"How the CPI measures price change of Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent)":
* https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
> The whole argument for printing money being OK is dumb. If it's OK to print money to pay for some things why are you not doing it more? Why not make everyone a millionaire?
Because while it may be "OK to print money to pay for some things" it may not be OK for others. Making "everyone a millionaire" may be one of those times when it is not-OK.
> Ultimately, printing money doesn't make anyone more productive or produce anything.
Money printing helps with liquidity, which helps the economy to keep running, which can (but is not guaranteed to) help with more "productive" aspects of the economy:
* https://en.wikipedia.org/wiki/Money_creation
You've managed to fit quite a few straw men in one post.
If the economy needed more liquidity you would see high or rising real interest rates and stationary or falling asset prices. Instead we see very low interest rates and sky-rocketing asset prices. Sure adding liquidity will continue to inflate assets prices for a while but as the other commenter said it does not actually produce anything real and actually leads to malinvestment or underinvestment. Thanks to excessive liquidity in the economy we have BS companies like Uber sticking around while real innovation is stagnating.
Eventually excess liquidity combined with high savings and low interest rates can even paradoxically lead deflation. See Japan for example. We may, also reach a point, where no matter how much liquidity we add we do not stimulate real economic growth.
Regardless the commenter is right, liquidity on its own produces nothing and low interest rates signal that it is not demanded.
Instead of worrying about inflation or deflation we should be worrying about what we can do to make the most people better off at time t+1. Traditionally that has been through economic growth. Liquidity does not promote economic growth if the economy is drowning in liquidity.
The fact that central banks can act quickly isn't a sign that what they're doing is wrong on the monetary side, but rather that the fiscal side of things needs to get its act together.
A better solution in my mind would have been to directly force the original wealth back into the system.
Unfortunately we've built an economy which requires progressively lower interest rates to sustain. Rebalancing will be expensive ( see the interest rate increase in the run-up to '08 )
the only market mechanism to force money back into the rest of the system is for interest rates to rise
EDIT: (so things naturally trend toward the overlevered state and a crunch)
I'd say many of them are literally hoarding it.
This presupposes banks actually loan it out — which doesn't always happen, for example if lending officers are gun-shy or underwriting policies get too tight because senior management is gun-shy.
I think it's highly unlikely that these overseas banks that the rich use are doing nothing but sitting on their money and this practice accounts for all the purported "hoarding".
https://research.stlouisfed.org/publications/economic-synops...
That's not my point.
My point is that loan growth slowing is not the rich hoarding all the money. They don't hoard. Hoarding is not only unprofitable, it costs money.
https://advisor.morganstanley.com/liberty-group/articles/ins...
You get money as compensation for goods or services you provide to other people. The money is a sort of "IOU note" from the rest of society.
If you never spend the money, you've chosen to never cash in the debt. You're essentially gifting that money to the world.
There are a lot of complex and dynamic systems at work in the economy, and it's easy to make good sounding arguments for and against anything. I find it helpful to think of the fundamentals.
Further, lower-income people often have debts, which is reduced (relatively) by inflation.
Ideally money wouldn't be just sitting around, and if proverbial piles of it are, perhaps we need to redistribute it more so that it's used more productively. This is why wealth (and not just income) taxes are being talked about more nowadays.
The people you're disagreeing with consider buying up real-estate and company stock to be "hoarding" wealth because those assets could otherwise be put to productive use by someone else. People could otherwise live in those houses and become home-owners. Or the companies in question could get re-structured into smaller more efficient organizations during bankruptcy. It's hard for me to see the value of a real-estate investor buying his millionth acre of land when in earlier times multiple families could live on that land and call it home.
In contrast, you're assuming that any money being loaned to anyone is put to "productive use." And the flip-side of that is that the loan will come due some day. So accumulated wealth is used to accumulate more wealth from people who don't have any to begin with. In other words, the hoard of money is being used to extract rent and to hoard even more money. It's hard for me to see the value of that kind of system. It seems to lead to a continual serfdom as most people become renters of everything in their life.
It is, indeed, true that inflation can "melt away" existing debts by devaluing both the principal and the interest payments. There is historical precedent of large, debt fueled investments being inflated away:
"Anyone with debt benefitted as debts were inflated away to nothing under hyperinflation. For example a Pomeranian landowner took out a loan to purchase a property in February 1922 and repaid it in the autumn from the sale of less than half the crop of a potato field."[1]
However, this only occurs with fixed rate loans. Lower income people (US mortgage debt notwithstanding) do not have the opportunity to borrow at fixed terms and it would be very difficult and expensive to incur large debts, for any purpose, at fixed rates.
The floating rates that lower income people would, undoubtedly, borrow at would not protect them from inflation.
[1] https://www.stewartinvestors.com/all/insights/stap/hyperinfl...
However, any kind of unsecured loan will have a floating rate. Certainly that includes all credit card debt and any kind of short term business financing like paypal offers.
Further, if you have a poor credit score it is likely that your car loan(s) will have a floating rate and that you will be aggressively steered into a floating rate mortgage (an "ARM"). This will be presented to you as a benefit in the form of lower monthly payments (for now).
The wealthy are systematically benefitting from low-interest loans being reduced in value by inflation -- in the form of corporate bonds and leveraged trading (shorts, forex, margin accounts).
Inflation is good for you!
Those things are systemic issues related to other aspects of the machinery, particularly the incentives or mechanism of wealth distribution outside of money markets.
What I think we need to be considering is the highly concentrated nature of monolithic corporate capital and power. Like, for example, Amazon. The immeasurable value of the exchanges that took place globally for goods through Amazon. And Amazon tends to invest that wealth, which would be a net decrease in "capital entropy", while Amazon nets increased value despite the fact that they don't hold the capital. They do briefly inject a small sum of capital over a wide range of industries, though, like building materials, construction labor, engineering, and etc... But ultimately that money loses velocity, it doesn't have the momentum it needs because everything is so expensive now, and as a product most people opt to leverage.
On that latter part, as a miser of sorts, it's actually far more effective, even in the case of depreciating assets, to leverage. I could've been "educated" by now if I wasn't exceedingly scrupulous in avoiding usury. I spent many years of my life accumulating the relatively meager wealth I did collect and it's only put me at a disadvantage due to the nature of federal grants weighing personal holdings, from which I'm only able to draw in tax refunds, and only a fraction of what the ultimate costs will be it also puts me in a morally precarious position as far as other modes of welfare. That is to say you're dually (and quite possibly triply, with inflation) punished for choosing the "responsible" path of self-funding. To ossify that point, 0% interest increased sticker prices, so now buying big ticket goods comes with interest embedded.
That said, consistent low levels of inflation have minimal impact on borrowing as the future cash paying for the loan is discounted. In effect it simply forces a minimum annual loan repayment rate.
Economics reminds me of Software Engineering a bit, where smart people on two sides can argue opposite cases and both sound reasonable!
Pet peeve: This is pretty valid for Macro Economics. Because it's an extremely difficult field.
Micro Economics is a solid hard science that has taught us many invaluable things!
Yes, maintaining and understanding large software systems is a process that's very hard to understand and control, despite basic Computer Science being very well understood.
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
A bunch of other folks (generally Keynesians, like Paul Krugman), said the above was non-sense.
The results of the 'experiment' came in: the Keynesians were right. See also "expansionary austerity".
