7 ms·

I tried to keep inflation between 1.5-2% for the first 50 months and then decided to find out what happens if I YOLO permanently fix the interest rate to -0.5%.

by yreg 4y ago

I tried to keep inflation between 1.5-2% for the first 50 months and then decided to find out what happens if I YOLO permanently fix the interest rate to -0.5%. After the 240 months I somehow ended with GDP 442999 and 1.53% inflation. How come? Shouldn't I have a runaway inflation?

FastMonkey 4y ago
Ha, I did the exact same thing. I guess the fed has it all wrong! Edit: I guess it's not as fair to the player, but maybe there should be more randomness in there, or perhaps some kind of forcing function that makes things a bit less stable.
- MonkeyClub 4y ago
  Macroeconomics aside, I surely am glad to see other primates in here, have been going bananas for a while on my own.
nwah1 4y ago
Under certain Keynesian views, Fed policy is mostly irrelevant, and only fiscal policy matters. Or actual printing... which low rates and QE are very different from. Another view from the neoclassical school has a similar conclusion dubbed the Policy Ineffectiveness Proposition. But others say Fed policy does matter because in the real world contracts and prices are sticky. https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposition https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposi...
- Proven 4y ago
- zeusk 4y ago
  How is QE or low rates not money printing? Low rates causes higher private lending, borrowing creates money (fractional reserve banking). QE also creates money by Federal Reserve buying Treasury's bonds with printed dollars. Both of these are temporary, but we have had QE and low rates for over a decade now. QE was supposed to be unwound in 2018, but covid pushed it to new peaks.
  - deleted 4y ago
    [deleted]
  - nwah1 4y ago
    https://www.pragcap.com/bernanke-explains-why-qe2-is-not-money-printing-again/ https://www.pragcap.com/bernanke-explains-why-qe2-is-not-mon...
    - adam_arthur 4y ago
      Suppressing rates via QE multiplies the spending power of a dollar, which has a very similar effect as creating more currency
      - nwah1 4y ago
        We should consider a lot of this to be zero-sum. Creditworthy demand for loans doesn't magically increase when rates change or the Fed buys bonds. In QE, like with accounting, you debit one side and credit the other. Netting to zero. The effects it all has probably are real in terms of steering where people park their money. And that matters in the long run. But that would mainly amplify whatever underlying incentive structures exist for investment. If you steer people to stocks, and the economy has only ponzi schemes to offer, it might be because they haven't figured out a policy framework that promotes actual production. But you can't magically add production by rewriting the knobs so that they all go to 11. Printing is differently zero sum, but the analogy works there as well.
        adam_arthur 4y ago
        You're ignoring refinancing. Cash out refis on homes, businesses and government debt. Somebody doing a cash out refi for 100k to add an extension to their house can certainly be inflationary
        nwah1 4y ago
        Interesting point. I'm sort of steelmanning the anti-monetary perspective to the best of my limited ability. Partly in hopes of hearing good rebuttals. I will have to think about this.
OJFord 4y ago
Similarly I immediately lowered to -0.25% and left it there, really quite stable and climbed gradually (not monotically, but close) to 442370. I assume it needs a bit of a tweak for negative inflations, or is limited by the events being fixed - 'people spend 12% less' is more likely to happen at higher interest rates for example. And in particular if we weren't leaving it fixed but had only just lowered it, (i.e. increased motivation to spend) that wouldn't really make sense.
- fartcannon 4y ago
  Isn't a negative interest rate basically UBI?
  - marcosdumay 4y ago
    Yes, as long as the B stands for Big Business.
  - Dylan16807 4y ago
    How so? I don't understand this connection at all.
  - OJFord 4y ago
    Erm, because one might hypothetically get paid a small amount for taking a short term loan, and everyone would do that you mean?
  - eru 4y ago
    Depends on the inflation rate. If prices are falling fast enough, a negative nominal interest rate is still a positive real interest rate.
  - imtringued 4y ago
    If cash is abolished or has to pay a negative interest rate then no, you will quickly notice that the negative interest rate is closer to a storage fee and you actually have to store that value somehow in the real economy. The purpose of credit is to bridge supply and demand across time and that actually takes some effort if there are no safe havens like cash or real estate.
madacol 4y ago
Same, 442209 apples. set to -0.5% from the beginning till the end
Stevvo 4y ago
Interesting I had a very similar number of apples; 442192. However, I had the rate first at 2%, up to 6% when the 12% buff came and down to 2% when the 12% shock.
bfung 4y ago
I fought inflation in SimCB and my economy produced 442549 Started with 0.25% and when the random events happened, adjusted rate really fast to get inflation to no more than 1% for ~6ticks
imtringued 4y ago
We don't know what the economic model is actually doing but remember the central bank controls the number of bankreserves, the reserve ratio and the interest rate. A -0.5% interest rate is the same as 0.5% inflation but with the caveat that it doesn't increase the money supply. If you never issue more central bank reserves the money supply won't go up but the circulation of money is encouraged by the negative interest rate. As long as your orchards keep operating and producing enough apples, the price of apples will remain stable with the money supply. Central banks do QE to increase total bank reserves which is an ugly bandaid for not having to cut interest rates below zero. Inflation then allows real interest rates to be negative. Inflation isn't the same for everyone though, resulting in unfair wealth transfers.
thelamest 4y ago
You can be unprofitable at -0.5%. It stabilizes; for a runaway inflation you need to have a positive feedback loop. From the author’s write-up (https://benoitessiambre.com/simcb.html https://benoitessiambre.com/simcb.html): >The inverse happens with negative interest rates. If the central bank makes a loss on a loan, people are taxed to make the central bank whole in a kind of reverse seigniorage. Now in the real world this doesn’t tend to happen. >It's difficult to create hyperinflation in SimCB (unless in the aftermath of high unemployment leading to low market inventory), when you lower interest rates, even to negative rates, the central bank takes a loss and you get reverse seigniorage, people's money is automatically taxed away, which offsets the inflationary effects of low interest rates and the system self stabilizes. This is partially due to there not being government debt to help fuel high inflation. I don't know how well this reflects real world economics. >The other aspect that is missing from SimCB which could cause hyperinflation is the option for people in an economy to switch to another currency. >(…) Now I could still have allowed central bank losses in SimCB's model. This might have made sense especially given that SimCB doesn't have a government to amplify central bank moves by borrowing. Central banks taking a loss, instead of taxing reverse seigniorage, might have simulated government stimulus, allowing the negative interests to act as little helicopter drops of money. Real world governments often borrow and spend during conditions that warrant very low rates (or under any other conditions really) to help put money into circulation. Something to try in a future version.

