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It's not that it's impossible to manage fiat money sensibly. It's that the incentives are perverse such that politicians have every incentive to keep the gravy

It's not that it's impossible to manage fiat money sensibly. It's that the incentives are perverse such that politicians have every incentive to keep the gravy train going and little to no incentive to be disciplined about spending. The end result is a system that necessarily has a greater likelihood to evolve into an inability to manage fiat money sensibly. So it's not about impossibilities, so much as it is about incentives and probabilities. Note, there are definitely cases where deficit spending is warranted (e.g. recessions) and even a good investment during boom times. But when deficit-spending during good times goes towards not infrastructure but ephemeral program spending, which much of the world is currently doing, then it's easy to see why it is so difficult to manage fiat money responsibly.

Retric 4y ago
Incentives don’t need to be perfect to work out. US has had a much more stable economy post fiat money than before fiat money. https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
- djbebs 4y ago
  (X) doubt Any evidence for that?
  - deleted 4y ago
    [deleted]
  - Armisael16 4y ago
    The US was on the gold standard from 1882 to 1933. Recessions from that time: * 1882-1885 recession (not totally fair; gold standard policies hadn’t had time to cause this) * 1887-1888 recession * 1890-1891 recession * Panic of 1893 * Panic of 1896 * 1899-1900 recession * 1902-1904 recession * Panic of 1907 * Panic of 1910-1911 * 1913-1914 recession * Post-WW1 recession (1918-1919) * Depression of 1920-1921 * 1923-1924 recession * 1926-1927 recession * The Great Depression We were on a mixed system from 1933 until the end of Bretton Woods. We’ve had seven recessions since then (vs 15 over a similar time span), and one of the big ones (1973-1975) was clearly driven by decisions made while operating on a gold standard. (It’s a different story if inflation is the only metric you about at all - while it was more volatile it was also lower on average)
    - kragen 4y ago
      Just to clarify, the dollar was gold-backed from 01944 until the end of Bretton Woods in 01971; it wasn't a fiat currency. Also I think saying that inflation was "lower on average" is really a dramatic understatement. From independence up to the advent of the "mixed system" in 01933 (really a switch to fiat currency until 01944) inflation was probably zero on average. The same was observed over the 1300 years of the commodity-backed pound sterling (usually gold, sometimes silver or bimetallic). I think there are plausible arguments that fiat currencies are less prone to such crises, and even that they stimulate economic growth, but I don't think it's an open-and-shut case.
      - Retric 4y ago
        Average inflation rates over multiple lifetimes largely irrelevant. 24+% inflation for 2 years in 1863 was a huge issue. Short term deflation is often much worse than inflation. Averaging both to zero is wildly misleading. The vast devaluation of silver after the discovery of the new world was a massive issue in Europe even if it averages out to nothing over time.
        notch656a 4y ago
        These kind of fluctuations that average out make the money useful on an immediate or long-term timeline, with the cost of medium-term fluctuations (think hold under a few months or over 5 years). Fiat as currently found in places like the US makes the money useful in the immediate or medium term timeline (think under 5 years). I think which you prefer depends on your station in life and your spending choices. Personally when fiat hits my bank account I want to shit-can it as soon as possible, eithre for equities or commodities. If I were paid in the kind of unstable but averaging out dollar of the 1800s I would very much prefer that, rather than losing money to middle men converting to some commodity like that (such as a commodities index, silver, whatever) and then converting back whenever I need to spend.
        Retric 4y ago
        Being able to store value as currency for long periods is a bug not a feature as it does bad things to the economy. Lets’s say you want to store gold in your basement for bad times like a famine. Great you and everyone else has 1+ oz of gold when a famine hits, but society didn’t actually get any more food so everyone having gold is not just pointless but wasteful both to mine the stuff and to keep it protected from thieves. Alternatively, society can try and store value as productive assets like stocks. On a day to day basis it looks similar but rather than building ever larger vaults and digging ever deeper it’s a quest to create even the smallest income stream. You still hit diminishing returns but it’s stuck with diminishing positive returns. PS: > losing money to middle men converting to some commodity You end up losing even more money when the government is trying to get and store enough gold to keep a gold backed currency, it’s just less obvious. Great Britten sent many ships to Canada during WWII to keep it’s gold safe. They had much much useful things to do with those ships and men.
