IndigoGolemWhy can't inflation be stopped by just printing less money?
southsamuraiNot all money is cash.
Seriously.
SteveIt can, but in a modern capitalist system, inflation has to be weighed up against economic output. It’s easy to bring inflation to zero, but that would also result in stagnation, which if not handled properly will result in recession.
Inflation of around 2% annually is considered healthy, as that gives enough economic leeway to invest (note: not necessarily “invest” as in buying stocks. We"re talking about bsinesses investing in upgrading own factories, etc) in a manner that is net positive for an economy, usually resulting in increased employment and wage growth.
The problem is when inflation outpaces wage growth and economic output, that’s when it becomes an actual problem. See current state of Russia as an example.
The usual tool to curb inflation is to raise interest rates, so that less money is circulated. This does however come with its own problems, as it squeezes those with loans (most of us), resulting in decreased consumer spending/demand, which tends to slow down the economy, and this too can result in stagnation of not handled properly.
So, what happens if you stop printing money AND increase interest, in other words, handling it improperly? Stagflation - a stagnating economy with inflation still way too high. It’s basically the worst of both worlds (cue Hannah Montana theme), and it rarely (if ever) ends well for a country.
sp3ctr4lSorry but some of this is wrong.
Actual money printing does happen.
It is very much worth clarifying that ‘inflation’ is a confusing and terrible word to use, because it means different things, in different contexts and theoretical frameworks, and is measured in many different ways.
Are you measuring … increasings in price levels experienced by consumers?
For… everything? Maybe just food?
If your house appreciates in value… is that, in and of itself, inflation?
Maybe inflation is best measured by the prices paid by manufacturers, retailers, farmers?
Or maybe you’re literally measuring the actual amount of money that exists in certain categories of accounts, at any given time?
What follows is mostly focused on the more ‘monetary/financial’ mechanisms of money, and how they relate to inflation.
When the government wants to sell Bonds, debt, to fund itself… and there is not enough demand from the market?
The central bank ‘buys’ the debt, by poofing money into existence to do that.
The technical term for this in the US is ‘Primary Dealer Takedown’.
Happens all the time, actually.
Or, the central bank can purchase … essentially stuff that isn’t actually worth what people want it to be worth, so that they can remain solvent.
Like Mortgage Backed Securities, that are actually based on a bit too many home mortgages that are in foreclosure.
So, the central bank ‘buys’ those ‘assets’ from the people that originally owned them… they ‘buy’ them by poofing into existence the money to do so.
This is called a bailout.
Banks do not create money by charging interest, not directly.
Banks accumulate money, by charging interest, and having people who consistently pay them that interest.
Banks directly create money by loaning out more money than they actually have.
This is moderated by what are called Reserve Requirements.
Basically, if you, a bank, have $10 dollars, and the Reserve Requirement Ratio is 10%, well you can loan out $90 dollars.
$100 in total, you have 10% of that in reserve, $10.
… and those $90 will often be loaned to another bank, who can now loan out $81 dollars. Who can now loan out $72 dollars. Etc.
This is called fractional reserve banking.
A whole bunch of real money, currently being used to pay for physical stuff and things and services, is poofed into existance by private banks, not just the central bank.
Then, well managed banks accumulate more and more money… because they are meant to be recieving constant payments on that money in the form of the interest they charge for those loans.
Yep.
They get to charge interest on stuff they mostly made up out of mostly nothing.
These are private banks, by the way. Owned and operated by small numbers of people, who run these banks… to make a profit, ie, accumulate more and more money.
If they do a poor job of selecting people to loan to, too many people fail to pay their obligations… well, more on that later.
There’s the total amount of money that actually exists, and then there is the velocity at which it changes hands in some kind of a transaction.
Both of these play into how an economy works.
And also… different sectors of the economy have different amounts of actual money in them, as well as different transaction volumes and paces, ie, velocities of exchange.
And, the effects of monetary inflation are felt at different times, for different actors in different markets.
Did you just get bailed out by the gov?
Excellent, you can now use that money now, before the money itself filters down to everyone else in a particular market sector, and causes a general upward pricing shift.
Think of it like gentrification.
If a bunch of wealthy people move to a cheap area, those wealthy people end up raising prices for all the locals, choking them out of their own neighborhoods.
That kind of logic and process applies to really any economic sector or location… it just looks like oligarchical industry consolidation, creating regional or local monopolies held in a tenuous balance by essentially a cartel of the orgs that finance it all.
It literally directly creates and exacerbates wealth inequality, when you poof a bunch of money into existence, and give it to, not everyone, but instead particular entity or group of entities.
But this all also works backwards as well.
A bank run?
A large company that issued or holds a lot of debt is now going under? Not being bailed out?
A commonly held investment asset is revealed to… not actually be properly pricing in all risks, or demand for it suddenly nosedives?