In fact Krugman recently wrote an entire book on "zombie ideas": certain things that come up over and over again, often over several decades, but will not die; Arguing with Zombies:
* https://wwnorton.com/books/9781324005018
* https://www.theguardian.com/books/2020/may/03/arguing-with-z...
* https://www.theatlantic.com/magazine/archive/2020/01/review-...
There are correct answers. It's just that certain political classes find them 'inconvenient' (i.e., contradictory) to their ideologies.
There are of course complicated matters where things are open for debate. But some things have been settled.
In economics you’re right until suddenly you’re not. Same thing with people like Peter Schaffer who was constantly wrong until he wasn’t.
But all of this doesn’t make economics a science with undeniable rules as to how the system works.
Few thing HAVE to happen. That being said, much of human behavior is linear optimization, which is predictable if you know the rules (and they don't change).
Which is exactly what Keynesians were saying. The Monetarists said otherwise. Guess who was right?
> and in fact we’ve seen the prices of some things (real estate?) go up astronomically the past 13 years.
Those "things" which have risen in price does not count as inflation. It has never counted as inflation. There is a different word that should be used for that phenomenon:
* https://en.wikipedia.org/wiki/Economic_bubble
I do not understand why this is difficult to understand: inflation/CPI is the cost of goods and services that are used on a daily/weekly/monthly basis. Asset prices are not one of those things.
Please stop using "inflation" when it comes to asset prices, as it does not apply. It's like pointing to a Boeing 787 and saying "boat".
> In economics you’re right until suddenly you’re not.
In economics, at least "good" economics, there are models. These models describe reality: some models are better than others. We should follow the ones that make (more) accurate predictions.
Keynesian models (for example) had problems with stagflation in the early 1970s, but by 1978 most text books had explanation as to why the earlier models broke down, and why the phenomenon occurred in the first place:
* https://en.wikipedia.org/wiki/Stagflation#Neo-Keynesianism
Some folks' models said inflation would occur from money printing post-2008; others' models said it was not. One group was right, and the other was wrong.
Similarly: a bunch of folks are worried about inflation after the US Congress passed the $1.9T rescue plan, others are not. This is an(other) experiment in which some folks will be right, and others wrong.
Whose model best/better describes (economic) reality?
AFAICT, the Keynesians have been right more than any other school of though. I'm sure they may/will be wrong at some point, but hopefully something will be learned and models improved.
I’m sorry you’re homeless, but it technically doesn’t count as inflation!
Blaming inflation (or how inflation is calculated) for a societal problem is a distraction.
You can have a "correct" answer that's unknowable. Assuming you know everything, you can calculate everything. However, there is an amount of randomness in the system (and everything can't be known), so the 'right' answer is hard to know, will not always be correct, and is impacted by personal risk tolerances.
I’d argue asking the question “what rate would you rent your home at” is fundamentally flawed and prone to underestimation. The answer is and always will be “the market rate for a rental in my neighborhood”. This number is generally greater than the interest+maintenance a fresh buyer would pay.
https://blog.principal.com/2017/07/06/owner-equivalent-rent-...
There is value in being able to predict the cost of things, a wild swing in costs and monetary policy probably won't damage the system, but it will make assets difficult to value and our system needs to do that.
Done
This much is patently false, and probably even still false once you account for the accepted exaggeration in most appeals to the entirety of human history.
There was no unified monetary system for the vast majority of human history, never mind one based on gold and silver.
And for the smaller, more recent portion of human history it is again probably largely untrue. I'd point to Debt: The First 5000 Years by David Graeber [0]. I'm sure many people have many opinions on the work, particularly around these parts, but I believe it at least does a good job of refuting this particular statement.
I realize some of these graphs may be coincidences but it makes a compelling case for me in understanding our current wealth inequality. When you can create money backed by nothing, those closest to the printer will know best how to funnel it into their pockets.
Blaming it on magic paper vs gold money to the exclusion of everything else seems like a red herring.
This is also a red herring. The New Deal did little to actually fix structural wealth problems. And "neoliberal" politics actually included a lot of progressive politics like negative income tax, drug legalization, prison abolition, etc.
A better reading of history would be that the post-war boom in the US mostly amounted to a lucky windfall and the US has wasted a lot of policies trying to recreate an economic boom using cultural levers.
Neither set of ideologies explains everything, but lots of little decisions over a few decades can add up.
(Also, I realize we're being fast and loose with labels here, but after 20 years of Reagan/Bush/Clinton drug war, taking credit for legalization feels a little bold.)
Under what interpretation of the word "neoliberal" do any of these things fall under? Especially the last two; find me a single person claimed to be neoliberal who supports either.
I have a hard time seeing the discontinuity between the New Deal people you're referencing and the 1960s Great Society ones that pretty much iterated on the same themes of the scientific management of society through monolithic institutions with expansive powers.
It's pretty much relentless hubris with little to show and much to answer for.
Or perhaps the question boils down to whether "on net" is the right objective function.
There's a lot of "quality of life" there that gets missed when people zoom all the way out and talk about state involvement, GDP and freedom.
I guess you'd have to ignore what Deidre McCloskey describes as the Great Enrichment of liberal democracies:
"[...] a rise in real wages 1800 to the present by a factor of 10 or 30 or (allowing for improved quality of goods) 100, which is to say 900 or 2,900 or 9,900 percent" [1]
Meanwhile there's a certain propensity for incredible inhumanity, eugenics (in the case of the 1920s Progressive movement) and the outright abuse and "reeducation" of minority races in China.
[1]: http://www.deirdremccloskey.org/docs/pdf/IndiaPaperMcCloskey...
I'm willing to change my mind. What sort of an ace in its hole does china have to change this situation?
The one child policy is 40 years old, China has been 4-2-1 for like 20 years at least, and no collapse has happened. Now they're allowing 2 children.
What's the specific thing that will collapse and be bad? An oversized retiree generation dying just frees up pension cash.
When people retire there is a sudden shift from investment to liquidation. That's a driving factor for popping asset bubbles, and china is currently one huge asset bubble.
Like it or not (i personally dont), we are also living in a world where the central planners rely on consumption-driven economics, and there just isn't a chinese consumer market anymore due to demographics.
The working population has been steady-state at 1-child for 40 years followed by 2-child for the last few years.
I suppose there could be some demand loss due to fewer people demanding things, but.. there's a lot of room for additional demand in China. Plenty of people where running water is a last-20-years nice new thing.
It's clear that it isn't working, which is why a heretical sect of MMT economics wants to do demand side. It's a big change, the kind that takes a generation dying off to accomplish. Especially since it may not work. It's a genuine unknown, with the primary advantage that we don't already know what kind of regulatory capture it would cause. Which is enough for some, given how badly the current situation is fraying.
You cannot make an absolute statement that consumers vs businesses deserve more money, you have to look at the current market.
However, the central banks have opened the flood gates for supply side monetary stimulus. It's not unreasonable to think that the demand side has been neglected massively and that money should be put into the demand side instead.
That question is usually answered by the people willing to take out commercial loans. Without the market supplying that function, you’d have to try and figure this out yourself centrally.
The second issue is that you really are spraying money evenly across the whole economy, effectively starving productive ventures of capital while at the same time endowing moribund ventures with it instead.
So it’s not quite an equivalent scheme, it has different benefits and costs.
(yes I know the Fed is “independent” but it is the tail on a government dog—the two are separated only in name)
> How can you "understand" anything from a page which provides no analysis and presents numbers with no caveats?
