Where is that hyperinflation, anyway?

I saw an article in a business magazine the other day about the inevitability of the coming inflation and how to prepare for it from a business perspective. There have been a lot of voices over the last few years predicting harmful levels of inflation, usually as a consequence of the Federal Reserve’s recent interventions in the economy. (Here are a couple classic examples from doom-pop site Zero Hedge.)

Bob Murphy was confident enough in the coming inflation to bet David Henderson $500 in 2009 that we would see 10% inflation by 2013. Through 2010 and 2011 gold and silver soared to records that many cited as evidence, but it never translated to the rest of the economy, and those metals are flat or down over the last twelve months. 10% inflation hasn’t come close to happening and it doesn’t look like it will.

(Of course, there are those like John “ShadowStats” Williams who claim that inflation really is much higher than the “official” levels, but that just doesn’t pass the smell test for me. From dollar menus to DVDs, most stuff has not doubled in the last 10 years, and in fact, a lot of it has gotten better and cheaper; the iPhone didn’t even exist until five years ago this Friday. Additionally, there’s a separate inflation measurement from MIT that closely tracks the official CPI and actually shows lower levels right now.)

Now I’ve only read a small percentage of the writings of both Bob and David, but they both seem to rest comfortably inside the libertarian-ish part of the political spectrum (unlike, say, the more predictable Paul Krugman). I don’t know why some libertarians aren’t worried about inflation (i.e. do they reject Austrian economic theories that some libertarians favor?), but there do seem to be a lot of libertarian-ish anti-government anti-Federal-Reserve folks that are very worried about it.

I respect Bob for publicly betting on his beliefs. A lot of the less open-minded doomsayer types will just keep moving the goalposts and claiming that severe inflation is still guaranteed to happen sometime, anytime. It will be “just around the corner” for years.

But even though their general arguments make sense to me, after enough time passes with no doom, I start to wonder. Does this mean the Austrians are wrong? Does this mean Bernanke is smarter than we thought? Does this mean the Federal Reserve is a really tricky institution that’s just making the coming hyperinflation even worse with its tricky delays?

I have no idea. Personally I think the global economy is too complicated for anyone to confidently predict much of anything. You can spend years studying X factors that lead you to believe that Y just has to happen, but there could be Z factors that you’re just not aware of, and by the time you think you figure those out, some A and B black swan events show up and throw everything out of whack again.

I started getting into economics via the credit crash and Ron Paul campaign of 2007-2008, and I became pretty convinced by the doomsayers I came across. But the economy started to get better (or at least stopped getting worse), and I also started to realize that doomsayers have been predicting doom for decades.

I recently found a book at Goodwill called “The Coming Economic Earthquake” that was published in 1991. (There’s also a 1994 edition, “revised and updated for the Clinton agenda.”) I’m still reading through it, but the gist of Larry Burkett’s premise is that too much debt made the Great Depression really bad, and too much debt is going to make another big crash really bad too. But of course, we never had $20 trillion in debt by the year 2000, and by a lot of metrics the Clinton years were actually pretty good.

This doesn’t mean that Burkett was fundamentally wrong about his economic beliefs. In fact the 2007-2008 crash arguably followed from his premise. Yet at the same time it mostly had to do with bad debts that were accrued long after his book was written – not the debts he was worried about twenty years ago.

Doom prediction is very hard. For example, it’s starting to seem like Europe is in perpetual crisis. Every couple of months Greece covers the headlines with its latest debt troubles, even as new countries keep hitting the headlines with new debt troubles. It seems like everything could blow up any day now, and yet we have an endless stream of vague reports about meetings and plans and agreements and more meetings.

Each new report sounds like the staggering zombie is still getting worse (such-and-such country is getting tired of propping up such-and-such country, such-and-such residents are getting tired of such-and-such measures), and yet it somehow keeps staggering on. It seems like it all just has to crash at some point. But doom prediction is just very hard.

If hyperinflation never comes to the US, the Paul Krugmans will continue to gloat about how much more right they are than those Austrian whackos. And if hyperinflation ever does come, the Austrian whackos will gloat about how much more right they are than the Paul Krugmans. But I think whoever’s right will just be more “lucky” than “right.” I don’t think anyone really understands what’s going on – though I certainly have my opinions about what sorts of policies will make such things more or less likely.

As such I’m less inclined to spend hours studying the details of economic theory and data that form Bob Murphy’s and David Henderson’s positions. I’m afraid that even if I think I figure it all out, I might just be wrong anyway (although if I catch either of them blogging about it, I will certainly try to follow along.)

I still think it’s very likely that the Euro will crash at some point and that the US will have a debt implosion at some point, but I have zero confidence about whether it will be tomorrow, ten years from now, or never. History shows us that bad things can come very, very quickly, but it also shows us that they can take a very, very long time to come, and that sometimes they never really come at all.

Now I suppose you can start with Pascal’s wager and apply some Bayesian reasoning to your game theory calculations to decide what that means for what kind of future you should prepare for. Just beware of anyone that thinks they have that future all figured out.