Well, now everyone acts defensively, pulls their money out, tries to clear out their existing obligations before everything gets locked or otherwise ‘re-valued’ or even wiped out.
This tanks the velocity of money, which can include the rate that banks (and private equity/capital) lend to themselves and other entities, so now, the money supply grows more slowly or may actually contract.
Also, there is no way a 5 year old can understand monetary/finance/economic theory.
Its just too complicated.
Sorry, some things require more fully formed brains to comprehend.
The value of a currency is not purely a function of supply. It changes based on the relative values of the things you can buy with it, including the relative values of alternate currencies. Human emotions play a large part, too. Simply coming up with a number for the inflation rate is a complicated and inexact exercise. Actively controlling inflation is even more difficult.
A little inflation is generally considered a good thing because it incentivizes people to spend their money rather than hoard it.
If I have 2 dollars and you have one dollar and then you get 200 dollars out of nowhere my 2 dollars suddenly doesn’t seem like a lot, especially when your friendly supermarket will increase the price of groceries to try and get as much of that 201 dollars from you as possible. Now I can no longer afford groceries with my 2 dollars.
Printing money isn’t the main driver of inflation. In developed economies, most of the money in circulation is created by private banks through lending.
Most inflation comes from demand outpacing supply. For example, if war in Iran disrupts oil production, supply shrinks and prices shoot up. The same thing happens when workers demand higher pay - businesses face higher costs and pass them on to customers through price increases.
Central banks fight inflation with interest rates - not by “printing less money.” When they raise rates, borrowing gets more expensive, people and businesses spend less, demand drops, and inflation cools off.
A little inflation - around 2% - is actually good. It keeps the economy moving. As money slowly loses value, people have incentive to spend it rather than hoard it. At 0% inflation, people have less incentive to spend on non-essentials or invest, because holding cash is costless. And deflation is the real killer - everyone holds off buying because their money will be worth more tomorrow.
MinnesotaGoddam2% to 4% is considered healthy inflation, yeah. Below 2 and you get too close to deflation which economists are terrified of for reasons
OBJECTION!First, we need to look at what “inflation” actually means. To the average person, “inflation” just means “things getting more expensive.” But there are lots of reasons why things get more expensive, for example, supply shortages, trade disruption, price gouging, etc. These things have nothing to do with the amount of money in circulation, and strictly speaking have nothing to do with inflation in a more technical sense, which is about things getting more expensive specifically because of the amount of money in circulation.
Suppose the government taxes billionaires and redistributes the money to ordinary people, and in response, rents go up. The amount of money that exists hasn’t changed, but landlords know they can squeeze more money out of you. This isn’t inflation, it’s an example of monopoly pricing, where the price is determined by “how much ya got.”
Second, the amount of money in circulation isn’t just a question of how much physical currency exists. A central bank can lend money that they don’t actually have, and that causes more money to be in circulation than what is physically printed by the mint.
Third, inflation, actual inflation, isn’t necessarily bad. Increasing the money supply essentially functions as a form of taxation, known as seignorage. Seignorage has several advantages as a form of taxation, it’s impossible to evade, and it hits those with the most money the most. It does have downsides especially when taken to excess, but the standard 2% inflation doesn’t really cause a lot of problems.
It can be slowed that way. The way you do it is by raising interest rates.
Which is why Trump is always pissed at federal reserve, because he wants them to keep interest rates low, so that they print more money, making more inflation, because the rich people will be fine, and the poor will doe, or be exploitable, sent to die in war, sold as sex slaves, whatever.
He doesnt care what happens to anyone, as long as he gets more wealth, and more power and so do his linke-minded friends, and all these people are doing everytjing in their considerable power, since they own social media, media, control government, and have all the money, to make sure you have no rights, minorities have no rights, workers have no rights, and so on, and the people are doing absolutely nothing about it.
They continue to use these platforms and services, and give money to the very people using it to wage war on their freedom.
Wake the fuck up and start boycotting meta, twitter, Paramount, tikotk, amazon, google. As much as possible. You dont need to use zero google products. Boycotting some of these is difficult, very difficult, thats how the fascists have you by the balls, but all you need to do, is to make sure future stock price predictions are very low, then the stock price plummets, then they lose a LOT of power.
Companies need to believe that siding with maga is choosing bankruptcy.
Don’t be a spectator. Fight back.
Interest rate manipulation is one lever the government and the treasury has.
Another way you do that is with treasury bills. It’s easier for me to think of it how it works from the point of view of an investor. Do they get cash? Then the investor sold a treasury bill back to the treasury and increased the general money supply/the government buys treasury bills. To decrease the money supply, the investor buys treasury bills/the government sells treasury bills. This happens electronically nowadays, so no actual cash needs to be printed.