Hyperinflation is not just more inflation. Additional conditions are needed to go from inflation to hyperinflation. From New Deal 2.0′ s Rob Parenteau
The Hyperinflation Hyperventalists
<!– Friday, 03/19/2010 – 10:57 am by Rob Parenteau | 2 Comments –>Rob Parenteau explains why the the hyperinflationist deficit hawks need to take a deep breath.
After a two day blogging slugfest on fiscal deficits, I find that the question of hyperinflation now demands an answer. And here it is: fiscal deficit spending may be a necessary condition of hyperinflation, but it is hardly a sufficient condition…..
Money is created by creating credit. Credit comes from nothing – banks make loans first. The loans create the deposits and reserves, not vice -versa. From Washington’s blog and cross posted by Yves Smith at Naked Capitalism:
German Central Bank Admits that Credit is Created Out of Thin Air
Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves.
But very few people – with the exception of those in the banking industry and financial experts – know where credit really comes from.
Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has admitted in writing that banks create credit out of thin air.
As the Bundesbank states in a publication entitled “Money and Monetary Policy” (pages 88-93; translation provided by Google translate, but German speaker and economic writer Festan von Geldern confirmed the basic translation):….
….more at: http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf (in German)….
Do you get it now?
Private banks don’t make loans because they have extra deposits lying around. The process is the exact opposite:
(1) Each private bank “creates” loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then
(2) If the bank doesn’t have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);
(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.
It’s not just Bernanke … the central banks and their owners – the private commercial banks – have been running the printing presses for hundreds of years.
Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won’t even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II’s capital requirements – but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).
The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.
It is – in fact – a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).At the very least, the system must be changed so that it is not – by definition – perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.
EconProph 
Dr Luke:
I am studying MMT on my own, and have come up against something I haven’t been able to figure out.
From my understanding of the billy blog and randall wray’s sites, among others, MMT theory says fiat money is created so people can pay taxes. Yet for many years I thought it was to enable trade, purchase “stuff”, etc. I have a hard time understanding how “money” would be worth anything without wheat, or oil, or labor, or something behind it. It is my understanding that it is created by the government, though I am not sure of the exact process, and that we are not dependent on “borrowing”. But I do not understand why anyone would want it without something along the lines of resources or labor to drive that.
Am I looking at two different things?
Thank you for your blog – I will read more.
Jim: you make a very good point. That is, I think some of the leading lights of MMT over-state the importance of tax as a necessary condition for the existence of money.
The fact is that prior to two hundred years ago or so in Europe, government income as a proportion of GDP was minute compared to nowadays. But there were perfectly viable forms of money in most European countries (and elsewhere in the World, no doubt).
Also the question as to what gives money its value is quite separate from the basic ideas behind MMT, which as I see it, are Abba Lerner’s ideas.
I written more about this here: http://chartal.blogspot.com/
Ralph: thanks for the link. I’ve just skimmed a little so far, but it looks very interesting.
I agree that some of the taxes-give-money-value folks are probably being a bit too strident. But, at least it’s generating some discussion beyond the hackneyed traditional gold-as-money-always-until-governments-debased-it traditional story.
You’re right about government incomes being tiny vs. GDP prior to 19th century. But we have to make sure we compare apples-to-apples. Most of our current “GDP” estimates of pre-20th century times are based on extrapolations from stats on actual physical production times a sampling of what we knew prices to be then. But that’s not the same as modern GDP. Modern GDP only counts market-sold production. Household production doesn’t count in modern GDP numbers. Yet the estimates of old era GDP’s are, in effect, estimates of the value of both market- and household- production. Given that one of the great transformations from then (more than 200 yrs ago) and now is the shift away from household production to market-sold production, we should be leary of using those GDP estimates and inferring that it tells us anything about the need for money at the time. Thought of this way, government incomes (taxes) were more significant if compared to what was probably the money-based transactions economy of those days.
There are several theories of money, state (Chartalism), utility (Mises), debt (Innes) commodity (Matalism), etc., and they are all correct in that they are factors affecting the value of money and its acceptance in trade. However, the question is causation, and in a fait system, the cause of the acceptance of state money is its absolute and non-negotiable need to satisfy nongovernment liabilities to the state.
It’s a hard concept to ‘get’ but in a way the budget surpluses reduce, or as Bill would say destroy, savings makes sense and is a matter of fact whereas budget deficit net spending increases money in the system and allows private sector to accumulate money, assets, savings and incomes/demand keeps growing.
What gives the money ‘value’ is that the monopoly supplier taxes it’s citizens in that currency and they continue to use it to buy and sell stuff/services.
Yes, it takes a bit at first to de-program from all the other nonsense we’re usually taught about money. What helped me to get a fix on it was the realization that all money, is in fact, promissory notes or tokens. It’s the taxes requirement that gives “teeth” to the government’s designation of it’s promissory notes (the non-interest earning ones called “dollars”) as legal tender. There’s other ways the government probably enhances this status – like giving itself a monopoly on it and prosecuting competitors (counterfeiters). I think this is an area that needs more thinking and research, hopefully actually based on good history.
Just a month a group of so called System Thinkers decided to open a discussion forum titled “Modern Monetary Theory – MMT World” at LinkedIn (http://bit.ly/MMTWorld). Our aim is to collect all people around the world (capable to read and write English) which want to verify, learn, teach, study MMT based ideas. Currently 58 members are available to debate any issue related to MMT and macroeconomics. To test my utterance please click on the hyperlink (http://bit.ly/MMTWorld). The choice is yours. No fees, no charges.
Kind regards
Cezary Wojcik
Reporting Co-owner of MMT World