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Moore’s Law and hyperinflation

Summary:
In pre-modern times there was almost no hyperinflation, at least for extended periods of time. That’s because kingdoms mostly relied on some sort of commodity money. Thus you did not observe the sort of inflation we see under fiat money regimes. The following table shows long run money growth rates and inflation during various periods, but mostly 1950-90: In Brazil and Argentina, prices were doubling approximately every 15 months, for decades on end. In pre-modern times, the value of various goods tended to bounce around, rising one year and then falling the next. That’s actually still true for most goods, if you define “value” in relative terms. Thus even in countries with high inflation persisting for decades, the relative price of commodities like copper

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In pre-modern times there was almost no hyperinflation, at least for extended periods of time. That’s because kingdoms mostly relied on some sort of commodity money. Thus you did not observe the sort of inflation we see under fiat money regimes.

The following table shows long run money growth rates and inflation during various periods, but mostly 1950-90:

Moore’s Law and hyperinflation

In Brazil and Argentina, prices were doubling approximately every 15 months, for decades on end.

In pre-modern times, the value of various goods tended to bounce around, rising one year and then falling the next. That’s actually still true for most goods, if you define “value” in relative terms. Thus even in countries with high inflation persisting for decades, the relative price of commodities like copper or oranges doesn’t show any dramatic (long run) upward or downward trend.

But whereas this pattern was true for essentially all goods in pre-modern times, in modern times we see two examples of goods that experienced a very rapid decline in value, which persisted over many decades. These two goods are computer chips and fiat money.

For many decades, the price of computer chips has been falling in half every 18 months, on average. This tendency is called “Moore’s Law.” In some developing countries during the 20th century, the price of their currency has been falling in half every 18 months, on average, for many decades. By 1990, one unit of Brazilian or Argentine currency could be purchased at a far lower price than in 1950, almost regardless of what you used to buy the currency. The price of their currency fell in terms of apples, oranges, coal, iron, US dollars and Japanese yen.

Over time, computer chip makers found it possible to produce a billion chips at the same cost that they had previously produced a million chips. Fiat money countries found that they could produce a trillion or even a quadrillion pesos at the same cost as they formerly produced a million or billion pesos. That cost reduction was a necessary but not sufficient cause of hyperinflation. You also needed to actually produce the money. Unlike computer firms, not all central banks are profit maximizers. (Thank God!)

It’s possible to measure NGDP using any numeraire. Thus you sometime see people claim that China has the world’s second largest GDP. In yuan terms, China’s GDP is much larger than the US GDP in dollar terms. So when people say China has the second largest GDP, they are implicitly describing what China’s GDP would look like if priced in terms of US dollars (without a PPP adjustment). Similarly, you could describe China’s GDP if priced in terms of ounces of gold or silver or one pound bags of rice. Or computer chips.

If you described the US or China’s GDP in terms of computer chips, it would be rising astronomically, it would look like a country experiencing hyperinflation. But the US and China don’t have hyperinflation. Venezuela has hyperinflation. And that’s because hyperinflation occurs when a country’s price level is rising very rapidly in terms of the thing in which prices are actually denominated.

Imagine I drew 100 graphs; each showing the US GDP measured using a different numeraire. One graph showed GDP in dollar terms. Another in terms of gold. Another in terms of apples. Another in terms of toasters. And one graph showed US GDP in terms of computer chips.

Now suppose I asked you to explain why America’s GDP in terms of computer chips rocketed much higher, year after year, for decades. Would you make reference to the Phillips Curve? To an “overheating economy”? Obviously not. Indeed I’m attacking a straw man here.

When we look at actual inflation and NGDP growth in money terms, almost nobody uses the Phillips Curve to explain inflation in a country experiencing hyperinflation. During the famous German hyperinflation of 1920-23, the world’s most famous non-monetarist economists, people like Keynes and Wicksell, suddenly switched to describing inflation in entirely monetarist terms. And then when the hyperinflation ended, Keynes quickly went back to non-monetarist explanations of inflation.

It’s always been known assumed that hyperinflation is a special case, which can only be explain by looking at what’s going on with a country’s currency. Similarly, hyperinflation of prices when measured using computer chips as a numeraire can only be explained by referring to things like Moore’s law, not Phillips curves. Hyperinflation is nothing more than a currency losing value at a very high rate. The debate is over how to explain “normal” inflation, normal NGDP growth rates.

The following equation is always and everywhere precisely true, to the very last decimal point:

M*V = C + I + G + (X-M)

Understanding what this equation means and more importantly what it doesn’t mean is the key to understanding money/macro.

The equation reminds me of two large hoofed male animals with curved horns, bashing their heads into each other, over and over again. NGDP is determined by M*V!! No it’s determined by C + I + G!!

LOL. It’s an identity!


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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