Presumably because one is able to do one's own analysis and think for themselves. Everything starts out as raw numbers.
> How can I trust that these charts aren't cherry picked?
Can you ever?
If we're talking "generally": Yes, we can trust that charts aren't cherry picked by reading the analysis. A proper analysis would include argumentation for why this metric is critical and why this chart is interesting.
Think about it this way. You play a video game with micro transactions. You receive 1000 units of premium currency. Why is that currency valuable? It's valuable because you can exchange it for cash shop items. Imagine if the cash shop shuts down but the game keeps running. Your currency would be worthless because you lost the ability to exchange it.
I even once got into a discussion with someone on a science fiction forum who's belief in gold was so absolute that he thought it would inevitably be the foundation of all interstellar commerce, even with alien species because gold is so unique it's one thing everyone would inevitably agree on being a universal store of value.
Money is “backed” by the trust that someone else will be willing to accept it at a later date for goods and services.
If the unit of exchange was always physical gold coins then yes, there would be a finite amount of money. However the moment we turned to promissory notes, cheques, bank notes and financial instruments such as in fractional reserve banking the link to physical gold was a fiction. Such notes have been around a very, very long time although of course increasing in prominence over time.
It was a fiction even for precious metal coins as well because the moment a government started running low on the metal, or just wanted to inflate it's currency, it would just debase the coins.
Gold standard means that the value of an unit of currency is tied to a specific amount of gold. In addition it may mean that the amount of bank notes in circulation in such system matches the amount of gold in the vaults of central bank.
Neither of those means that the amount of money people have lent to the banks (i.e. money at their bank account) has any meaningful relationship to the amount of gold - at least without extremely strict regulation of financial companies, lending and saving.
(Of course, same applies to cryptocurrencies, the claim that current cryptocurrencies would somehow set a limit for money creation is just a massive misunderstanding of money and credit.)
A naive example:
Alice has a gold coin. she walks to a bank and makes a deposit. Now she has one gold coin in her bank account and bank is holding her coin.
Now Bob walks into the bank and says that he needs a loan of one gold coin to buy things. Bank happily lends the coin received from Alice to Bob.
Bob walks to Alice and buys things from Alice and gives the coin to Alice.
Now Alice has one gold coin and another gold coin at her bank account. Total amount of money she has is now two gold coins, even if only one gold coin exists in the whole universe!
And yes, that money at her bank account is as real money as money nowadays gets. And yes, the truth is even more weird, you do not even need to circulate the money as in the naive example, banks can and will just create money out of thin air to people's accounts. After all, the money at the account is literally, literally nothing more or less than a way for bank to say that it will pay you money some later date if you so wish. To make that promise, you do not need any money to exist anywhere. Even I can do that promise on any imaginable currency (what that promise is worth is another discussion). And as said, this has absolutely nothing to do with what "base money" the monetary system is built on. And of course, this is the reason why financial system is so heavily regulated.
If there is little confidence in that, people wouldn't store their gold there.
There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term.
With fiat currency backed by nothing, the reserve no longer needs to exist at all as long as you have control over the creation of new money.
I'm not saying the gold standard is the answer but it is different. That difference does not go away when we talk about lending.
The point is that both fiat and gold sit in a system of debt powered by trust. If you're theorizing a natural limit to the smallness of reserves, you might as well be theorizing a natural limit to the amount of money that can be printed.
edit: it's certainly physically easier to have no reserves than to print infinite paper.
[1] See your favourite mania, or even crisis of 2008 that can be argued to be because of failure of regulation to limit leverage of financial institutions.
This happens even if the monetary 'base' remains a fixed quantity, like bullion gold.
Look into the market value of the gold certificates that the fed has on its books. The fed hasn't marked their gold position to the market since the 70s. Very peculiar if you ask me. Also consider why each of the federal reserve banks trade these certificates amongst one another.
On top of that you can read the treasury's website and find that the policy states that the treasury gold plays an important role as collateral on the dollar https://www.treasury.gov/resource-center/faqs/Currency/Pages... "Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them."
This is why Islam, Judaism, and Christianity prohibit interest. That closes the door on exploits like this.
The intrinsic value argument hardly makes any sense because it's almost always lower than the actual value. Someone interested in intrinsic value would be buying copper, not gold.
Compare this to Bitcoin which can be replaced by any competitor.
Compare this to the US dollar which is required to pay taxes. You will still see a use case for the dollar in a hundred years.
When talking about money, the term intrinsic value means the market value of the commodity the money is made from, versus the face value of the money.
This is very real and has been exploited in the past, with people effectively melting down large quantities of money and selling it as a commodity.
But anyways, if one looks at why gold emerged as the preferred money for its time and place, “finiteness” aka non-zero marginal cost of production is certainly a relevant factor.
Ignoring that half those graphs are just arrows pointing to arbitrary knees in exponential functions, I couldn't find this one which, unlike most on that page, directly graphs an ongoing policy choice, minimum wage vs. productivity: https://i0.wp.com/chicagopolicyreview.org/wp-content/uploads...
https://economicsfromthetopdown.com/2020/01/17/debunking-the...
It is how we all got immeasurably richer since then, while constantly fearing that all jobs will be automated away soon.
Wealth tends to flow uphill. Even in Communism the politically connected realized that wealth in that system was political capital and learned to position themselves to accumulate it. There is a reason the USSR collapsed and gave way to one of the most aristocratic states in the world.
I don’t discount that site though. A lot more happened in or around the early 70s than just the collapse of Bretton Woods.
I also don’t dismiss your comment as untrue. A fair inflationary currency would almost literally drop money from helicopters, not issue it to banks and governments. Still I imagine over time people would learn how to chase the helicopters.
All systems will be gamed. No exceptions.
Isn't that what money really is about?
Debt and money go together. When you take on debt your creditor can decide to sell his credit to somebody else, de facto using your promise to repay your debt as a currency.
Isn't your promise...just a promise? Yet you can buy stuff with it?
Congress lost secret voting,
https://www.congressionalresearch.org/Jumbotrons.html
I'm more of the opinion that our problem is hyper targeted lobbyist money...
https://economicsfromthetopdown.com/2020/01/17/debunking-the...
Let’s be kind and “assume the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize.”
States have picked all kinds of units for accounting and tax purposes for literally millennia. Wheat, silver, wool, gold. They adjusted standard weights and measures all the time to manage their debts and the economy. Fiat is the historical norm, going back about five thousand years.
Separately, some governments have made coins out of various things for a little over two thousand years. And separately still, people have traded gold throughout history as a commodity.
But it's just not true that gold and silver were de-facto money somehow until 1971.
But let's suppose that what Murphy really wants is a "state-directed economy", and that he's concerned that opponents of that are making bad arguments about inflation to oppose it. In that case, why shouldn't he write an article explaining why he disagrees with the key premise of those arguments, namely that there's a real danger of problematically high inflation?
It seems like the principle you're appealing to ("why not just ... and dispense with the charade?") is that if you want X, you should always just argue for X rather than addressing bad arguments against X. I think that principle is very wrong. People are often persuaded by bad arguments, and if someone has been persuaded by a bad argument against X then they will likely not listen willingly when you present your arguments for X. (Because they already know X is bad.) But if you write something about the specific argument they've been convinced by, they might pay attention, and you might convince them.
Back when dimes were silver you could get a gallon of gas for about a dime. If you found a silver dime today and sold it for melt value you will get pretty close to being able to get a gallon of gas for that dime still!
