6 ms·

Can someone explain to me why central banks find it so hard to create inflation? It seems to me that the difficult direction should be convincing people that yo

Can someone explain to me why central banks find it so hard to create inflation? It seems to me that the difficult direction should be convincing people that your currency is worth something. Making your currency lose value should be easy, shouldn't it? If Google wanted to tank their share price they would have no problems.

rusk 7y ago
Well, the simple answer is that they’re actively fighting inflation for political reasons.
vidanay 7y ago
I'm not so sure about that RE Google share price. Even if they were to magically slice 20% of the share price, it would immediately start a buying rally. Anything that would have a permanent effect on the share price would probably have to threaten the very existence of the company.
Tenoke 7y ago
It's not hard doing it in an absolute sense. E.g. drop a bomb on yourself. It's hard doing it without messing everything else so much as to not be worth it.
jldugger 7y ago
I suspect the problem is creating only a little bit of inflation. Hyperinflation is easy, just ask the Weimar republic.
- rusk 7y ago
  Or Zimbabwe or Argentina even ... but I think these extremes are absurd. They are blunders. What we are talking about here is why EU isn’t taking prudent steps to provoke growth, and that’s all down to keeping certain dominant nationa happy.
  - conanbatt 7y ago
    * Cries in pesos
  - econcon 7y ago
    The reason they managed to create hyperinflation is because when you print more currency, inflation doesn't immediately change in reaction. So they ended up printing more and more till, it all corrected at once and hyperinflation was already here before they could roll back their currency printing machines. They took a practical approach to managing inflation yet paying off debt obligations with more currency but didn't realize it all could backfire - they didn't do something as stupid as others will have you believe.
- ahakki 7y ago
  what simple mistake did the weimar republic do that caused a hyperinflation? I thought it was primarily caused by a massive reduction in the supply of goods following the versaille treaty without a corresponding reduction in monetary supply. At that point there really wasn't a lot the government could do to stop it. Zimbabwe faced similar problems after disowning their most productive agricultural providers, reducing supply.
  - econcon 7y ago
    Mostly because of the world war they waged, they created bonds and then printed more and more currency to pay it off, creating hyperinflation.
mullen 7y ago
Inflation can spiral out of control and be very difficult to control if it does. It's a tiger that you don't want to let out of the cage.
- muthas 7y ago
  I don't know if I'd agree its something you can't make useful, but trying to use inflation as a means of macroeconomic policy - rather than an indicator of the success/health of the overall economy - seems utterly dangerous.
jfengel 7y ago
Usually, fear. People hoard cash when they're afraid of a crash. When a crash happens, money becomes more valuable, so they can buy things more cheaply. People who anticipate a crash risk provoking one by removing money from the supply. So central banks try to counter that: "Your money will be worth less in the future, so spend it now. Or make an investment that will produce returns greater than the rate of inflation." So they spend their money, creating demand, and jobs materialize (hopefully) to fill that demand. For the last decade-plus we've had a combination of anticipation of disaster, and banks flooding the system with cash to assuage that fear. That's like pressing both the accelerator and the brake as hard as you can -- you don't go anywhere until suddenly something gives, and then the entire thing goes to hell in a handbasket right quick. When? If I knew that, I'd be rich. The general advice is that the market can remain irrational longer than you can remain solvent.
- Bombthecat 7y ago
  My tip is 5 to 6 years. But who knows?
  - jfengel 7y ago
    That's what I said... ten years ago. So we all know what my opinion is worth.
muthas 7y ago
I heard an interesting podcast a little while back that conjectured the typical way to get inflation going (so-called "helicopter money" to the spending population) is far and away the least predictable way to do things. Specifically, the speaker argued that compared to large banks and investing entities, people might do things like pay off debt or save the cash for a rainy day... neither of which are inflationary. That isn't to say that handing out wads of cash wouldn't eventually lead to inflation, but that the systemic lag and second-/third-order effects might make the process so unpredictable that by the time inflation begins to tick up, the central bank would have no way to provide effective control.
notahacker 7y ago
It's not difficult to create inflation, if that's your objective, though it's not quite as simple as increasing the money supply by a fixed percentage and is obviously politically difficult. It's much more difficult to create economic growth by persuading banks to lend more.
Analemma_ 7y ago
Inflation isn't just about money supply (no matter what certain people on the internet tell you), it's about money velocity. If the central bank prints a hundred billion dollars but it immediately gets stashed in vaults or under people's beds or in international tax havens, it might as well not exist and there's no inflation. The "pushing rope" metaphor for inability to create inflation is a good one.
- AmericanChopper 7y ago
  I think liquidity might have been the word you were looking for, but your example was not an increase in money supply. Creating money and storing it in a bank account increases supply. Creating money and adding it to a banks reserves increases supply. Withdrawing cash and permanently storing it somewhere decreases supply. Increasing reserve requirements decreases supply. If the amount held in reserve goes up because a bank doesn’t want to loan, or charges too much for it, that decreases supply. Inflation is entirely about the supply and demand for money. You were just calculating it wrong.
  - smabie 7y ago
    Most economists look at the velocity and supply in order to calculate inflation for their models. If you want combine them into supply and demand, fine. But seperating the concepts is valuable. Moreover the velocity and liquidity of money are seperate concepts.
dontbenebby 7y ago
Well in Germany's case they believe the economic conditions (inflation) were a cause of Hitler's rise to power, and are understandably extremely skittish about triggering similar conditions https://en.wikipedia.org/wiki/Hyperinflation#Germany_(Weimar_Republic) https://en.wikipedia.org/wiki/Hyperinflation#Germany_(Weimar...
- ahakki 7y ago
  both the weimar era hyperinflation and hitlers rise to power were caused by the conditions of the versaille treaty.
300bps 7y ago
There are many factors and others have pointed out some of them. Here's another one: The dollar's relative value to goods and services isn't rising... and it's because of countries like China that make goods and services for so few dollars. Think about it - I can go to oldnavy.com and buy a shirt for $9. That shirt was made literally on the other side of the world, shipped, marketed, sold, packaged and delivered for $9. The disparity in incomes and environmental protections between the U.S. and other countries makes it very difficult to trigger price inflation. And things just keep getting cheaper. Prices don't rise when supply of goods and services keeps pace with the demand from dollars.
40acres 7y ago
Because central banks don't direct how the money is spent. The central bank puts money into the system but it's up to fiscal policy makers to determine flows -- in the US laws lead to inflation in asset prices.
jajag 7y ago
Central banks are creating inflation, problem is it's in all the wrong places - e.g. asset inflation - instead of a rising CPI. (There is a bit of a debate taking place in central banking circles at the moment about whether CPI is an adequately measure, and whether it should better reflect things like rent increases; FT's Alphaville blog has had a number of interesting articles on the topic over the past week).
erichocean 7y ago
They don't find it hard, because it's trivial: just restrict imports (i.e. available inventory). If there are less things to buy, inflation will rise as people "compete" to buy whatever is available. When you hit your target inflation number, relax the restriction on imports to reduce the inflation. Season to taste. This policy likely has 2nd and 3rd order effects, as it will hurt other countries, but that's a simple strategy to artificially create inflation in CPI items that's fail-proof in execution. Prices will go up. Restricting imports is much better than just giving people money, because they can use the extra money you give them on things like paying down their debt, or just put it in the bank and save it. Instead, you want to target the things they already buy and make those things scarce, so their price goes up (the definition of "inflation"). Food, fuel, and electricity are the easiest to monkey with because people are always buying them, and don't have much of a choice. (If you can't restrict imports (or don't want to), you can simply print money to buy up the local inventory yourself and trash it/warehouse it/export it out of the country/set it on fire. The effect is the same: less inventory for the general population is available, causing the price of whatever is left to go up.)
- econcon 7y ago
  Or like in India - make imported oil/gas expensive and inflation goes up.

