4 ms·

A government that prints and thus creates its own money can't run out of money.

hylaride 7y ago
A government that prints too much money eventually makes it worthless and then "runs out" of it, though. See also: Venezuela, Zimbabwe, Weimar Germany.
- bilbo0s 7y ago
  In fairness, none of them printed their own money really. They all relied on something else, and then printed promissory notes for that "something else". So the more promissory notes they printed, the less "something else" each promissory note was worth. One of the most confusing things to me in some of my econ classes was the realization that there is no "something else" backing my nation's currency. The US Dollar. As I understood it, it's just backed by the word of the US? (Could be wrong, it's been a while.) So I always wondered, what keeps them in check? I've never really figured that out. Someday maybe I'll go back and sit in on some more advanced classes?
  - effie 7y ago
    It certainly isn't merely the word of the US, it is its status and behaviour. The big factor is that US is a very big and stable economy and military wise. People know that, so they think large and long-term fall of dollar value is quite unlikely to happen.
- pjc50 7y ago
  Both of these are right, rather than contradictory: a government can always keep printing its own currency. What it can't print is foreign currency. So hyperinflation shows up as a forex and balance of trade phenomenon first. As was the case in all three of those examples: Zimbabwe's land reform destroyed the productive export-led farming industry, so the cost of required imports such as oil drove the Zim dollar into the ground. Similarly Venezuala trashed its oil export industry and failed to develop others. Weimar Germany was required to pay reparations in gold to France. The postwar destroyed industry wasn't able to export enough goods to pay for the gold, so yet again other imports became prohibitively expensive. The US is very, very unlikely to experience these kind of problems; it is large enough to not be so dependent on imports, and in recent years not even on oil. The last inflation spikes were due to OPEC: yet again import-led inflation.
  - hylaride 7y ago
    I disagree. You don't get 79,600,000,000% (in Zimbabwe's case) inflation long after your farms had been idled. The price of goods in foreign "hard" currency actually remained relatively stable after some initial shocks, but the actual inflation was in Zimbabwe dollars after the gov't printed more Z$, which the majority of people there got paid in. If you study monetary history in the US, you'll find that the OPEC angle of the 1970s inflation was a scapegoat, and the real causes were politicians (in that case Nixon) refusing to raise interest rates (which indirectly slows monetary growth) because it would cool the economy and affect his popularity. It's a prime reason why the Fed (and most central banks in the world) now have "independence" to set rates. If the high cost of oil was all it took, we'd have had higher inflation during the oil spike a decade ago. Heck Germany, which has to import 100% of it's oil, saw it's inflation levels DROP in the 1970s as they raised rates to tame inflationary pressures.
    - effie 7y ago
      That is interesting. Can you recommend some good sources on these economy laws? How can I convince somebody that increasing interest rates, an unpopular move, should prevent large inflation, which is something people want?
      - hylaride 7y ago
        As already mentioned it's a complex subject that I personally was "forced" to go through in an econ 201 level course back in university. It involves understanding the money supply levels( https://www.investopedia.com/terms/m/moneysupply.asp https://www.investopedia.com/terms/m/moneysupply.asp ), fractional reserve banking ( https://www.learningmarkets.com/understanding-the-fractional-reserve-banking-system/ https://www.learningmarkets.com/understanding-the-fractional... ), and how the velocity of money (eg how often money changes hands in spending/loans) affects prices. (I'm going to simplify some things here to keep this high level). In modern banking, a central bank creates money. Let's say it's $1000. That's monetary growth in the base monetary supply (usually known as M0 or M1 in economic cirlces depending on the country). That $1000 gets deposited into a bank at a set core interest rate. The bank then keeps a fraction as a reserve and lends the rest out, lets say half of it. Now you get $1000 in the original bank and $500 in another bank. So now we have $1500 total. the 2nd bank takes the $500, keeps a reserve, and loans out more and so on until eventually a "stable" supply of money exists. Sustained hyperinflation happens when the central bank just pumps out the base cash. Since there'd be so much money sloshing around, prices across the board rise. If the growth of the base of money is relatively stable (and how much it should increase is a long topic with tons of minutia), interest rates affect the growth of the later levels of money (known as M2/M3). Lower interest rates mean more borrowing and therefor more spending. But if it's too low for too long, prices will rise and you'll drown out productive growth. This happened in the "stagflation" of the 1970s where you had high inflation coupled with low economic growth. If interest rates are too high, you risk making it difficult for productive use of money to be used. So that's the dilemma of central banks. The temping thing is that keeping interest rates low can look good in the short term, as inflation tends to take awhile to work its way through the economy. Milton Friedman loved to say that artificially low rates are let getting drunk. The party is now, but there's a hangover you have to deal with later. The hard part is that inflation isn't necessarily something people want. You want it if you have too much debt or assets that are inflation "protected" (gold, housing), but if you're on a fixed income, you get screwed. The hard part is that while we've had low inflation over the past few decades, we've had several asset bubbles that have driving up housing, commodities, etc all over the place. If you're explaining it to somebody else in laymans terms, it helps to explain that money is subject to the same supply and demand curves as anything else (even when it was backed by gold, new gold discoveries in the late 1800s drove inflation). Too much money makes it less valuable and vise versa. Higher interest rates make the money "rarer" and thus increase it's worth to everything else.
- sneak 7y ago
  Which was exactly my point: the government that debases currency runs out of money only after the population does.