In case this is an honest misunderstanding:
Pretty much every society in history used gold, silver, or some other rare natural resource. Of course there was never a global such system, but OP didn't mean to say that.
In fact it references the same book I mentioned earlier, which clearly talks about the lack of such systems in early societies. And of course, such societies dominate human history.
If you want to talk about more modern well-recorded history, again I turn to the book mentioned. And there the simplest summation I can come up with is "yes, but no."
Why is there so much misinformation about the CPI? Literally the biggest component of the US CPI (at 33%) is housing/shelter. See Table 1, column Relative Importance: https://www.bls.gov/news.release/archives/cpi_02102021.htm
At least get familiar with the definition before criticising anything.
In the UK:
“The CPI takes no account of housing costs”.
“the CPIH does include [housing costs but] it uses an approach called ‘rental equivalence’ – not the mortgage payments but how much rent the householder would pay for an equivalent property”.
“the RPI takes account of mortgage interest payments”.
From: https://www.thetimes.co.uk/money-mentor/article/rpi-versus-c...
https://wolfstreet.com/2021/03/11/house-price-inflation-in-c...
Ah yes the classic some’s good more’s better fallacy. Some salt is good on food, but keep adding more and it’s inedible. Just because there isn’t a discrete point where you can say it’s too much (that one grain made it too salty) doesn’t mean that there’s no such thing as too much.
There are many other such cases, for example drug titration springs to mind.
This is a variant of the "slippery slope" fallacy.
Money is being printed to maintain liquidity, at the cost of inflation, because a liquidity crisis is considered worse than inflation.
Indeed, if you're in the market for a new home, you are paying a huge premium due to asset price inflation. However, this alternative is preferable to the situation where a liquidity crisis causes massive waves of bankruptcies, leaving you without a job to finance a home in the first place.
Your (proto-Austrian?) view of economics has long been disproven empirically, as well as theoretically (monetarism and subsquent). Its only purpose now is to sell gold/silver to people who need an oversimplified economic theory that fits their world view.
When central banks engage in quantitative easing, they purchase financial assets (typically government bonds, corporate debt, stocks etc.) that can in principle be sold back to the market at a later date. When an initial central bank purchase is made, the amount of money in circulation increases, but that increase can be reversed if the asset is sold. If the asset is sold at purchase price, there is no net change in the money supply; if it is sold at a loss there is an increase proportional to the loss, and if it is sold at a profit there is a decrease proportional to the profit.
If money creation is instead used to, for instance, purchase consumable goods and services or pay wages (this is typically what happens when hyperinflation occurs), then the monetary expansion cannot be reversed in the same way — some other mechanism like tax rises would be needed.
The economic behaviour of the recipients of the newly created money is also significant. If consumers are the recipients then, all else being equal, the prices of the goods and services that consumers buy may be expected to rise. If banks and large corporate investors are the recipients of the money then, all else being equal, the prices of the things those organisations buy (principally investments like bonds and stocks) may rise.
My understanding is that the experience with quantitative easing has been that it has caused a kind of price inflation, but primarily the prices affected have been those of the assets purchased by institutional investors (i.e. stock markets have risen, and bond yields and interest rates in general have been suppressed).
Furthermore, even when consumers are the recipients, inflation is not necessarily to be expected when that money is replacing lost income. In that case, spending (and thus demand) remains the same. Inflation would not occur unless there was a simultaneous drop in supply.
People pointing at Venezuela or Zimbabwe as cautionary tales of money printing often ignore the decades of economic mismanagement that preceded the money printing.
Noblesse oblige.
What's the material difference, in your opinion, between the threat of the central bank selling back existing government bonds, and the government just creating new bonds of precisely the same type.
There is no money in circulation. All that has happened is that the type of savings has changed - from holding government bonds to holding bank deposits.
And that just means the term and interest rate has changed on the financial instrument.
The fundamental problem is the belief in interest rates and how they work is wrong in practice. People hold savings for a myriad of reasons.
In the former case (where the central bank sells back government bonds it has previously purchased from investors as part of a quantitative easing scheme), all else being equal, money is withdrawn from circulation and the total stock of government debt remains the same.
In the latter case (where the central bank does not sell any of the government bonds acquired from investors and the government issues new bonds of equal value instead), the total stock of government debt increases, and assuming the government spends the money raised from selling the new bonds as is usually the case, the amount of money in general circulation remains the same (though investors in government bonds have less of it, to the extent that they are not net recipients of the increased government spending).
This is assuming the simplest model; in practice of course, the details will differ consequentially depending on how these processes operate in different jurisdictions. For example, to the best of my knowledge the central banks I'm most familiar with are required to remit interest payments on government debt back to their national treasuries; and in the European Union, direct central bank monetisation of government debt is supposed to be illegal — things like this complicate the picture in reality.
I can see from your other comments that you are well-informed about these details, so I would defer to you there.
All this QE, aka money printing, can only be removed in a "nice" way if the additional liquidity is to a larger extend used to create additional value rather than consumption.
De facto, most of the liquidity is consumed without added value (Zombie companies, certain government expanses,...)
This can only work for a finite amount of time.
The economy of Japan is living proof that it can work for a very long time, with no clear end in sight. Nobody wants to be the one push the "reset" button.
I think this is sort of right, sort of wrong. It's not so much as liquidity in so much as preventing deflation. Though yes we are in a liquidity trap at the moment.
https://en.wikipedia.org/wiki/Liquidity_trap#Origin_and_defi...
The central banks especially several in Europe lost control of their monetary base. They have gone to negative interest rates + legally requiring pensions funds and similar to purchase these bonds. In other words the governments are robbing the retirees.
The government's goal right now is to prevent the recession from becoming a depression. In fact everything has aligned to make this recession turn into a depression. The only reason it doesnt appear to be a depression is because of expansionary monetary policy.
>Your (proto-Austrian?) view of economics has long been disproven empirically, as well as theoretically (monetarism and subsquent). Its only purpose now is to sell gold/silver to people who need an oversimplified economic theory that fits their world view.
Disproven empirically? Could you provide a link for me to read on this? I do understand that Austrian school is criticized and not generally used but I dont feel like it has been disproven.
Sure, there's a chance that whatever arises from the ashes is going to be more efficient than whatever preceded it. There's also a chance that whatever is there right now is about as good as whatever the new thing will inevitably converge to.
Either way, blowing it all up at once seems unwise.
Housings costs are included as part of the CPI. I'm not sure why you think otherwise.
https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
“If someone were to rent you home today, how much do you think it would rent for monthly[...]”
That’s a very poor proxy for housing cost.
First of all it’s a guess. A guess from whom? What do these oracles know about how much their home can rent for if they haven’t put it up?
Second, the homes available in the rental market are vastly inferior from (for example) my home. I cannot find a home remotely as nice as my home (bought in 2017 for 320k, currently valued for 400k - pretty average middle class home in my city) but I can’t rent mine for what I’d want to rent it for [1] - so the supply and demand price don’t overlap for my type of home in my city. Without overlap of price, the question, as it pertains to my home is meaningless.
On the other hand, there is an easy way to include housing price for owners. Add price of homes to the CPI. In fact, investments generally should be included, since they are goods whose price raise with the increase in monetary mass
[1] is the accelerated deterioration of my home, and the headache of being a landlord worth the $1400/month renting it to a family? No. Can I rent it for $1800 by splitting it into rooms, say, for students? $1800/month is not worth having destructive students live here.