rusk 7y ago

Well, the simple answer is that they’re actively fighting inflation for political reasons.

vidanay 7y ago

I'm not so sure about that RE Google share price. Even if they were to magically slice 20% of the share price, it would immediately start a buying rally. Anything that would have a permanent effect on the share price would probably have to threaten the very existence of the company.

Tenoke 7y ago

It's not hard doing it in an absolute sense. E.g. drop a bomb on yourself. It's hard doing it without messing everything else so much as to not be worth it.

jldugger 7y ago

I suspect the problem is creating only a little bit of inflation. Hyperinflation is easy, just ask the Weimar republic.

rusk 7y ago
Or Zimbabwe or Argentina even ... but I think these extremes are absurd. They are blunders. What we are talking about here is why EU isn’t taking prudent steps to provoke growth, and that’s all down to keeping certain dominant nationa happy.
- conanbatt 7y ago
  * Cries in pesos
- econcon 7y ago
  The reason they managed to create hyperinflation is because when you print more currency, inflation doesn't immediately change in reaction. So they ended up printing more and more till, it all corrected at once and hyperinflation was already here before they could roll back their currency printing machines. They took a practical approach to managing inflation yet paying off debt obligations with more currency but didn't realize it all could backfire - they didn't do something as stupid as others will have you believe.
ahakki 7y ago
what simple mistake did the weimar republic do that caused a hyperinflation? I thought it was primarily caused by a massive reduction in the supply of goods following the versaille treaty without a corresponding reduction in monetary supply. At that point there really wasn't a lot the government could do to stop it. Zimbabwe faced similar problems after disowning their most productive agricultural providers, reducing supply.
- econcon 7y ago
  Mostly because of the world war they waged, they created bonds and then printed more and more currency to pay it off, creating hyperinflation.

mullen 7y ago

Inflation can spiral out of control and be very difficult to control if it does. It's a tiger that you don't want to let out of the cage.

muthas 7y ago
I don't know if I'd agree its something you can't make useful, but trying to use inflation as a means of macroeconomic policy - rather than an indicator of the success/health of the overall economy - seems utterly dangerous.

jfengel 7y ago

Usually, fear. People hoard cash when they're afraid of a crash. When a crash happens, money becomes more valuable, so they can buy things more cheaply. People who anticipate a crash risk provoking one by removing money from the supply. So central banks try to counter that: "Your money will be worth less in the future, so spend it now. Or make an investment that will produce returns greater than the rate of inflation." So they spend their money, creating demand, and jobs materialize (hopefully) to fill that demand. For the last decade-plus we've had a combination of anticipation of disaster, and banks flooding the system with cash to assuage that fear. That's like pressing both the accelerator and the brake as hard as you can -- you don't go anywhere until suddenly something gives, and then the entire thing goes to hell in a handbasket right quick. When? If I knew that, I'd be rich. The general advice is that the market can remain irrational longer than you can remain solvent.