- kragen 4y ago
  It's hard to assess economic stability because big crises are low-probability events, but it doesn't seem obvious to me that Bretton Woods US (01944–01971) was systematically less stable than the US after the switch to fiat money in 01971. Certainly it was far more economically prosperous; the change to a fiat currency coincides with a widely-remarked drop in the GDP growth rate and an even more dramatic growth of inequality, to the point that the lowest quintile in the US has famously seen no real income growth since the switch to fiat money. But that could easily be a coincidence, because many other things also changed. For example, the Bretton Woods period was a historically anomalous period during which the US was by far the world's dominant economic power; all the other advanced economies had been bombed to smithereens, the PRC and Russia were additionally crippled by communism, and the former colonies in India, Africa, and Latin America were only beginning to recover from colonialism. The dollar itself enjoyed the exorbitant privilege of being the backing for all other currencies. Plausibly the US's dominance during this period allowed it to strip resources from weaker powers in a way that dramatically enhanced its own economic growth, a way that is no longer possible. Also, you could reasonably quibble that, rather than being a natural division between systems, comparing to Bretton Woods amounts to historical cherry-picking: it's been 51 years since the US transitioned to a fiat currency, and the preceding 51 years include the crash of 01929 and the Great Depression! Any period of world history is economically stable compared to a period embracing the Great Depression.
  - Retric 4y ago
    I am suggesting you compare 1776-1971 vs 1971+ which is the opposite of cherry-picking. Ignoring all US history prior to 1944 is going to give you a very distorted view of what’s normal. Especially as Brenton Woods was a mixed system. The degree to which these differences are a function of various monetary systems is debatable, but it’s very hard to argue that fiat is worse on those timescales.
    - kragen 4y ago
      I don't think it's very hard to argue that fiat is worse on those timescales; few if any fiat money systems have ever survived for a period of 195 years, like 01776–01971, without succumbing to at least one episode of hyperinflation. These are localized but generally worse than the Great Depression. We have numerous examples going back to the Yuan Dynasty, including four already this century: North Korea, Turkey, Venezuela, and most notoriously, Zimbabwe. You could of course argue that Turkey isn't the US: there are important differences between the countries. And that's true, and surely the differences are relevant to the risk of hyperinflation. But the US today isn't the US of 50 years ago, either — economically speaking, it has a lot less in common with the US of 01972 than with today's Turkey (PPP GDP US$37000 per capita).
FabHK 4y ago
You are right, those are the bad incentives. And that is why there are legal and institutional and customary mechanisms in place to insulate central banks from political pressure, and by and large they seem to work well (maybe not in Argentina...) Even Trump didn't manage to sway Powell.
- SilasX 4y ago
  What? Trump got Powell not to raise rates in 2018 and 2019 when that would have been the perfect opportunity to.
  - FabHK 4y ago
    Powell raised rates 4 times in 2018. Then, in 2019, the Fed became more dovish, but that was arguably justified by economics (inverted yield curve in spring of 2019). More details than you ever wanted, from Bernanke's 21st Century Monetary Policy: > At his swearing-in ceremony on February 5, 2018, Powell noted the importance of Fed independence—its “long-standing, nonpartisan tradition to make decisions objectively, based only on the best available evidence." > On monetary policy, Powell soon made clear that, the president’s preferences notwithstanding, he planned to continue gradually moving toward a more neutral, or “normal,” policy stance. At his first meeting as chair, in March 2018, the FOMC voted unanimously to increase the target range for the federal funds rate by another quarter percentage point, to 1½–1¾ percent. > In June [2018], the Committee raised the target range for the funds rate by another quarter percentage point [...] > President Trump had praised Powell at the announcement of his nomination: “He’s strong. He’s committed. He’s smart.” And he remained silent on monetary policy through Powell’s first five and a half months. The honeymoon ended on July 19, 2018, when Trump, in a CNBC interview, said “I’m not thrilled” about the Fed’s interest-rate increases. > [Trump's] public criticism of the Fed’s policy decisions would continue—a sharp break from the norm that, with few exceptions, had governed presidents after Nixon. Trump’s complaints also reversed his campaign-trail rhetoric that easy-money policies had created a “false” stock