Let’s say it has (my guess of my particular case) a 30% error. What happens to CPI if the weighted average of housing is off by 30%? Assuming housing is a third of CPI, that puts CPI up to 10%.
Look, I’m actually looking to buy a home out in the country and remote work from there. I’m actually living the problem of “should I sell my home or rent it out?” It’s not a survey question, that’s for sure!
That’s a very poor proxy for housing cost."
Agreed. Rental data is publicly available. Why bother asking only to get a worse answer?
As a matter of fact, home ownership has become a highly speculative play for the ordinary wage earner and this is largely due to asset price inflation as a result of low-interest rate policies (worldwide, not just the US).
It’s like asking what the position and momentum of particle is simultaneously. You can’t know the price of something you don’t intend to rent unless you rent it, but you’re not renting it because you have no intention of renting.
Even if you “pretend” to rent by putting out a fake add and then not signing the rental agreement, that doesn’t count. That only gives you the demand side of the price. Since you know that you don’t intend to actually rent your home, you will not give serious consideration the opportunity cost of renting out your home.
The point of the fake ad is to gauge what the current market clearing price is, which presumably already takes into account the current supply/demand. It's not any different than using the current stock price to judge what an entire company is worth (market cap), even though only a fraction of the shares are actually on the order book.
1. Clearing price assumes efficient markets. My house in my neighborhood is one of maybe three (probably much less judging by the rental units friends of similar means live in) like it that will be available throughout the year.
I don’t agree a fake add will get the clearing price in these conditions.
Even if I put up an ad to rent a room in a student house -one of tens of thousands in a typical college town- the hypothesis fails since students are extremely sensitive to distance to their main building, nearby amenities, availability of parking, etc.
2. Even in the stock market the clearing price is dubious; the market cap of a company is a useful bit of fantasy. By multiplying the clearing price by the outstanding shares there is an implicit and incredible assumption that all the shareholders value the shares equally - which is obviously not true, some share-holders believe the stock has more promise, others are sentimental (the founder’s family members).
And that ‘price*shares == company worth’ is not true is evident in mergers and acquisitions which can be very acrimonious events. If the clearing price times the outstanding shares were a fair measure of the market cap, why would rational investors care about a merger except for the costs associated w/ closing?
But bringing this all back to the OP. Housing cost for the majority of the middle class is not meaningfully included in the CPI, except with a flawed metric.
Yes, low liquidity in the rental market means that there's a spread in the estimates, but I don't see how it follows that "imputed rent is meaningless". The low liquidity can cause the estimate to be both above or below reality. Do you have evidence that the inflation numbers for the housing component of the CPI is totally detached from actual market prices?
>2. Even in the stock market the clearing price is dubious; the market cap of a company is a useful bit of fantasy. By multiplying the clearing price by the outstanding shares there is an implicit and incredible assumption that all the shareholders value the shares equally - which is obviously not true, some share-holders believe the stock has more promise, others are sentimental (the founder’s family members).
Again, this seems to be more of a complaint that the market cap figure isn't 100% accurate, rather than that the number is "meaningless" as claimed in your original comment. It seems like the entirety of your argument (for both imputed rent and market cap) is "well there are these factors that causes the number to be inaccurate, therefore the number is totally meaningless and should be ignored".
It's interesting to note, the stock price is a small part of a company's valuation. There are many different structures for stock issuance.
Every component of CPI is an estimate, that doesn't mean it's meaningless.
So by underrepresenting housing's weight by that much, combined with the fact that housing prices are growing much faster than everything else in the index, combined with the drastic disparity in housings effectively "felt" weight on inflation for people of different incomes, and you get this problem: things may seem fine to a banker on the Board of Governors of the Federal Reserve, while the bottom 20% rightly thinks our nation is going up in flames. There is a massive disconnect between what the metrics say and what people are actually experiencing, and nothing is happening about it because the metric still feels right to the wealthy people that control it.
That statement is easily refuted by running it backwards: say reducing the amount of money in circulation via a huge once-off tax would thus have no impact on productivity which of course is silly.
>> If it's OK to print money to pay for some things why are you not doing it more? Why not make everyone a millionaire?
if drinking water is good, isnt drowning even better?
Creation of money either by expansion of private debt or governments running a current account deficit have always had the effect of goosing GDP figures. The 'free money' the central bank is creating is merely nominally swapping out the value of private-debts for equivalent nominal government debts. The money-creation is the net difference between the two and not equivalent to a blanket cheque.
Operations are not correct based on if they are reversible, nor are economic truths.
Proponents of the gold standard, at heart, simply does not trust the authorities to set fiat policies. Sometimes, that's a correct assessment (ala, Venezuela). But in the US, and other developed countries, the central banks are fairly transparent, and at least tries to keep to their mandates.
The truth is that these countries suffer from structural problems like food imports and petroleum exports that have dropped in value. If they were able to produce their necessities on their own they wouldn't be such problematic countries.
Which is why we don't have a gold/silver economy, but we do have a property and land economy which has taken its place.
These "investments" are based on a pile of almost-free fiat government IOUs. They have been converted into equally imaginary tangible value. You happen to be able to live in this store of value if you choose to, but at the high end hardly anyone does.
It's a form of imaginative arbitrage for high end abstract markets, just like gold/silver, cowrie shells, and big round rocks are. (And BTC, in its own way.)
Which is why at the high end economics is almost entirely faith-based. Fundamental use value is swamped almost instantly by an imaginary tradable value. And that is based entirely on faith in the stability and potential of the investment of your choice.
The consumer market is different because prices - including rentals - have some relationship to scarcity and use value. But there's still a large element which is faith-driven and subject to an irrational boom/bust cycle as faith and hope waver - partly driven by central bank and government signalling about future outcomes.
Can someone elaborate on why this is false? Archeologists have found precious metal coinage going back to the dawn of civilization.
like suppose one person has more grain than they need. everyone else is starving, but they have nothing to trade for grain. if the grain person agrees to let the other villagers have grain now in exchange for the promise of an ox next year, they have in a sense expanded the money supply. this type of arrangement can be implicit and difficult to track. maybe there was no explicit promise of an ox, but an unspoken understanding that a favor would be owed in the future. it still has the effect of expanding the money supply without digging rare metals out of the ground.
They are not the same, but speaking about them at a high level abstraction allows one to pretend that there was some continuous system in place that was abruptly overturned in recent times, for ostensibly nefarious reasons.
Indeed. If a government is dead set on printing money then it should give that money directly to people - many of whom will use it to pay down mortgages so the banks will get it anyway, but it will also do some good on the way.
Not sure if I personally subscribe to the above, but as long as we don’t experience collapse of currency/dollar and ensuing hyperinflation, we should be ok.
* https://fred.stlouisfed.org/series/M2V
See also:
* https://en.wikipedia.org/wiki/Money_supply#Link_with_inflati...
But you are right. Wealth inequality is the cost of this form of monetary policy.
Well, sure, if you give a bunch of people some money and they all decide to spend it on re-doing their homes at the same time then the prices charged by local tradesmen will probably go up, then correct themselves again when the peak demand passes. I'd argue that's not a bad thing in the sense that real work is being done, and the money is circulating in real goods and services - because if value is actually being created then there is something backing the new money.
Printing money by itself is not ok, it matters an awful lot what is done with it. Your argument is classic “if it’s ok to do this thing in specific circumstances to solve a particular problem, why not do it all the time for everything as much as possible”. Kind of weird argument, what can I say except, er, no.
