Inflation as caused by the increase in the quantity of a currency ('money printing') is a form of devaluation or debasement of currency. It's quite literally a hidden tax.

So there's not much difference, really. That may have been your point. — Tzeentch

Danke for the clarification. :up:

I might add to this that something that confuses the discussion is that basic market mechanisms, that is when free market sets the price because of supply and demand, can have inflationary consequences. That is the "cost-push" and "demand pull" inflation. Or the discussion of external shocks, like COVID restrictions and their impact to supply chains etc.

Of course there are multiple reason for a complex phenomenon, but naturally the central banks will (and have) emphasized the external shock argument and naturally will be silent of the effects of monetary policy. In this situation it is totally understandable that they won't be forth coming and honest: it's simply their role to be so.

However I think the really big question is here, will the US try to get it's debt problem contained by inflation? Of course somethings have to be done along with this: likely the increase the age limit when people can have social security, higher the age when people can retire, lower military spending, limit money transfers and so on.

In the 70's, in ten years the US dollar lost about half of it's value with only "modest" inflation, not experience anything remotely to hyperinflation. Now that the past acquired debt would be cut 50% might help with inflation, but of course then current expenditure is the problem. It really doesn't add up. Neither in the US or here in Europe.

In the end the system has to be changed: either by collapse, some twisted debt-jubilee or some kind of wealth transfer. Unfortunately in our time, the nation states and their leaders have forgotten from history is that the easiest way is simply to rob the bankers, throw them in jail and start it over with new bankers.

I need to read more. Fun fact: News media seems to be an educational program that's relatively cheap but also has credibility issues because reporting is by and large slanted.

Arigato gozaimus for the reply.

I need to read more. — Agent Smith

If you understand two things:

1) That money is created through the issuance of debt.

and

2) Fiscal and monetary policy do interact, especially when the government finances it's spending through printing money.

Then I think you will get the hang of it.

I get the general idea, printing money $\to$ inflation, but I don't understand the actual mechanism so to speak - there seems to be some intermediate steps that I'm missing you see.

Oh, it's quite convoluted as you talk Quantitative Easing and many start with silly arguments because it's really not physical money printing. But take a central bankers word for it:


(That was years ago. And we do have that high inflation now. And the Fed ought to be doing what Bernanke says.)

The mechanism is easy. The government has to pay something: salaries and other expenditures. It hasn't gotten enough tax revenues. So the government goes to a money printer, prints money and sends that money to it's employees etc. and problem solved. Yet as in the economy there are now more money trying to buy the same goods, hence prices rise. And when the people lose faith in the currency altogether, then you have hyperinflation.

(It's easier to understand when just imagine what would happen to prices of the cars, homes, luxury items and even basic food and if every US citizen (330 million of them) would instantly get 1 million dollars to their bank account. You really think nobody of the 330 million would go and buy something?)

Why inflation can be beneficial to governments:

There are a few reasons inflation makes it easier for a government to pay its debt, especially when inflation is higher than expected. In summary:

Higher inflation increases nominal tax revenues (if prices are higher, the government will collect more VAT, workers pay more income tax)

Higher inflation reduces the real value of debt, bondholders on fixed interest rates will see a fall in the real value of their bonds and it becomes easier for the government to pay back these bonds.

Higher inflation can enable the government to freeze income tax thresholds so more workers pay higher tax rates – it becomes a way to increase tax revenues without increasing tax rates.

get the general idea, printing money →
→
inflation, but I don't understand the actual mechanism so to speak - — Agent Smith

Monetary policy — the actions of the federal reserve — inflate asset classes like stocks and housing. Currently, it accounts for some inflation— some.

Mostly inflation is the result of COVID and the war in Ukraine. People who want to reduce it all to “printing money” have read too much Milton Friedman, and are unwittingly giving cover to austerity policies, which will hurt mostly the working classes. But it’s not that simple.

The mechanism involved is this:

The treasury issues debt to fill the gap between expenditure and revenue — the deficit. That debt can be bought by individuals, companies, institutions, foreign countries, and even parts of the government itself. We run deficits every year— This is why we have a high national debt, which is the total of all deficits.

The federal reserve owns some of that debt — but only some. When they buy treasuries, they buy them from institutions. With what money? Mostly through “printing” money — in todays world, by adding digits to an account — which only they have the power to do.

The institutions are banks, mostly. If these banks hold more cash than bonds, they tend to lend out money and for better interest rates. More companies and individuals borrow, and you have more spending. This simulates the economy, in theory.

:up:

So you've just made Friedman's case that printing money causes inflation. It indirectly funds government expenditure (increased demand) because banks always have a buyer for bonds which governmental demand cannot be answered in a near full production environment.

The additional investments banks would theoretically make to increase production doesn't work for the same reason. Meanwhile housing prices doubled in ten years in the Netherlands. Many advanced economies have seen strong rises in housing prices and they're a basic need. Rents moved with it. That's not just "some" inflation, that's a huge chunk of people's disposable income and should figure strongly in any inflation figures but usually doesn't because it's not a pretty picture (we het owner occupying costs because nobody ever moved houses in inflation fantasy land).

