Episode #13 – Recession, Hyperinflation, and Stagflation

It’s been a while, I know.  I’m still about 4 episodes behind, but I’m about to start publishing my posts on a fixed schedule to catch up, and so you know when to expect them.  Stay tuned for more info in the next post.


As per usual, this episode of Crash Course was a mixed bag of good, bad, and glossed-over economics.  I’m going to start with the most egregious mistake:

Military Spending

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Getting out of the depression took nearly a decade, and it wasn’t really monetary policy that put an end to it.  It was the massive government spending of World War II.

But Adriene!  Remember what you said in Episode 1?:

Military spending in the United States is over $600 billion per year.  That’s close to what the next top 10 countries spend combined…the opportunity cost of [each] aircraft carrier could be hospitals, schools, and roads.

I realize now that Crash Course believes any and all government spending is good for the economy, including things that do not benefit the public generally.  If you remember back to their discussion of opportunity cost in week one, every dollar spent (either by government or private persons) could be spent somewhere else (also either by government or private persons).  So why would Crash Course think that military spending can help get the government out of depressions?

In short: Keynesianism.  We talked about the show’s Keynesian Presuppositions before, but this makes it clear: Crash Course believes spending is what fuels the economy.  When people are not spending, governments need to step in and (tax and) spend for them!  If you recall, we critiqued this idea in episode 5, so I won’t go through it again, but in short: saving also fuels the economy.

Monetary Balance

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An increase in the money supply can have two effects.  It can increase output or increase prices or some combination of the two.  Inflation starts when output is pushed to capacity and can’t rise much further, but policymakers continue to increase the money supply.  In theory, once output is maximized, the more money you print, them more inflation you’ll get.

This theory, stated as fact here in Crash Course, is one of multiple ideas of how the money supply affects the economy.

First, the “output or price” dichotomy is generally not how most economists think of money printing.  All economic schools of thought believe that money printing will always increase prices, but some economists think that the boost to output is worth the pain of rising prices.  It’s not an either/or scenario; it’s an “is it worth it” scenario.  Sometimes the price inflation doesn’t occur immediately, but as the money circulates, prices will rise.

The Austrian School however, argues that money printing will distort the economy, flooding money into certain areas and creating bubbles, only to eventually crash and do even more harm than if the government had not interfered at all.

Hyperinflation

Crash Course rightly puts some of the blame for hyperinflation on central banks who print money to oblivion, but they also seem to blame consumers:

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After a couple of years of doubling prices, people started to expect high inflation, and that changed their behavior.  Say you’re planning to buy a new refrigerator, and you expect prices to rise quickly.  You buy it as soon as possible before the prices have a chance to change, but with everyone following that logic, dollars start to circulate faster and faster and faster.

Economists call the number of times a dollar is spent per year the velocity of money.  When people spend their money as quickly as they get it, that increases velocity, which pushes inflation up even faster.

Consumers do not create inflation (central banks do), but they can speed up or slow down how long it takes for the newly printed money to affect prices.  If the central bank printed a bunch of money but kept it out of circulation, prices would not rise, but when that money starts to circulate, then prices rise.  Once the new money is out there, it can take a long time or a short time for that to affect prices, but the eventual rise in prices is due to the initial money printing.

But Crash Course seems to think that consumers’ eagerness to spend is what pushes prices up, even if the printing has stopped.

Let’s imagine an economy without a