You’re quite right the cost for producing goods is falling and stable prices just mean our money is falling in value, it just doesn’t seem that way because these effects cancel out. The article is making the exact same argument.
I think where were likely to agree is that if we’re going to rescue financial markets and corporations in hard times, why not also help ordinary people? If corporate welfare is ok, how come personal welfare isn’t? In some situations like an economic collapse or like Coronavirus deficit spending is essential, I don’t buy your skepticism of that, but I do think it needs to be more equitably deployed. By and large this is what actually happened this time around with wage support here in the UK and direct payments to households in the US. There are arguments to be had about the level and Lana e of this kind of spending, but I think they’re both needed to at least some degree.
The article is about the UK though and I’m a Brit and we do have a fairly well developed social welfare system compared to the US and many aspects of it such as the NHS are much less controversial than in the US. This comes from our experiences in the world wars when the entire country was expected to come together for a common cause. It became untenable after that to throw people out on the street with no support and just say “Thanks for the help, see you in 20 years for the next world war. Until then you’re on your own.” It was also about national security. Far too many people were unfit for national service due to malnutrition and disease. Ensuring a fit healthy population became essential to our military preparedness.
This
Enemies of America had zero resistance in co-opting both extremes on income scale of American society to turn against it.
How many will be ready to fight when the time comes, will they fight for a broke country whose elites put them into misery to begin with?
Inflation is a long con, eventually if you don’t keep increasing your profits you can’t sustain, that’s why I think a lot of disdain for capitalism is misguided, it’s the monetary system that has created this race to the bottom mentality where you have to keep squeezing to get more profitable just to stay in the game (or decreasing the size of the candy bar to keep the same price).
This is a great point.
The 3 main goals of the Fed[1] are:
1. Maximize employment
2. Stable prices
3. Moderate long-term interest rates
Maximizing employment and keeping prices stable are antithetical to the realities of automation and ephemeralization. If we want to use our automative technology correctly, we should be minimizing employmemt, and decreasing prices.
Suppose you have a society with a total economy of say 10^9 dollars, and you need to allocate 10% of the to the government for it to operate.
The conventional approach is various taxes. Income taxes, sales taxes, VAT, property taxes, the list goes on and on.
The question the book asked is why not just have the government print the money it needs?
Printing 10^8 dollars would not quite do it because of the inflation that would cause, but if it printed 1.11 x 10^8 dollars then the government would have enough to buy 10% of the inflated economy.
So why not replace taxes with printing money to fund the government?
It has a couple of clear advantages. First, no more need for everyone to file tax returns, employers to withhold tax payments, and all that jazz, and no need for the government to have a giant tax collecting apparatus or a giant tax code. Second, it makes tax evasion a lot harder.
There are some downsides too. First, it would take away a large part of the usefulness of taxation as a way to change behavior. Deductions, credits, progressive rate structure--all gone. Deductions and credits could be replaced with government subsidies, but if you aren't careful you will end up recreating much of the complexity and bureaucracy that the old tax system had.
Second, the inflation would be significant enough that it wouldn't take many years before even small things involve large numbers of dollars. This could probably be addressed by going to an almost all electronic money system so you could just periodically re-scale the whole thing.
Third, inflation from printing money doesn't affect all assets equally, so this would encourage people to try to hold more of the wealth in assets that are less affected. People lean toward that anyway to deal with normal inflation, but with the current system if there is too much off that the government can use tax incentives to nudge things in the other direction.
I remember this leading to some interesting discussion in class. Even if it is not practical, thinking about it is interesting. It can get you to really think about what money really is.
This makes it sound like you're treating 'size of the economy' (GDP) and 'size of the economy' (amount of money) as equal. But they're not. In the US, GDP is about $22T/year and amount of money is about $7T (so the average dollar is spent about 3 times a year). So if the government wanted to spend 10% of GDP, it would have to print $2.2T which would cause about 2.2/7 = 31% inflation. In fact the government spends 35% of GDP, so inflation would be around 100%. The value of the dollar would halve every year.
In other words, MMT is about understanding the mechanism behind inflation. If you know how inflation works then you have full control over it. You can raise and lower it at will and use this power to actually achieve policy goals.
For example, by injecting money exactly where it causes inflation you can directly cause inflation. It sounds obvious in retrospect and it explains why current central bank policies fail to create inflation.
The money never reaches the hands of people who actually spend it.
Once you reach your policy goals you can stop printing money. Meanwhile if you create money fruitlessly without achieving policy goals you end up creating more money than necessary.
The irony behind MMT is that by printing more money you end up printing less money.
If one slice of cake tastes nice why wouldn't you enjoy eating a million slices of cake?
This seems to be completely absent from the public debate.
And the answer is when you get bad outcomes. You have to assume the Fed knows what it is doing, but most people seem to think they know better.
If you gave everyone a million dollars would they all be able to buy a million dollar home?
No? Why do you think not?
Because the price of million dollar homes would go up because everyone would now be able to bid for them.
You can literally give everyone a million dollars, but you won't be giving them a million dollars of purchasing power relative to before you gave them the money.
Is the line $8 trillion? $25T? $50T?
There are other reasons that inflation is good too, having to do with sticky wages and recessions. I'm not sure how to work that into the cake analogy though.
The perceived value of each slice relies a lot in the psychology of the public.
It's the job of the central bank to make sure the slices are proportioned properly and the perceived value of each slice of cake is maintained.
We don't have good models for how the economy actually works. Until 2008 most models didn't even have a financial sector. Currently economic models can't accurately predict the velocity of money or even explain changes after the fact very well. We still have no consensus among economists as to what causes recessions.
So this is an experiment but the claims that it is "obviously" going to lead to inflation are flat wrong. We are going to learn a lot from this experiment. If we need to pull back to bring down inflation, we have tools for that.
It's bad because making everyone a millionaire by decree, or printing more units of currency is necessarily the same thing as devaluing the currency. Such that the population as a whole has exactly the same amount of buying power, and now each unit of currency is worth much less.
The inflation of the M0 money supply, base money, WILL lead to an increase in consumer prices for everything including essentials like food. The only reason people can try to convince themselves otherwise is because of the time lag between when the money is printed and when it shows up in consumer prices. So when the government quadruples the base money supply and the price of a loaf of bread doesn't quadruple in price, people start to think this inflation is no big deal. Well just wait. That loaf of bread will more than quadruple in price. And it will happen all of a sudden.
The majority of the printed money is going into assets like equities. These have increased massively in value, despite the fact that revenues have not increased that much, or have even decreased. This is a bubble and it will collapse. When that happens, then you will see all those printed dollars. Investors will rapidly divest themselves of their shares and will be putting those dollars into others assets that are seen as much safer investments like commodities including food.
By this point governments have no ability to reverse course, in fact they are committed to exacerbating the situation. Printing money is necessary to plug the deficit of government spending. You could turn off the money supply but it will mean devastating cuts to government spending. So they won't do it. Instead they will start implementing wide-scale, all pervasive capital controls in an effort stop people divesting themselves of the rapidly weakening dollar. This is an economic straight jacket and will shrink the economy further, massively stunting tax revenues, in turn reducing government spending, in turn shrinking the economy further.