So housing prices are filtered out and stocks and bonds never featured in them in the first place. That has nothing to do with covid and Ukraine though definitely is inflation and will wipe out 50% in value at some point affecting pensions and people's personal holdings.

Energy price and food inflation, that's Ukraine. Broken supply chains, that's covid. The only reason they are considered predominant in inflation figures is because the methodology is arbitrary bullshit. In reality inflation is much higher.

So you've just made Friedman's case that printing money causes inflation. It indirectly funds government expenditure (increased demand) because banks always have a buyer for bonds which governmental demand cannot be answered in a near full production environment. — Benkei

They buy some bonds. The Fed has been doing so for decades. During QE in 2009, they were doing it on steroids. People screamed of inflationary effects— and the CPI stayed roughly the same. It did, however, have effects on markets.

As I said before— I’m not saying that increasing the money supply has no effect on inflation. But it’s much more contained to the three main asset classes than to the economy as a whole.

What’s changed this time around is the fiscal stimulus and COVID programs put into place. And COVID itself, of course.

That's not just "some" inflation, that's a huge chunk of people's disposable income and should figure strongly in any inflation figures but usually doesn't — Benkei

Yes, housing is certainly affected by low interest rates. They’re one of the asset classes I mentioned. Having been in the market for the last two years I can tell you it’s not only interest rates, however. COVID played a large role in behavior as well.

That has nothing to do with covid and Ukraine — Benkei

It has a lot to do with COVID. It greatly changed supply and demand.

True, it has nothing to do with Ukraine — I never claimed otherwise.

Energy price and food inflation, that's Ukraine. Broken supply chains, that's covid. — Benkei

COVID factors into both— but Ukraine added to the problems, yes.

In any case, energy prices have a huge effect on all aspects of the economy, from plastics to cars to shipping costs. And those increases have led the charge. They haven’t led the charge because of the Fed. That’s the point.

They buy some bonds. — Xtrix

About 30% of most issues is not "some". Maybe it's different in the US. Even so, I have the feeling you're not understanding my general comment. The whole point is that CPI is not an adequate measure when asset inflation has real life consequences for consumers with regards to housing and pensions. That inflation existed well before covid and Ukraine so really had nothing to do with either of them.

About 30% of most issues is not "some". — Benkei

?

What would you call it?

It’s a lot — the Fed buys a lot of bonds. Maybe that’s what you’re getting at. The point I was making is that it’s one part of the overall debt — an important part, but not even the majority.

The whole point is that CPI is not an adequate measure when asset inflation has real life consequences for consumers with regards to housing and pensions. That inflation existed well before covid and Ukraine so really had nothing to do with either of them. — Benkei

I can’t speak for Holland, but in the US the housing market really took off around the start of COVID. I know this well only because it corresponded to when my wife and I started looking for a house. COVID changed a lot of behavior — but it wasn’t only that. It was also the Fed lowering rates to almost zero. That played a huge role — no denying it.

Maybe I have missed your point. If your main argument is that CPI doesn’t tell the whole story about inflation, I agree.

That's not just "some" inflation, that's a huge chunk of people's disposable income — Benkei

Thus housing prices aren't counted when talking about inflation. Rents don't change as much, hence they are usually preferred.

It's not a conspiracy, the simple fact is that "ugly" or politically delicate statistics like actual inflation or the unemployment rate are made to look better by changing the statistics. Just as the companies in a stock index are changed if the stocks don't perform well (and you don't take them all into account), the food stuffs in the basket are changed too. And then there's hedonic adjustment with which you can lower also inflation.

Ceaseless money printing is the elephant in the room. It isn't being addressed for political reasons.

For one, central governments and banks have no reason to admit being at fault. Economies are complex enough that it's always possible to find another patsy - financial markets, covid, the Ukraine war, etc. and let the next administration deal with it.

Second, money printing is instrumental to the survival of modern states because tax revenues do not cover state expenses, yet these states have gotten into the habit of spending a lot more than they bring in. Money printing is one of the ways this sand castle is kept standing. It's voter deception plain and simple, because the taxpayer pays for it, but it's never mentioned in any campaign plans. I wonder why?

Third, there are swathes of individuals who sense their preferred politicial systems hinge on this situation of overspending (and they'd even like to see more), so much like my first point, they find a patsy to deflect the blame.


Money printing can be fine, even desirable, to stimulate a growing economy. Economies cannot grow forever, though, and money printing is not a way to support irresponsible fiscal policy and towering government expenditure. It's like a person who has been living well beyond their means and does not wish to cut back. In a sense, states cannot cut back, because they've built a house of cards ontop of this situation. So in reality what's left is to wait for the reaper to come and collect his due.