market. > Powell’s strategy for dealing with Trump was multipronged. As he had at his swearing-in ceremony and, earlier, at the announcement of his nomination, he regularly and publicly emphasized that independence allows the Fed to make decisions in the public interest based on objective data and analysis and free of short-term political considerations. > Consequently, the best policy, [Powell] concluded, was to continue Yellen’s policy of gradual rate increases, with close attention to economic developments and a willingness to adjust nimbly. As foreshadowed in Powell’s speech, the FOMC raised the target range for the funds rate again in September [2018], bringing it to 2–2¼ percent. > On December 19, 2018, near the end of Powell’s first year as chair, the FOMC increased the federal funds rate target to 2¼–2½ percent. It was the ninth quarter-point increase since the tightening of policy had begun three years earlier under Yellen, and the fourth under Powell’s chairmanship. > Four rate hikes in 2018, the promise of more in 2019, and the ongoing reduction in the balance sheet—which traders had dubbed “quantitative tightening”—added up to a significant prospective tightening, which seemed hard to justify when set against the agnostic stance that Powell had taken in Jackson Hole or the economic crosscurrents he cited at the press conference. > In 2019, Powell and the rest of the FOMC navigated continued pressure from the president. They had to avoid “caving” to Trump’s demands but also not allow a desire to demonstrate independence to distort their decisions. > On April 5 [2019], the president told reporters that the Fed should cut rates, and on April 30 he tweeted that the economy would “soar like a rocket” if the Fed lowered its benchmark rate by a full percentage point. “They [Fed officials] don’t have a clue,” he tweeted on June 11. > It is hard to overstate how jarring Trump’s tactics were, particularly compared with his predecessors’ assiduous respect for Fed independence. Understanding the importance of not taking the bait, Fed officials responded to the inevitable press questions about the president’s tweets and comments through gritted teeth. For decades, presidential jawboning has not been an effective way to influence Fed policy, and it was not this time. > At the press conference, Heather Long of the Washington Post asked Powell about Trump’s threat to demote him. He replied, “I think the law is clear that I have a four-year term [as chair], and I fully intend to serve it.” > The foreshadowed rate cut, along with an early end to the runoff of the Fed’s balance sheet, came at the next meeting, at the end of July [2019]. > Despite the rate cut, the Fed’s first in a decade, Trump continued to assail the Fed chair. On August 14 he called Powell “clueless.” On August 19 he criticized Powell’s “horrendous lack of vision.” > On September 11 [2019], [Trump] called on the Fed to “get our interest rates down to ZERO, or less,” labeling the FOMC, in a second tweet, “Boneheads.” At its September meeting the FOMC, as expected, cut the target range for the funds rate another quarter point, to 1¾–2 percent.

Retric 4y ago

Incentives don’t need to be perfect to work out. US has had a much more stable economy post fiat money than before fiat money. https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...

djbebs 4y ago
(X) doubt Any evidence for that?
- deleted 4y ago
  [deleted]
- Armisael16 4y ago
  The US was on the gold standard from 1882 to 1933. Recessions from that time: * 1882-1885 recession (not totally fair; gold standard policies hadn’t had time to cause this) * 1887-1888 recession * 1890-1891 recession * Panic of 1893 * Panic of 1896 * 1899-1900 recession * 1902-1904 recession * Panic of 1907 * Panic of 1910-1911 * 1913-1914 recession * Post-WW1 recession (1918-1919) * Depression of 1920-1921 * 1923-1924 recession * 1926-1927 recession * The Great Depression We were on a mixed system from 1933 until the end of Bretton Woods. We’ve had seven recessions since then (vs 15 over a similar time span), and one of the big ones (1973-1975) was clearly driven by decisions made while operating on a gold standard. (It’s a different story if inflation is the only metric you about at all - while it was more volatile it was also lower on average)
  - kragen 4y ago
    Just to clarify, the dollar was gold-backed from 01944 until the end of Bretton Woods in 01971; it wasn't a fiat currency. Also I think saying that inflation was "lower on average" is really a dramatic understatement. From independence up to the advent of the "mixed system" in 01933 (really a switch to fiat currency until 01944) inflation was probably zero on average. The same was observed over the 1300 years of the commodity-backed pound sterling (usually gold, sometimes silver or bimetallic). I think there are plausible arguments that fiat currencies are less prone to such crises, and even that they stimulate economic growth, but I don't think it's an open-and-shut case.
    - Retric 4y ago
      Average inflation rates over multiple lifetimes largely irrelevant. 24+% inflation for 2 years in 1863 was a huge issue. Short term deflation is often much worse than inflation. Averaging both to zero is wildly misleading. The vast devaluation of silver after the discovery of the new world was a massive issue in Europe even if it averages out to nothing over time.
      - notch656a 4y ago
        These kind of fluctuations that average out make the money useful on an immediate or long-term timeline, with the cost of medium-term fluctuations (think hold under a few months or over 5 years). Fiat as currently found in places like the US makes the money useful in the immediate or medium term timeline (think under 5 years). I think which you prefer depends on your station in life and your spending choices. Personally when fiat hits my bank account I want to shit-can it as soon as possible, eithre for equities or commodities. If I were paid in the kind of unstable but averaging out dollar of the 1800s I would very much prefer that, rather than losing money to middle men converting to some commodity like that (such as a commodities index, silver, whatever) and then converting back whenever I need to spend.
        Retric 4y ago
        Being able to store value as currency for long periods is a bug not a feature as it does bad things to the economy. Lets’s say you want to store gold in your basement for bad times like a famine. Great you and everyone else has 1+ oz of gold when a famine hits, but society didn’t actually get any more food so everyone having gold is not just pointless but wasteful both to mine the stuff and to keep it protected from thieves. Alternatively, society can try and store value as productive assets like stocks. On a day to day basis it looks similar but rather than building ever larger vaults and digging ever deeper it’s a quest to create even the smallest income stream. You still hit diminishing returns but it’s stuck with diminishing positive returns. PS: > losing money to middle men converting to some commodity You end up losing even more money when the government is trying to get and store enough gold to keep a gold backed currency, it’s just less obvious. Great Britten sent many ships to Canada during WWII to keep it’s gold safe. They had much much useful things to do with those ships and men.
kragen 4y ago
It's hard to assess economic stability because big crises are low-probability events, but it doesn't seem obvious to me that Bretton Woods US (01944–01971) was systematically less stable than the US after the switch to fiat money in 01971. Certainly it was far more economically prosperous; the change to a fiat currency coincides with a widely-remarked drop in the GDP growth rate and an even more dramatic growth of inequality, to the point that the lowest quintile in the US has famously seen no real income growth since the switch to fiat money. But that could easily be a coincidence, because many other things also changed. For example, the Bretton Woods period was a historically anomalous period during which the US was by far the world's dominant economic power; all the other advanced economies had been bombed to smithereens, the PRC and Russia were additionally crippled by communism, and the former colonies in India, Africa, and Latin America were only beginning to recover from colonialism. The dollar itself enjoyed the exorbitant privilege of being the backing for all other currencies. Plausibly the US's dominance during this period allowed it to strip resources from weaker powers in a way that dramatically enhanced its own economic growth, a way that is no longer possible. Also, you could reasonably quibble that, rather than being a natural division between systems, comparing to Bretton Woods amounts to historical cherry-picking: it's been 51 years since the US transitioned to a fiat currency, and the preceding 51 years include the crash of 01929 and the Great Depression! Any period of world history is economically stable compared to a period embracing the Great Depression.
- Retric 4y ago
  I am suggesting you compare 1776-1971 vs 1971+ which is the opposite of cherry-picking. Ignoring all US history prior to 1944 is going to give you a very distorted view of what’s normal. Especially as Brenton Woods was a mixed system. The degree to which these differences are a function of various monetary systems is debatable, but it’s very hard to argue that fiat is worse on those timescales.
  - kragen 4y ago
    I don't think it's very hard to argue that fiat is worse on those timescales; few if any fiat money systems have ever survived for a period of 195 years, like 01776–01971, without succumbing to at least one episode of hyperinflation. These are localized but generally worse than the Great Depression. We have numerous examples going back to the Yuan Dynasty, including four already this century: North Korea, Turkey, Venezuela, and most notoriously, Zimbabwe. You could of course argue that Turkey isn't the US: there are important differences between the countries. And that's true, and surely the differences are relevant to the risk of hyperinflation. But the US today isn't the US of 50 years ago, either — economically speaking, it has a lot less in common with the US of 01972 than with today's Turkey (PPP GDP US$37000 per capita).

FabHK 4y ago

You are right, those are the bad incentives. And that is why there are legal and institutional and customary mechanisms in place to insulate central banks from political pressure, and by and large they seem to work well (maybe not in Argentina...) Even Trump didn't manage to sway Powell.

SilasX 4y ago
What? Trump got Powell not to raise rates in 2018 and 2019 when that would have been the perfect opportunity to.
- FabHK 4y ago
  Powell raised rates 4 times in 2018. Then, in 2019, the Fed became more dovish, but that was arguably justified by economics (inverted yield curve in spring of 2019). More details than you ever wanted, from Bernanke's 21st Century Monetary Policy: > At his swearing-in ceremony on February 5, 2018, Powell noted the importance of Fed independence—its “long-standing, nonpartisan tradition to make decisions objectively, based only on the best available evidence." > On monetary policy, Powell soon made clear that, the president’s preferences notwithstanding, he planned to continue gradually moving toward a more neutral, or “normal,” policy stance. At his first meeting as chair, in March 2018, the FOMC voted unanimously to increase the target range for the federal funds rate by another quarter percentage point, to 1½–1¾ percent. > In June [2018], the Committee raised the target range for the funds rate by another quarter percentage point [...] > President Trump had praised Powell at the announcement of his nomination: “He’s strong. He’s committed. He’s smart.” And he remained silent on monetary policy through Powell’s first five and a half months. The honeymoon ended on July 19, 2018, when Trump, in a CNBC interview, said “I’m not thrilled” about the Fed’s interest-rate increases. > [Trump's] public criticism of the Fed’s policy decisions would continue—a sharp break from the norm that, with few exceptions, had governed presidents after Nixon. Trump’s complaints also reversed his campaign-trail rhetoric that easy-money policies had created a “false” stock market. > Powell’s strategy for dealing with Trump was multipronged. As he had at his swearing-in ceremony and, earlier, at the announcement of his nomination, he regularly and publicly emphasized that independence allows the Fed to make decisions in the public interest based on objective data and analysis and free of short-term political considerations. > Consequently, the best policy, [Powell] concluded, was to continue Yellen’s policy of gradual rate increases, with close attention to economic developments and a willingness to adjust nimbly. As foreshadowed in Powell’s speech, the FOMC raised the target range for the funds rate again in September [2018], bringing it to 2–2¼ percent. > On December 19, 2018, near the end of Powell’s first year as chair, the FOMC increased the federal funds rate target to 2¼–2½ percent. It was the ninth quarter-point increase since the tightening of policy had begun three years earlier under Yellen, and the fourth under Powell’s chairmanship. > Four rate hikes in 2018, the promise of more in 2019, and the ongoing reduction in the balance sheet—which traders had dubbed “quantitative tightening”—added up to a significant prospective tightening, which seemed hard to justify when set against the agnostic stance that Powell had taken in Jackson Hole or the economic crosscurrents he cited at the press conference. > In 2019, Powell and the rest of the FOMC navigated continued pressure from the president. They had to avoid “caving” to Trump’s demands but also not allow a desire to demonstrate independence to distort their decisions. > On April 5 [2019], the president told reporters that the Fed should cut rates, and on April 30 he tweeted that the economy would “soar like a rocket” if the Fed lowered its benchmark rate by a full percentage point. “They [Fed officials] don’t have a clue,” he tweeted on June 11. > It is hard to overstate how jarring Trump’s tactics were, particularly compared with his predecessors’ assiduous respect for Fed independence. Understanding the importance of not taking the bait, Fed officials responded to the inevitable press questions about the president’s tweets and comments through gritted teeth. For decades, presidential jawboning has not been an effective way to influence Fed policy, and it was not this time. > At the press conference, Heather Long of the Washington Post asked Powell about Trump’s threat to demote him. He replied, “I think the law is clear that I have a four-year term [as chair], and I fully intend to serve it.” > The foreshadowed rate cut, along with an early end to the runoff of the Fed’s balance sheet, came at the next meeting, at the end of July [2019]. > Despite the rate cut, the Fed’s first in a decade, Trump continued to assail the Fed chair. On August 14 he called Powell “clueless.” On August 19 he criticized Powell’s “horrendous lack of vision.” > On September 11 [2019], [Trump] called on the Fed to “get our interest rates down to ZERO, or less,” labeling the FOMC, in a second tweet, “Boneheads.” At its September meeting the FOMC, as expected, cut the target range for the funds rate another quarter point, to 1¾–2 percent.