Bombthecat 7y ago
My tip is 5 to 6 years. But who knows?
- jfengel 7y ago
  That's what I said... ten years ago. So we all know what my opinion is worth.

muthas 7y ago

I heard an interesting podcast a little while back that conjectured the typical way to get inflation going (so-called "helicopter money" to the spending population) is far and away the least predictable way to do things. Specifically, the speaker argued that compared to large banks and investing entities, people might do things like pay off debt or save the cash for a rainy day... neither of which are inflationary. That isn't to say that handing out wads of cash wouldn't eventually lead to inflation, but that the systemic lag and second-/third-order effects might make the process so unpredictable that by the time inflation begins to tick up, the central bank would have no way to provide effective control.

notahacker 7y ago

It's not difficult to create inflation, if that's your objective, though it's not quite as simple as increasing the money supply by a fixed percentage and is obviously politically difficult. It's much more difficult to create economic growth by persuading banks to lend more.

Analemma_ 7y ago

Inflation isn't just about money supply (no matter what certain people on the internet tell you), it's about money velocity. If the central bank prints a hundred billion dollars but it immediately gets stashed in vaults or under people's beds or in international tax havens, it might as well not exist and there's no inflation. The "pushing rope" metaphor for inability to create inflation is a good one.

AmericanChopper 7y ago
I think liquidity might have been the word you were looking for, but your example was not an increase in money supply. Creating money and storing it in a bank account increases supply. Creating money and adding it to a banks reserves increases supply. Withdrawing cash and permanently storing it somewhere decreases supply. Increasing reserve requirements decreases supply. If the amount held in reserve goes up because a bank doesn’t want to loan, or charges too much for it, that decreases supply. Inflation is entirely about the supply and demand for money. You were just calculating it wrong.
- smabie 7y ago
  Most economists look at the velocity and supply in order to calculate inflation for their models. If you want combine them into supply and demand, fine. But seperating the concepts is valuable. Moreover the velocity and liquidity of money are seperate concepts.

dontbenebby 7y ago

Well in Germany's case they believe the economic conditions (inflation) were a cause of Hitler's rise to power, and are understandably extremely skittish about triggering similar conditions https://en.wikipedia.org/wiki/Hyperinflation#Germany_(Weimar_Republic) https://en.wikipedia.org/wiki/Hyperinflation#Germany_(Weimar...

ahakki 7y ago
both the weimar era hyperinflation and hitlers rise to power were caused by the conditions of the versaille treaty.

300bps 7y ago

There are many factors and others have pointed out some of them. Here's another one: The dollar's relative value to goods and services isn't rising... and it's because of countries like China that make goods and services for so few dollars. Think about it - I can go to oldnavy.com and buy a shirt for $9. That shirt was made literally on the other side of the world, shipped, marketed, sold, packaged and delivered for $9. The disparity in incomes and environmental protections between the U.S. and other countries makes it very difficult to trigger price inflation. And things just keep getting cheaper. Prices don't rise when supply of goods and services keeps pace with the demand from dollars.

40acres 7y ago

Because central banks don't direct how the money is spent. The central bank puts money into the system but it's up to fiscal policy makers to determine flows -- in the US laws lead to inflation in asset prices.

jajag 7y ago

Central banks are creating inflation, problem is it's in all the wrong places - e.g. asset inflation - instead of a rising CPI. (There is a bit of a debate taking place in central banking circles at the moment about whether CPI is an adequately measure, and whether it should better reflect things like rent increases; FT's Alphaville blog has had a number of interesting articles on the topic over the past week).

erichocean 7y ago

They don't find it hard, because it's trivial: just restrict imports (i.e. available inventory). If there are less things to buy, inflation will rise as people "compete" to buy whatever is available. When you hit your target inflation number, relax the restriction on imports to reduce the inflation. Season to taste. This policy likely has 2nd and 3rd order effects, as it will hurt other countries, but that's a simple strategy to artificially create inflation in CPI items that's fail-proof in execution. Prices will go up. Restricting imports is much better than just giving people money, because they can use the extra money you give them on things like paying down their debt, or just put it in the bank and save it. Instead, you want to target the things they already buy and make those things scarce, so their price goes up (the definition of "inflation"). Food, fuel, and electricity are the easiest to monkey with because people are always buying them, and don't have much of a choice. (If you can't restrict imports (or don't want to), you can simply print money to buy up the local inventory yourself and trash it/warehouse it/export it out of the country/set it on fire. The effect is the same: less inventory for the general population is available, causing the price of whatever is left to go up.)

econcon 7y ago
Or like in India - make imported oil/gas expensive and inflation goes up.