by yreg 4y ago

FastMonkey 4y ago

Ha, I did the exact same thing. I guess the fed has it all wrong! Edit: I guess it's not as fair to the player, but maybe there should be more randomness in there, or perhaps some kind of forcing function that makes things a bit less stable.

MonkeyClub 4y ago
Macroeconomics aside, I surely am glad to see other primates in here, have been going bananas for a while on my own.

nwah1 4y ago

Under certain Keynesian views, Fed policy is mostly irrelevant, and only fiscal policy matters. Or actual printing... which low rates and QE are very different from. Another view from the neoclassical school has a similar conclusion dubbed the Policy Ineffectiveness Proposition. But others say Fed policy does matter because in the real world contracts and prices are sticky. https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposition https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposi...

Proven 4y ago
zeusk 4y ago
How is QE or low rates not money printing? Low rates causes higher private lending, borrowing creates money (fractional reserve banking). QE also creates money by Federal Reserve buying Treasury's bonds with printed dollars. Both of these are temporary, but we have had QE and low rates for over a decade now. QE was supposed to be unwound in 2018, but covid pushed it to new peaks.
- deleted 4y ago
  [deleted]
- nwah1 4y ago
  https://www.pragcap.com/bernanke-explains-why-qe2-is-not-money-printing-again/ https://www.pragcap.com/bernanke-explains-why-qe2-is-not-mon...
  - adam_arthur 4y ago
    Suppressing rates via QE multiplies the spending power of a dollar, which has a very similar effect as creating more currency
    - nwah1 4y ago
      We should consider a lot of this to be zero-sum. Creditworthy demand for loans doesn't magically increase when rates change or the Fed buys bonds. In QE, like with accounting, you debit one side and credit the other. Netting to zero. The effects it all has probably are real in terms of steering where people park their money. And that matters in the long run. But that would mainly amplify whatever underlying incentive structures exist for investment. If you steer people to stocks, and the economy has only ponzi schemes to offer, it might be because they haven't figured out a policy framework that promotes actual production. But you can't magically add production by rewriting the knobs so that they all go to 11. Printing is differently zero sum, but the analogy works there as well.
      - adam_arthur 4y ago
        You're ignoring refinancing. Cash out refis on homes, businesses and government debt. Somebody doing a cash out refi for 100k to add an extension to their house can certainly be inflationary
        nwah1 4y ago
        Interesting point. I'm sort of steelmanning the anti-monetary perspective to the best of my limited ability. Partly in hopes of hearing good rebuttals. I will have to think about this.