For one, central governments and banks have no reason to admit being at fault. Economies are complex enough that it's always possible to find another patsy - financial markets, covid, the Ukraine war, etc. — Tzeentch

The Fed was printing plenty of money in 2009 too. No inflation.

An unprecedented global lockdown has major consequences. Claiming this is used as a "patsy" is laughable.

Inflation has multiple causes. One cause is the money supply. COVID's disruptions is another. The war is yet another.

This isn't difficult for anyone who isn't insistent on blaming one thing.

The Fed was printing plenty of money in 2009 too. No inflation. — Xtrix

The 700 billion loaned to banks was eventually paid back in full. It's just a very different situation. The pandemic response was specifically meant to stimulate the economy, where the Great Recession payouts were meant to shore up confidence and unfreeze credit.

But you're right that there are multiple causes of inflation, one being the sluggishness of the Fed to respond before inflation had set into the American psyche.

The Fed was printing plenty of money in 2009 too. No inflation. — Xtrix

The difference is the Fed was then responding (correctly) to an economic recession. Now it's creating one!

The 700 billion loaned to banks was eventually paid back in full. — Tate

So what?

The pandemic response was specifically meant to stimulate the economy, where the Great Recession payouts were meant to shore up confidence and unfreeze credit. — Tate

Both were meant to stimulate the economy. The Fed printed money back then too and people screamed about inflation. Didn't come.

But you're right that there are multiple causes of inflation, one being the sluggishness of the Fed to respond before inflation had set into the American psyche. — Tate

Yes, the Fed should have raised interest rates last summer, at the latest.

The difference is the Fed was then responding (correctly) to an economic recession. — Tzeentch

Not exactly. It was responding to catastrophe in the financial sector. Since that sector has become central to the US economy, the government had no choice but to respond.

The 700 billion loaned to banks was eventually paid back in full.
— Tate

So what? — Xtrix

So it didn't inflate the money supply.

The pandemic response was specifically meant to stimulate the economy, where the Great Recession payouts were meant to shore up confidence and unfreeze credit.
— Tate

Both were meant to stimulate the economy. — Xtrix

Actually, no. The point of payouts in 2009 was to keep the global economy from collapsing by increasing confidence in the banking system.

Also, I don't recall anyone saying anything about inflation at that time. The whole world was like a deer in headlights.

So it didn't inflate the money supply. — Tate

It did increase the money supply. For years the supply has increased, in fact.

https://tradingeconomics.com/united-states/money-supply-m0

Actually, no. — Tate

Actually, yes. The fact that the financial sector was the primary target is irrelevant. The entire global economy was on the brink of depression then -- it was on the brink of depression during COVID, as well. The Fed has a few tools to fight recessions. All of the tools used thus far has increased the money supply, and has done so for years.



https://www.nytimes.com/2009/05/04/opinion/04meltzer.html

https://www.nytimes.com/2009/05/29/opinion/29krugman.html

It did increase the money supply. For years the supply has increased, in fact. — Xtrix

Well, yes, the Fed allows the money supply to go up over time. I meant that TARP didn't make a significant impact, and it wasn't intended to.

Actually, yes. The fact that the financial sector was the primary target is irrelevant. The entire global economy was on the brink of depression then -- it was on the brink of depression during COVID, as well. The Fed has a few tools to fight recessions. All of the tools used thus far has increased the money supply, and has done so for years. — Xtrix

Right. So what you can do is point out that the government, specifically since the 1930s, responds to contraction by easing the money supply, creating make-work projects, and instituting price fixing for farmers.

The pandemic response was unprecedented in scale, though. The intention was to keep the lockdown from wiping out part of the infrastructure of the US economy.

Not exactly. It was responding to catastrophe in the financial sector. Since that sector has become central to the US economy, the government had no choice but to respond. — Tate

It responded to a major recession. Recession is a general slow down of the economy. A reduced demands can lead to deflation and it's been one of the key tasks of the Fed to ensure deflation is kept from worsening a recession further, or worse: ending up in a deflationary spiral. One way it can do so is by increasing the money supply.

In my view, this seems to fit the 2009 Fed response quite well. Today, is clearly quite different. Today the threat is not deflation, but inflation, and printing money will only worsen the situation.

It responded to a major recession. Recession is a general slow down of the economy — Tzeentch

You don't appear to know anything about what happened in 2009. You should read about it. Every American should understand what happened.

I think I know quite a bit. :chin:

I think I know quite a bit. — Tzeentch

Who was Timothy Geithner, and what did he do to save the global economy from crashing?

I meant that TARP didn't make a significant impact, and it wasn't intended to. — Tate

Yes but TARP wasn't the Fed. That was legislation from Congress. I was talking specifically about monetary policy and its relation to inflation. It's certainly true that the bills this time around (for COVID) were MUCH larger, and that undoubtedly had an impact on inflation. No question.

A bunch of stuff. But I don't see how one cancels out the other. There was a financial crisis to solve, and a recession that followed. Maybe you can state your point clearly.

:up: