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Anyone want to dig into why this worked? What stopped the other currency from inflating? All we’re told is that ‘they made everything cost 1 Bitcoin (or one ulv

Anyone want to dig into why this worked? What stopped the other currency from inflating? All we’re told is that ‘they made everything cost 1 Bitcoin (or one ulv or some shit), and that unit never changed’. Okay. Why?

vmception 5y ago
I’m guessing the actual government had an issue with the prices of everything it wanted to buy also rising due to no market not trusting it with credit. If the market stopped dumping the currency and started bidding up the bonds. Then the temporary disruption in high interest rates was enough for the government to get ahead on payments. Just a guess. Would like more source on what happened.
justbored123 5y ago
We saw this phenomenon in Argentina. It's called "inflationary inertia". Basically, the government prints money creating inflation in the first place, so prices go up. But when you stop printing money, like Argentina did in 2016 and even reduced the money supply by 5%, inflation still goes up because everybody expects it to go up so they get ahead of it to avoid losing money, starting with the businessmen. Once the businessmen rise prices, everybody else in the economy does the same, and workers demand a pay raise to match inflation, etc. creating a vicious cycle so you have inflation regardless of the money you print or don't print. This technique seems to have stopped that cycle by changing the expectations of the people.
- imtringued 5y ago
  It's more fun to print your way out of hyperinflation though. In theory printing money to support economic sectors that are suffering from shortages would lead to excess production and they would have a hard time getting rid of those products, which gives buyers a negotiating advantage which forces the seller to lower their prices despite hyperinflation.
kqr 5y ago
Inflation is caused by a decreased demand for money. When in normal times you go up to the grocer and say "can I have three eggs for this coin?" they go "sure, I like coins, that sounds like a fair deal." Under inflation they go "I don't want your coins" and if all you have are coins, and you need eggs, all you can say is "okay what about 10 of the coins? 100?" and this is how prices go up. Once people realises inflation is happening, that in and of itself will feed into a negative feedback loop and cause them to demand money less. When people want to get rid of their money as quickly as possible -- and no other people want to take on large amounts of money, liquidity drops and as always when that happens, prices rise. By visibly pegging the prices of things in a completely virtual measure of value, people's faith in the virtual measure of value was established, causing demand for things that could be exchanged for a fixed amount of the virtual measure of value. How can a powerful economic entity set a maximum price? By stubbornly offering to sell seemingly infinite quantities at that price, for example. That way, nobody will have any reason to offer it for sale at a higher price. Why couldn't they do this with the old currency? It depreciated too fast even for the government, due to the lost confidence in it. Maybe this is all obvious to you and I've been rambling for no good reason.
dalmo3 5y ago
The reason why the real didn't lose value immediately was because for a very long time you could always exchange it for USD 1:1. So there was no reason to get rid of (i.e. devalue) it, neither for Brazilians nor external investors. That was achieved via huge dollar reserves and tight money supply. The government had been accumulating USD to point they had ~4x as much of it in reserves than all reais in the economy (M1) when the real was launched. Brazilians were used to price things in dollars, and saved dollars whenever they could for obvious reasons. They had been forced to adopt new currencies in the past which immediately lost value as you suggested. When they were forced to adopt this new currency which was provably as valuable as the dollar, people understood that it was safe to stop raising prices. Of course the dollar reserves wouldn't last forever and a few years later that policy gave way to other measures, but it was a decent starting point. A very good, very long view (in Portuguese): https://www.mises.org.br/article/1294/uma-breve-historia-do-plano-real-aos-seus-18-anos https://www.mises.org.br/article/1294/uma-breve-historia-do-...
- jalbertoni 5y ago
  Ah yes, what a good article; The one time the Brazilian Mises Institute admitted a leftist position in politics was right because it fixed a problem right-wing-economy politicians made it worse over the last decade. One can genuinely laugh at how far they try to push a pro-huge-corporation view in the article, only to say the opposite two paragraphs later, blessing government regulations for fixing the economy.
  - dalmo3 5y ago
    Austrians like sound money. Backing your currency by a strong global currency that you can't print goes very much in that direction. It's akin to the US going back to the gold standard. I'm not sure what's "leftist" in that. > they try to push a pro-huge-corporation view in the article, only to say the opposite two paragraphs later, I didn't see any "pro-huge-corporation view" in the article. From your username I assume you read the original, not a translation. I might be wrong, and you can prove it by quoting the article if you want to have the last word - I'm not interested in continuing this particular thread.
  - 5y ago
saxelsen 5y ago
Modern economic literature suggests that managing inflation is about managing public expectations. If businesses expect there to be price increases in the future (inflation), they'll raise their prices today to offset future losses from general price increases. Basically a self-fulfilling cycle. So by creating a new economic unit with no inflation and managing to convince people that it has no inflation, the public does not raise their "real" prices, thereby fulfilling the expectation of no inflation. This is a lot harder in practice, but that's just the general theory :)
memorysafety 5y ago
I'll cross-post instead of guessing. Another comment here: > URVs were quoted in cruzeiros reais and its intrinsic value was pegged to three price indices and had a fixed parity of 1-to-1 to the daily U.S. dollar exchange rate. [0] > The problem with pegging your currency is that you get a disconnect between the official value and the private value. So introducing this new currency which was pegged, and transferring over only once the disconnect was resolved was the stroke of genius. [0] https://en.wikipedia.org/wiki/Unidade_real_de_valor https://en.wikipedia.org/wiki/Unidade_real_de_valor
- hakfoo 5y ago
  The gimmick here was that there was no actual URV currency. No notes or coins, no bank accounts denominated in it. This prevented developing a free-market exchange rate that undermined the abstract value the state was trying to establish. I could say "I'm only willing to pay 0.50USD for 1URV". If someone takes me up on it, the fulfillment would have to take place in cruzieros-- the transaction becomes "I'm paying 0.50USD to 15 cruzieros" or whatever. This sort of transaction would have more impact on the cruziero's exchange rate than the URV's. I could imagine trading some sort of "osudeo-URV" derivative product that was basically a prepaid purchase contract, but its value would be heavily affected by cruziero-related risk.
neilwilson 5y ago
The legislature sets the unit of account that taxes get paid in. Setting that unit and imposing liabilities in it causes demand for the currency. Then you get a cascade effect. That's why, in strong taxing nations, the currency border is very sharp. The one in Ireland for example between Sterling and the Euro. They also then set the relative price of everything by how many of their new currency units they issue in exchange for goods and services. If I tell you that you will get 20 groats for an hour of labour, you'll immediately know the price of everything in groats because you already have a relative map in your mind of how much things cost per unit of work required - or can quickly construct one from your own experiences. Every new currency has an infinite exchange rate to start with. It doesn't matter how many USD you have you can't get a new currency because they haven't issued it yet. If you analyse currency changes with these viewpoint tools you'll see how it works.

vmception 5y ago

I’m guessing the actual government had an issue with the prices of everything it wanted to buy also rising due to no market not trusting it with credit. If the market stopped dumping the currency and started bidding up the bonds. Then the temporary disruption in high interest rates was enough for the government to get ahead on payments. Just a guess. Would like more source on what happened.

justbored123 5y ago

We saw this phenomenon in Argentina. It's called "inflationary inertia". Basically, the government prints money creating inflation in the first place, so prices go up. But when you stop printing money, like Argentina did in 2016 and even reduced the money supply by 5%, inflation still goes up because everybody expects it to go up so they get ahead of it to avoid losing money, starting with the businessmen. Once the businessmen rise prices, everybody else in the economy does the same, and workers demand a pay raise to match inflation, etc. creating a vicious cycle so you have inflation regardless of the money you print or don't print. This technique seems to have stopped that cycle by changing the expectations of the people.

imtringued 5y ago
It's more fun to print your way out of hyperinflation though. In theory printing money to support economic sectors that are suffering from shortages would lead to excess production and they would have a hard time getting rid of those products, which gives buyers a negotiating advantage which forces the seller to lower their prices despite hyperinflation.

kqr 5y ago

Inflation is caused by a decreased demand for money. When in normal times you go up to the grocer and say "can I have three eggs for this coin?" they go "sure, I like coins, that sounds like a fair deal." Under inflation they go "I don't want your coins" and if all you have are coins, and you need eggs, all you can say is "okay what about 10 of the coins? 100?" and this is how prices go up. Once people realises inflation is happening, that in and of itself will feed into a negative feedback loop and cause them to demand money less. When people want to get rid of their money as quickly as possible -- and no other people want to take on large amounts of money, liquidity drops and as always when that happens, prices rise. By visibly pegging the prices of things in a completely virtual measure of value, people's faith in the virtual measure of value was established, causing demand for things that could be exchanged for a fixed amount of the virtual measure of value. How can a powerful economic entity set a maximum price? By stubbornly offering to sell seemingly infinite quantities at that price, for example. That way, nobody will have any reason to offer it for sale at a higher price. Why couldn't they do this with the old currency? It depreciated too fast even for the government, due to the lost confidence in it. Maybe this is all obvious to you and I've been rambling for no good reason.

dalmo3 5y ago

The reason why the real didn't lose value immediately was because for a very long time you could always exchange it for USD 1:1. So there was no reason to get rid of (i.e. devalue) it, neither for Brazilians nor external investors. That was achieved via huge dollar reserves and tight money supply. The government had been accumulating USD to point they had ~4x as much of it in reserves than all reais in the economy (M1) when the real was launched. Brazilians were used to price things in dollars, and saved dollars whenever they could for obvious reasons. They had been forced to adopt new currencies in the past which immediately lost value as you suggested. When they were forced to adopt this new currency which was provably as valuable as the dollar, people understood that it was safe to stop raising prices. Of course the dollar reserves wouldn't last forever and a few years later that policy gave way to other measures, but it was a decent starting point. A very good, very long view (in Portuguese): https://www.mises.org.br/article/1294/uma-breve-historia-do-plano-real-aos-seus-18-anos https://www.mises.org.br/article/1294/uma-breve-historia-do-...

jalbertoni 5y ago
Ah yes, what a good article; The one time the Brazilian Mises Institute admitted a leftist position in politics was right because it fixed a problem right-wing-economy politicians made it worse over the last decade. One can genuinely laugh at how far they try to push a pro-huge-corporation view in the article, only to say the opposite two paragraphs later, blessing government regulations for fixing the economy.
- dalmo3 5y ago
  Austrians like sound money. Backing your currency by a strong global currency that you can't print goes very much in that direction. It's akin to the US going back to the gold standard. I'm not sure what's "leftist" in that. > they try to push a pro-huge-corporation view in the article, only to say the opposite two paragraphs later, I didn't see any "pro-huge-corporation view" in the article. From your username I assume you read the original, not a translation. I might be wrong, and you can prove it by quoting the article if you want to have the last word - I'm not interested in continuing this particular thread.
- 5y ago

saxelsen 5y ago

Modern economic literature suggests that managing inflation is about managing public expectations. If businesses expect there to be price increases in the future (inflation), they'll raise their prices today to offset future losses from general price increases. Basically a self-fulfilling cycle. So by creating a new economic unit with no inflation and managing to convince people that it has no inflation, the public does not raise their "real" prices, thereby fulfilling the expectation of no inflation. This is a lot harder in practice, but that's just the general theory :)

memorysafety 5y ago

I'll cross-post instead of guessing. Another comment here: > URVs were quoted in cruzeiros reais and its intrinsic value was pegged to three price indices and had a fixed parity of 1-to-1 to the daily U.S. dollar exchange rate. [0] > The problem with pegging your currency is that you get a disconnect between the official value and the private value. So introducing this new currency which was pegged, and transferring over only once the disconnect was resolved was the stroke of genius. [0] https://en.wikipedia.org/wiki/Unidade_real_de_valor https://en.wikipedia.org/wiki/Unidade_real_de_valor

hakfoo 5y ago
The gimmick here was that there was no actual URV currency. No notes or coins, no bank accounts denominated in it. This prevented developing a free-market exchange rate that undermined the abstract value the state was trying to establish. I could say "I'm only willing to pay 0.50USD for 1URV". If someone takes me up on it, the fulfillment would have to take place in cruzieros-- the transaction becomes "I'm paying 0.50USD to 15 cruzieros" or whatever. This sort of transaction would have more impact on the cruziero's exchange rate than the URV's. I could imagine trading some sort of "osudeo-URV" derivative product that was basically a prepaid purchase contract, but its value would be heavily affected by cruziero-related risk.

neilwilson 5y ago

The legislature sets the unit of account that taxes get paid in. Setting that unit and imposing liabilities in it causes demand for the currency. Then you get a cascade effect. That's why, in strong taxing nations, the currency border is very sharp. The one in Ireland for example between Sterling and the Euro. They also then set the relative price of everything by how many of their new currency units they issue in exchange for goods and services. If I tell you that you will get 20 groats for an hour of labour, you'll immediately know the price of everything in groats because you already have a relative map in your mind of how much things cost per unit of work required - or can quickly construct one from your own experiences. Every new currency has an infinite exchange rate to start with. It doesn't matter how many USD you have you can't get a new currency because they haven't issued it yet. If you analyse currency changes with these viewpoint tools you'll see how it works.