Calls to 'tax the wealthy' will be eventually implemented, but there isn't anywhere near enough wealth there to tax to cover the effects of a money supply that has grown exponentially. Regardless new tax bills will be introduced. The very wealthy will have already moved their wealth into non taxable assets, domestic and overseas. (This is already happening). The law makers know this, yet regardless this taxation burden will fall squarely on the rapidly diminishing middle classes and ballooning lower classes. You can read the above again to see exactly how printing money is a highly effective tax in it's own right and it did not require any legislation to write.
At this point the world is caught in an economic death spiral and it won't recover until the currency has completely bottomed out and begins again with a new currency and confidence slowly returns. There is no telling how much long term economic damage will have been done by this point.
There is no magic or mystery here. This is not complicated. It is not new, unknown and to be determined. This will be a carbon copy repeat of exactly the same follies experienced by numerous economies in recent history. The only open question is, much like a coming earthquake, when? The answer unfortunately is very soon.
Now wealth income can easily be spent on large amounts of things that are typically seen as CPI items. At any moment the top 10 billionaires can choose to spend their wealth on an extravagant amount of labor, drastically rising labor incomes, but they choose not to as it lowers their long-term utility.
The fed's mandate is to create a system where they don't mix. It must always be the case for wealth assets like fancy homes and stocks to on average rise in value more than CPI items. If at any point the reverse is true, all of the wealthy will liquidate their stockpiles of stocks(crashing the stock market in the process) and instantly transfer their wealth into the thing that brings the best returns. If the best returns is GPU's, gamers won't get to game. If the best returns is on beans and rice, people will starve.
One of the best ways that the fed does this is by intentionally creating recessions whenever CPI inflation kicks up. Whenever oil money starts targeting water money, the fed kicks up interest rates above the 30 year[0], triggering a yield curve inversion, which triggers a recession. The recession forces employers to let employees go, which drives down the demand on CPI items, and that reduces inflation. At the same time, they put interest rates below what it was when it started, and the wealthy move their money back to oil.
(Note: I'm not an economist, just a programmer with an interest in economics and an eye for details. I'm mostly posting here for feedback, and I know I'm not exactly correct, but every post is one more chance for clarity.)
Per se, it is speculation (in higher prices) rather than investing (in future cash flow).
> If the best returns is on beans and rice, people will starve.
Farmland and equipment are assets, but they are valued based on cash flow from selling produce. Produce is perishable and can only be sold as food, so it will be sold at a market prices regardless of speculation in farmland.
> all of the wealthy will liquidate their stockpiles of stocks(crashing the stock market in the process)
Not "all of the wealthy". Relatively little is required at the margin to crash the stock market, and the majority of "wealth" would follow the market down. Only a tiny proportion would be able to exit at the right moment.
Asset depreciation is an adjustment of the relative value of labour vs. assets.
A possible delineation between "water" and "oil" is whether the thing can be legally used as collateral for loans and how the value is booked. But idk.
If Bitcoin goes to 1 million USD, will that drown out all other energy? Energy is a piece of the CPI, so that's something we need to watch.
Economies are very much complex systems, not a steady state systems. At times it behaves like a steady state, but at other times there are significant shifts that break the previous paradigm. You only have to consult any history book of the 20th century to prove this to yourself. I strongly suggest that this a Pascal type wager that you do want to take. You want to assume my argument is correct and hedge against massive inflation. Your livelihood, and possibly your life depends on it.
One way you might convince yourself is if you look at similar situations in economies that were not governed by the Fed. There are many: https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin...
I would argue that the Fed, IMF etc actually agree with my position and that is what is driving their desire for new Central Bank Digital Currencies (which IMO are a sham to profit of the public ignorance of actual cryptos and provide a smoke screen while a new global currency is rolled out that will be used to economically control everyone) however I strongly doubt that they will be able implement such a thing before the collapse begins (and it merely delays the inevitable anyway).
Therefore governments (where they can) will default to precious metals to back their currencies. The major winner will be China, as it has the world's largest actual gold reserves (despite the official figures). The US will then be using a gold dollar and China will dictate its price. China now effectively rules the world.
The run on the dollar will be an epic calamity. Epic.
You can already see American rich voting with their wallets. Some believe it is better red, than broke, and taxed to death.
https://www.afr.com/world/asia/forget-politics-foreign-inves...
Clearly wrong. Specifically consider the velocity of money. If it falls as the supply increases there will be no inflation. It is falling <https://fred.stlouisfed.org/graph/?g=AzYM> (from another comment). Why? Will it continue to fall or will it rise? You don't know and can't figure out.
Also, how much liquidity is required to maximize economic growth -- the "size of the cake"? In recessions (liquidity crunches) growth falls. Would it rise further if we increase liquidity beyond "the usual"? Would it rise enough to wash out the inflationary effect? You don't know and can't figure out.
Your positions and other similar ones depend on the situation being subject to simple reasoning but this is wrong. The interactions are complex and the obvious variables do not provide a clean way of decomposing the system.
However the well established hyperinflation trend is the money supply is increased as the velocity is falling until the point where confidence in the currency collapses. Then the velocity spikes and the value of the currency goes to zero.
So we know exactly where we are. We are currently in the deflationary period that precedes all hyperinflation. And we know it will be hyperinflationary because of the amount of money being printed and the lack of economic growth.
If the money supply had increased 5% in the past year then I wouldn't say we're about to have hyperinflation. But the M0 money supply increased from 3T to 5T in about a year. No system, no matter what it is can sustain that level of growth. All exponential growth is short lived.
This is not totally true.
The ability to print money enables redistribution without taxes.
Bank loans and credit would not be nearly what is is today without all of the various methods that the government allows to borrow debt on debt.
Those loans and credit help start companies and build houses.
Cryptocurrencies won’t change how things need to work to avoid economic collapse, because those that understand how things work won’t change.
cryptos won't be able to be loaned as easily, since it's hard to create more cryptos on demand. So if there's a surge in demand for loans, the price of loans (aka, interest rate) will surge. Under a fiat system, the state/central banking authorities can simply make more credit available to satisfy those loans, and thus keeping interest rate stable in the face of huge demand.
Tether has printed $2B in the past week. Loans will be freely available.
And I don't know who you think is getting "free money". The Fed creates it and then uses it to buy bonds. It then gives most of the excess earnings from those bonds to the US Treasury.
The big question regarding hysterical claims about printing money, etc is: it's been happening for over a decade in multiple large advanced economies, why hasn't there been a disaster? This time is different, right?
Would the GFC count? Technically it wasn't a system shattering event (more like system shuddering), but boom and bust cycles certainly do seem to be growing.
None of this was in any way dependent on or catalyzed by government money creation. The same dynamic cause the beginning of the great depression in 1929-30 due to excessive margin lending and then runs on banks. At that time the US was on the gold standard.
how would you know that the GFC wouldn't have been worse had the Feds not printed back then?
To add to this point, the amount of income the treasury gets from the Fed is tiny compared to the amount it gets from taxation.
Deflation is what happens when there is an oversupply of products. Primarily caused by increased productivity through technological progress. You have to print more money just to maintain stable prices. If you didn't do this then companies would cut down on production capacity and simply produce less goods. This would cause a downward spiral of production and since we all know that fiat currencies are backed by the existence of an economy that lets you exchange the fiat currency for goods and services the fact that the economy is shrinking is a bad thing for holders of the currency and it's bad for workers who are receiving incomes in the future. Since we cut down on production we also need less workers and thus your future income will be lower. Your best bet would be to obtain wealth as soon as possible and simply sit on it.
