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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 a

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.
- pjc50 7y ago
  It's a complex subject, but the ECB seem to have a fairly decent explainer: https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html https://www.ecb.europa.eu/mopo/intro/transmission/html/index... Broadly, cheap credit -> more purchases by individuals and business -> demand expands relative to supply -> prices and wages rise ; or vice versa. The unpleasant side effect of this is that there is a minimum level of unemployment for the policy to work (NAIRU, "non-accelerating inflation rate of unemployment")
pjc50 7y ago
> 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. Yes, that's part of what I mean; since no foreigners want Z$ to buy Zim export goods (since there weren't any), people in Zimbabwe found themselves needing more and more Z$ to buy the same level of things. The role of oil in inflation seems to be disputed, but it looks like it used to be more correlated (probably indicating a greater dependence on cheap oil back then): https://www.frbsf.org/economic-research/publications/economic-letter/2005/october/oil-price-shocks-and-inflation/ https://www.frbsf.org/economic-research/publications/economi... I agree that raising rates to combat inflation works astonishingly well for moderate inflation, and this is one of the big successes of orthodox economic policy. The catch is that this works by increasing unemployment. And it can't do anything about hyper inflation, which is where we got into this discussion.
- hylaride 7y ago
  I think we mostly agree, but were kind of discussing different aspects. Inflation can be stoked by the literal creation of the base supply of money (known as M1 to economists) as well as interest rates (which effect the growth of the other levels of money via the velocity of money trading hands). Hyperinflation is almost always a former, whereas general high inflation is usually a product of the later via artificially low interest rates, though the later can be caused by overhang of a suddenly contracting economy. But to get in million-level percent sustained (hyper)inflation, it's gotta be the growth of M1.

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.
pjc50 7y ago
It's a complex subject, but the ECB seem to have a fairly decent explainer: https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html https://www.ecb.europa.eu/mopo/intro/transmission/html/index... Broadly, cheap credit -> more purchases by individuals and business -> demand expands relative to supply -> prices and wages rise ; or vice versa. The unpleasant side effect of this is that there is a minimum level of unemployment for the policy to work (NAIRU, "non-accelerating inflation rate of unemployment")

pjc50 7y ago

> 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$, which the majority of people there got paid in. Yes, that's part of what I mean; since no foreigners want Z$ to buy Zim export goods (since there weren't any), people in Zimbabwe found themselves needing more and more Z$ to buy the same level of things. The role of oil in inflation seems to be disputed, but it looks like it used to be more correlated (probably indicating a greater dependence on cheap oil back then): https://www.frbsf.org/economic-research/publications/economic-letter/2005/october/oil-price-shocks-and-inflation/ https://www.frbsf.org/economic-research/publications/economi... I agree that raising rates to combat inflation works astonishingly well for moderate inflation, and this is one of the big successes of orthodox economic policy. The catch is that this works by increasing unemployment. And it can't do anything about hyper inflation, which is where we got into this discussion.

hylaride 7y ago
I think we mostly agree, but were kind of discussing different aspects. Inflation can be stoked by the literal creation of the base supply of money (known as M1 to economists) as well as interest rates (which effect the growth of the other levels of money via the velocity of money trading hands). Hyperinflation is almost always a former, whereas general high inflation is usually a product of the later via artificially low interest rates, though the later can be caused by overhang of a suddenly contracting economy. But to get in million-level percent sustained (hyper)inflation, it's gotta be the growth of M1.