inflation? In just one month (October 1923), it was 29,000 per cent (see Wiki).  If one holds the Quantity Theory of Money to be approximately right in such circumstances, that involves the creation of about 290 times’ as money at the end of the month as in the beginning.

Paul Krugman has proposed some extensions of Godwin’s Law, recommending, for example, that to the outer darkness should be consigned anyone who  “Responds to calls for more government action in some area — employment creation, health care, whatever — by invoking the example of the Soviet Union”.    The Weimar Nutters should have their own coda to the law.

In fact, according to Adam Posen in his excellent speech on QE, the links between developing world money printing and inflation are quite low:

When looking at any of these G7 countries, the only periods where excessive monetary growth led to sustained rises in inflation were during the early and mid-1970s. As we all know, there was a lot more going wrong with macroeconomic policy in those times, and many more upwards pressures on prices then, than we have today . . . Turning more directly to parallels with the current situation, the pattern remains the same. We can identify two recent instances where central banks consciously created large amounts of
central bank reserves on a similar scale to that being pursued by the Bank under QE this past year.10 Most similarly, the Bank of Japan officially began what it termed Quantitative Easing in March 2001, buying huge numbers of Japanese government bonds and creating reserves in the banking system. As can be seen in Figure 8, the spike in narrow money growth did not result in an increase in broad money or credit growth, let alone an increase in the price level.

I am not trying to prove with academic rigor (which these charts admittedly do not attain) that money is endogenous or some other fundamental concept. What I am trying to do is make the practical point that there is no evidence from relevant periods of UK or other major economies’ economic history that QE will result in high or sustained inflation.

What really annoys me about the ‘Top Ranked Bond Manager’ is that he clearly doesn’t believe it either.  Even inflation of just 10% would be enough to make him hugely wealthy if he just went short of some nominal instruments (bonds) and went long of some other inflation hedge (gold, Lego, land).   Next time some fool tells you that QE works by making Weimar Inflation comparisons, ignore him: or offer to lend him cash at 5% pa, because he would surely, if he were rational, take the opportunity to be short of such a depreciating asset.

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5 thoughts on ““Top bond manager” leaves us mystified as to why he is called “top bond manager”

  1. Mmm……I posited the advisability of expanding the scope of Godwin’s law just last week to reflect new internet norms (http://thoughcowardsflinch.com/2009/11/07/apparenty-im-a-nazi/ ) only to find it picked up as a useful conceit by Alex Massie at the Spectator, who had commented on my post (and called me a Nazi), on the very same day.

    While there is no evidenced path then from Massie to Krugman, it is clear K has been stealing my work, just as he did with all that Asian bubble and depression economics stuff he’s always going on about, and which I’ve been banginig on about in the pub for ages, honest.

    I think there’s probably a new Godwin-like law in there to account for the sudden expansion of Godwin’s’ law.

  2. God, that Guido site is ***ing dreadful isn’t it? There seems to be an entire netherworld where being a halfwitted loudmouthed fool is a badge of honour.

    Krugman anticipated the Zimbabwe one in his original post.

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