>Ultimately, printing money doesn't make anyone more productive or produce anything. All it does is redistribute wealth from those that were first to get the new free money away from those that were last to contact it.
It could be worse. Since you print money every year that means future people will receive the money first. If you cease to print money then the ones who received it first are people in the past which could be centuries ago.
Would you be willing to work for someone who inherited their wealth 200 years ago and did nothing with it except sit on it? By "sit" I mean scrooge mcduck vaults. No investments.
I look it as raising taxes on the rich is too hard, and too easy to roll back. Just give the people who need it most the money, devaluing rich people's money. It's just a more efficient form of wealth transfer, and inflation isn't an issue as long as the deficit growth doesn't exceed long term growth.
> At the moment we have new money being created by central banks and given to privileged institutions who get access to free money.
Also, did you forget about fractional reserve lending? Banks don't need the fed to create money, they do it on their own all the time.
Do the very rich, the top 1% * n, keep much of their wealth in liquid currency?
People deposit real money into the bank. It keeps a fraction and loans out the rest. That loaned money eventually gets used to pay debts and it gets once again deposited into the bank. It keeps a fraction and loans out the rest...
The exact same money gets loaned many times. The situation keeps looping and looping and with every iteration new money that doesn't actually exist is created by the bank. It will only start existing once real value is created or extracted from the planet, thereby making possible to repay the loan.
Inflation is like a tax. When government and banking institutions inflate the currency, they systematically and worst of all invisibly rob people of their purchasing power.
Housing definitely isn't excluded from CPI calculations. In fact housing is by far the biggest single component of the basket used to calculate inflation.[1]
Moreover, there's really no evidence that long-term housing inflation is running faster than the broader economy. In 2019 the average American consumer spent 25% of their income on housing and 15% on shelter.[2] (Aside, "shelter" just includes the cost of rent, mortgage, property taxes and maitenance. Whereas "housing" includes utilities, appliances, furniture, housekeeping, laundry, etc.) In 1990, the average household spent a virtually identical 27% of income on housing and 15% on shelter.[3] If housing was inflating much faster than the rest of the economy, we'd expect to see increasing shares of income dedicated to housing.
[1]https://www.bls.gov/cpi/tables/relative-importance/2020.htm [2]https://www.bls.gov/cex/2019/standard/multiyr.pdf [3]https://www.bls.gov/cex/1990/Standard/income.pdf
Actually, in 1933 the US ended the use of the gold standard, following the UK (well, British Empire) which abandoned it in 1931.
What came to an end in 1970 was the Bretton-Woods system where global currencies were pegged against the dollar. There was political control over the tax rate between 1946 and 1971, but the US was always able to unilaterally end the system. It did so to print money to fund the Vietnam war (sort of).
The peg against the dollar meant america could have $100 of stuff from the UK or France by printing it, whereas we needed to pony up actual goods and services. It wasn't ideal.
The system was also put under pressure by petrodollars. Western purchases of oil were a leak of the currency outside of the Bretton Woods countries. Since Bretton Woods was ultimately about governments being able to regulate their currencies, petrodollars weakened their grasp and created markets which threatened confidence in the system.
The 1980s are where the real issues began, because most countries moved to fractional reserve banking rather than full reserve. The risks this produced in the system caused the 2008 crisis and led to the epic price inflation in housing etc we have seen in the last forty years. QE is an admission of defeat of the system introduced in the 80s, a hope that eventually we can go back to that time. No interest group has been strong enough to properly challenge this system, so it has yet to die.
TL;DR it ain't about gold, it is about banks
Edit: removed errant hyphens in "Bretton Woods".
Also, the 2008 crisis was not due to or amplified by fractional reserve banking. The debt overhang was due to mortgage brokers and investment bankers (often without a retail bank license) selling securities -- effectively bonds secured by mortgages. As with any security, these had the explicit risk of becoming valueless, but this risk was hand-waved away by corrupt bond rating and other tricks.
In fact, I'm pretty sure that no bank customers lost any deposits due to the 2008 crisis. Fractional reserve regulation worked exactly as intended.
What I meant by the role of fractional reserve was related to capital ratios. I was incorrect to say full reserve was in effect until the 1980s, but the rate at which banks could create money was lower before then because their capital ratios were different. The rate of creation of money (usually for mortgage lending) increased from the lower capital requirements. This in turn increased the size of the market for mortgage backed securities (created to shift mortgages off the books of banks and to let them lend more) and led to 2008.
It is a sufficiently epic size of subject to not really play nicely with brief explanation, so I aimed to make a tactical simplification. Fair enough for pointing that out!
This is an issue I’ve always had with overseas production. It feels like this weird out-of-sight, out-of-mind ethical problem that usually comes from people opposed to bringing more manufacturing to the US (aka - “it’s not the jobs we want”).
And it doesn’t make sense.
One of these things is not like the others. Inflation benefits debtors at the expense of creditors. If I owe $500,000 on a fixed-rate mortgage, I'm thrilled to see inflation because it makes my debt cheaper to pay off.
No one is advocating for unlimited money printing. The fact that money printing is being used to inflate financial assets that benefits elites is a policy and political failure not a repudiation of monitary policy.
That's not in evidence. You are assuming their intentions without providing evidence to backup your claim.
It's a fact that the Fed has unlimited lending powers. Jerome Powell is the chair of the Federal Reserve. Explaining his powers doesn't show he intends to use them. Maybe you have the quote or you miswrote?
They are not excluded, why do people keep parroting this?
Inflation does not hit countries evenly as well.
Right now, US is exporting inflation in droves. I've seen it firsthand abroad.
On top of that, there is talk, political rhetoric perhaps but still talk, of moving manufacturing back in house.
The US wants to do it with chip manufacturing on nat security grounds. Trump and Bernie popularity was partially on anti NAFTA grounds. There's increasing hostility between China and US (witness the MS hack last week). Nothing stays the same, and we might be in for some surprises.
Overall, today's mixed economies have a lot more central control than the average person realises, and it's no wonder that Marx was such a fan of central banking.
This doesn't really work because when inflation goes up, so do interest rates. Inflation was rampant in the 70s, but so were the interest rates, so there isn't any free lunch here.
And economists keep repeating "It's nothing, it's not a problem". They're so disconnected from reality, they won't realize there is a problem until they have a noose around their necks.
When you create new money prices don't rise evenly. At the moment we have new money being created by central banks and given to privileged institutions who get access to free money. They use that to buy investments: real estate, stocks, etc. These are precisely the things getting really expensive. The last things to get more expensive during big cycles of inflation are employee wages.
The world used gold/silver for its currency for most of human history until 1970 when we entered this period of worldwide fiat currencies. Our current situation is pretty remarkable.
The whole argument for printing money being OK is dumb. If it's OK to print money to pay for some things why are you not doing it more? Why not make everyone a millionaire?
I think that another deception is that we should ordinarily be experiencing price deflation. Every day our society is getting more efficient at making things. If prices for goods are staying the same then it may not be that their value has not changed, they may be less valuable goods, but they cost the same because you're also buying them with less valuable currency.
If you have gone through years of moving everything to China to make it cheaper to manufacture, improved technology to make processes more efficient, etc. and I'm still paying the same amount for all of the stuff in my life, then again, maybe all these things are cheaper, but I'm also buying them with currency that's less valuable.
Ultimately, printing money doesn't make anyone more productive or produce anything. All it does is redistribute wealth from those that were first to get the new free money away from those that were last to contact it.