OJFord 4y ago

Similarly I immediately lowered to -0.25% and left it there, really quite stable and climbed gradually (not monotically, but close) to 442370. I assume it needs a bit of a tweak for negative inflations, or is limited by the events being fixed - 'people spend 12% less' is more likely to happen at higher interest rates for example. And in particular if we weren't leaving it fixed but had only just lowered it, (i.e. increased motivation to spend) that wouldn't really make sense.

fartcannon 4y ago
Isn't a negative interest rate basically UBI?
- marcosdumay 4y ago
  Yes, as long as the B stands for Big Business.
- Dylan16807 4y ago
  How so? I don't understand this connection at all.
- OJFord 4y ago
  Erm, because one might hypothetically get paid a small amount for taking a short term loan, and everyone would do that you mean?
- eru 4y ago
  Depends on the inflation rate. If prices are falling fast enough, a negative nominal interest rate is still a positive real interest rate.
- imtringued 4y ago
  If cash is abolished or has to pay a negative interest rate then no, you will quickly notice that the negative interest rate is closer to a storage fee and you actually have to store that value somehow in the real economy. The purpose of credit is to bridge supply and demand across time and that actually takes some effort if there are no safe havens like cash or real estate.

madacol 4y ago

Same, 442209 apples. set to -0.5% from the beginning till the end

Stevvo 4y ago

Interesting I had a very similar number of apples; 442192. However, I had the rate first at 2%, up to 6% when the 12% buff came and down to 2% when the 12% shock.

bfung 4y ago

I fought inflation in SimCB and my economy produced 442549 Started with 0.25% and when the random events happened, adjusted rate really fast to get inflation to no more than 1% for ~6ticks

imtringued 4y ago

We don't know what the economic model is actually doing but remember the central bank controls the number of bankreserves, the reserve ratio and the interest rate. A -0.5% interest rate is the same as 0.5% inflation but with the caveat that it doesn't increase the money supply. If you never issue more central bank reserves the money supply won't go up but the circulation of money is encouraged by the negative interest rate. As long as your orchards keep operating and producing enough apples, the price of apples will remain stable with the money supply. Central banks do QE to increase total bank reserves which is an ugly bandaid for not having to cut interest rates below zero. Inflation then allows real interest rates to be negative. Inflation isn't the same for everyone though, resulting in unfair wealth transfers.

thelamest 4y ago

You can be unprofitable at -0.5%. It stabilizes; for a runaway inflation you need to have a positive feedback loop. From the author’s write-up (https://benoitessiambre.com/simcb.html https://benoitessiambre.com/simcb.html): >The inverse happens with negative interest rates. If the central bank makes a loss on a loan, people are taxed to make the central bank whole in a kind of reverse seigniorage. Now in the real world this doesn’t tend to happen. >It's difficult to create hyperinflation in SimCB (unless in the aftermath of high unemployment leading to low market inventory), when you lower interest rates, even to negative rates, the central bank takes a loss and you get reverse seigniorage, people's money is automatically taxed away, which offsets the inflationary effects of low interest rates and the system self stabilizes. This is partially due to there not being government debt to help fuel high inflation. I don't know how well this reflects real world economics. >The other aspect that is missing from SimCB which could cause hyperinflation is the option for people in an economy to switch to another currency. >(…) Now I could still have allowed central bank losses in SimCB's model. This might have made sense especially given that SimCB doesn't have a government to amplify central bank moves by borrowing. Central banks taking a loss, instead of taxing reverse seigniorage, might have simulated government stimulus, allowing the negative interests to act as little helicopter drops of money. Real world governments often borrow and spend during conditions that warrant very low rates (or under any other conditions really) to help put money into circulation. Something to try in a future version.