Hyperinflation Sparked by Lack of Faith Not QE: Cutting Research

Anyone concerned that central banks’ printing of money for quantitative easing may cause hyperinflation, have no fear. It takes more than that.

Hyperinflation isn’t simply a monetary phenomenon, James Montier, a strategist at Grantham, Mayo, Van Otterloo & Co. LLC, wrote in a paper this month. Sudden sharp reductions in supply that hurt potential output play a prominent role in periods of hyperinflation by creating excess demand, he said.

“To say that the printing of money by central banks to finance government deficits creates hyperinflations is far too simplistic,” Montier wrote. “History teaches us that a massive supply shock, often coupled with external debts denominated in a foreign currency, is required, and that social unrest and distributive conflict help to transmit the shock more broadly.”

Montier, a collector of bank notes from past hyperinflations, said those conditions probably mean that the U.S., the U.K. and Japan are safe from a bout of out-of-control inflation. On the other hand, a breakup of the euro could trigger an episode, London-based Montier said.

“If simply ‘printing money’ really did lead to hyperinflations, then we should expect to see hyperinflations all of the time,” he wrote. “Yet, rather than two-a-penny, hyperinflations are thankfully rare events, representing occasions when populations lose complete faith in their currencies.”

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The wealth effect may not be what it used to be.

So say economists Neal Soss and Henry Mo of Credit Suisse Group AG (CSGN) in New York. In a Feb. 13 research note entitled “Honey, I Shrunk the Wealth Effect,” they argue that the impact of rising stock and housing prices on consumption in the U.S. has diminished since last decade’s financial crisis.

Household net worth climbed to an almost five-year high in the third quarter of last year as equity and home prices increased, Federal Reserve data show. Under the wealth effect hypothesis, the higher asset prices should boost consumption as people become more comfortable with their finances, leading them to spend more and save less.

Soss and Mo found that changes in housing wealth have a bigger impact on consumption than do fluctuations in stock market wealth. That’s in line with the conclusions of other researchers, including Karl Case and Robert Shiller, developers of a series of house price indexes bearing their names.

Their more “novel” finding, according to the Credit Suisse economists, was that “wealth effects appear to have shrunk since the 2007-2008 financial crisis, and more so for housing wealth than for stock market wealth.”

They offered a number of potential explanations for the change. Homeowners may be more reluctant to count on higher real estate values after the housing bust showed that prices can go down as well as up. Many also remain “underwater” on their mortgages -- owing more on the loans that the house is worth -- even after the recent rebound in prices.

The results of their research have implications for the Fed and its efforts to pump up the economy, Soss and Mo wrote in their report. The central bank “will need to ‘engineer’” even larger bull markets in house prices and stock prices for any given desired pick-up in economic growth.

“The great financial crisis is proving to have a long tail,” they concluded.

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European Central Bank President Mario Draghi says he’ll do “whatever it takes” to save the euro. That doesn’t mean Germany necessarily should do the same, according to Goldman Sachs Group Inc. (GS)

The German government needs to assess at what point the costs of a breakup become smaller than the net present value of future payments needed to keep the monetary union together, Goldman economists Dirk Schumacher and Matthieu Droumaguet said in a Feb. 14 report.

“At some point, the economic costs of keeping the monetary union together could become so high that they would outweigh any possible political benefit,” wrote Frankfurt-based Schumacher and London-based Droumaguet. They didn’t recommend what course of action Germany should pursue.

In a breakup, the German economy would fall into a deep recession as its new currency appreciates once independent from the peripheral economies. Industrial production would decline more than 40 percent, the economists said in their report. In addition, the government and companies would face substantial writedowns as their euro-area assets held in weakening non- German currencies outside Germany lose value.

The economists estimate Germany’s current direct exposure via various financial support facilities that have been created over the past couple of years to be 730 billion euros ($964 billion).

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At the same time, Germany is finding that last decade’s structural overhaul of its economy is working.

An International Monetary Fund working paper found the 2005 implementation of labor law changes known as Hartz IV was successful in reducing the country’s long-run unemployment rate by 1.4 percentage points.

The changes achieved the main goal of shrinking non- cyclical unemployment by increasing the incentive to search for work, said Tom Krebs of the IMF and Martin Scheffel of the Swiss Federal institute of Technology Zurich.

“The story about the ‘sick man of Europe’ had turned into a story about the ‘German labor market miracle,’” the authors wrote.

The changes are named after then-Volkswagen AG personnel chief Peter Hartz, who led a government panel that recommended many of them. They reduced entitlement duration and benefit levels for most households, in what was a “radical overhaul of the German unemployment benefit system,” the authors said.

Long-term unemployed households were the biggest losers in the changes as cuts to their jobless benefits were quite large, while short-term unemployed recipients had smaller losses.

“The Hartz IV reform achieved its main goal, namely to reduce the structural unemployment rate by increasing the incentive of the unemployed to search for new jobs,” Krebs and Scheffel said.

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A woman’s bargaining power in a marriage and the assets she brings into her new life can influence the amount of nutrition consumed by her children, especially daughters, a World Bank working paper showed.

Using data from Bangladesh, one of the world’s poorest countries, the study showed a female child’s calorie adequacy ratio tends to climb with a wife’s assets. It declines when the husband’s holdings increase, said Aminur Rahman of the World Bank’s International Finance Corp.

“My findings imply that for any given level of economic development and household income, gender disparity could be potentially reduced through increased women’s bargaining power within the household achieved through various legal and policy changes that grant women more control over resources,” Rahman wrote.

The results of the study are also consistent with others that show more control of resources by women leads to an improvement in children’s health and education, and to their own well-being, he said.

“However, the change in a woman’s bargaining power may affect marriages and perhaps divorces,” Rahman said.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net, Rich Miller in Washington at rmiller28@bloomberg.net;

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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