A government that prints too much money eventually makes it worthless and then "runs out" of it, though. See also: Venezuela, Zimbabwe, Weimar Germany.

bilbo0s 7y ago
In fairness, none of them printed their own money really. They all relied on something else, and then printed promissory notes for that "something else". So the more promissory notes they printed, the less "something else" each promissory note was worth. One of the most confusing things to me in some of my econ classes was the realization that there is no "something else" backing my nation's currency. The US Dollar. As I understood it, it's just backed by the word of the US? (Could be wrong, it's been a while.) So I always wondered, what keeps them in check? I've never really figured that out. Someday maybe I'll go back and sit in on some more advanced classes?
- effie 7y ago
  It certainly isn't merely the word of the US, it is its status and behaviour. The big factor is that US is a very big and stable economy and military wise. People know that, so they think large and long-term fall of dollar value is quite unlikely to happen.
pjc50 7y ago
Both of these are right, rather than contradictory: a government can always keep printing its own currency. What it can't print is foreign currency. So hyperinflation shows up as a forex and balance of trade phenomenon first. As was the case in all three of those examples: Zimbabwe's land reform destroyed the productive export-led farming industry, so the cost of required imports such as oil drove the Zim dollar into the ground. Similarly Venezuala trashed its oil export industry and failed to develop others. Weimar Germany was required to pay reparations in gold to France. The postwar destroyed industry wasn't able to export enough goods to pay for the gold, so yet again other imports became prohibitively expensive. The US is very, very unlikely to experience these kind of problems; it is large enough to not be so dependent on imports, and in recent years not even on oil. The last inflation spikes were due to OPEC: yet again import-led inflation.
- hylaride 7y ago
  I disagree. You don't get 79,600,000,000% (in Zimbabwe's case) inflation long after your farms had been idled. The price of goods in foreign "hard" currency actually remained relatively stable after some initial shocks, but the actual inflation was in Zimbabwe dollars after the gov't printed more Z$, which the majority of people there got paid in. If you study monetary history in the US, you'll find that the OPEC angle of the 1970s inflation was a scapegoat, and the real causes were politicians (in that case Nixon) refusing to raise interest rates (which indirectly slows monetary growth) because it would cool the economy and affect his popularity. It's a prime reason why the Fed (and most central banks in the world) now have "independence" to set rates. If the high cost of oil was all it took, we'd have had higher inflation during the oil spike a decade ago. Heck Germany, which has to import 100% of it's oil, saw it's inflation levels DROP in the 1970s as they raised rates to tame inflationary pressures.
  - effie 7y ago
    That is interesting. Can you recommend some good sources on these economy laws? How can I convince somebody that increasing interest rates, an unpopular move, should prevent large inflation, which is something people want?
    - hylaride 7y ago
      As already mentioned it's a complex subject that I personally was "forced" to go through in an econ 201 level course back in university. It involves understanding the money supply levels( https://www.investopedia.com/terms/m/moneysupply.asp https://www.investopedia.com/terms/m/moneysupply.asp ), fractional reserve banking ( https://www.learningmarkets.com/understanding-the-fractional-reserve-banking-system/ https://www.learningmarkets.com/understanding-the-fractional... ), and how the velocity of money (eg how often money changes hands in spending/loans) affects prices. (I'm going to simplify some things here to keep this high level). In modern banking, a central bank creates money. Let's say it's $1000. That's monetary growth in the base monetary supply (usually known as M0 or M1 in economic cirlces depending on the country). That $1000 gets deposited into a bank at a set core interest rate. The bank then keeps a fraction as a reserve and lends the rest out, lets say half of it. Now you get $1000 in the original bank and $500 in another bank. So now we have $1500 total. the 2nd bank takes the $500, keeps a reserve, and loans out more and so on until eventually a "stable" supply of money exists. Sustained hyperinflation happens when the central bank just pumps out the base cash. Since there'd be so much money sloshing around, prices across the board rise. If the growth of the base of money is relatively stable (and how much it should increase is a long topic with tons of minutia), interest rates affect the growth of the later levels of money (known as M2/M3). Lower interest rates mean more borrowing and therefor more spending. But if it's too low for too long, prices will rise and you'll drown out productive growth. This happened in the "stagflation" of the 1970s where you had high inflation coupled with low economic growth. If interest rates are too high, you risk making it difficult for productive use of money to be used. So that's the dilemma of central banks. The temping thing is that keeping interest rates low can look good in the short term, as inflation tends to take awhile to work its way through the economy. Milton Friedman loved to say that artificially low rates are let getting drunk. The party is now, but there's a hangover you have to deal with later. The hard part is that inflation isn't necessarily something people want. You want it if you have too much debt or assets that are inflation "protected" (gold, housing), but if you're on a fixed income, you get screwed. The hard part is that while we've had low inflation over the past few decades, we've had several asset bubbles that have driving up housing, commodities, etc all over the place. If you're explaining it to somebody else in laymans terms, it helps to explain that money is subject to the same supply and demand curves as anything else (even when it was backed by gold, new gold discoveries in the late 1800s drove inflation). Too much money makes it less valuable and vise versa. Higher interest rates make the money "rarer" and thus increase it's worth to everything else.
sneak 7y ago
Which was exactly my point: the government that debases currency runs out of money only after the population does.