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> History teaches us that inflation will continue as long as the government keeps printing fiat money. Of course, that is almost a tautology. The devil is in t

• kelseyfrog 4y ago
  Why are interests rates as a money sink preferable to the more direct approach of simply sinking money out of supply via tax? They seem to amount to the same thing at the end of the day - siphoning dollars out.
  • bombcar 4y ago
    Because you don't have to subject it to a vote. People vote against taxes, they kinda ignore moderate interest/inflation.
  • merely-unlikely 4y ago
    That is also a valid approach but I'm not sure it is more direct. Tax policy is generally only set once a year and only affects tax payers. Interest rates can be tweaked more frequently and (I think) directly impact a larger subset of economic players. That and the Fed doesn't determine tax rates.
    • atq2119 4y ago
      Your point about how tax rates are set compared to interest rates is true, but could be changed. I don't follow the second part though: pretty much everybody pays a significant amount of taxes, if only the likes of sales tax. Far fewer (though of course still many) players have substantial interest income or expenses.
  • marcosdumay 4y ago
    Why governments don't do monetary policy by fiscal means? Well, because the central bank is the authority on monetary matters, and the congress the authority on fiscal matters. They don't even usually agree on what direction to go. (Things are this way on every democracy.) But that specific question, nobody would take money out of the economy by fiscal means, even if they could. You would need huge fiscal changes to have the same effect of a small monetary restriction. And you don't do huge fiscal changes, ever.
  • badpun 4y ago
    This way, you'd only be vacuuming dollars held by US entities (citizens, companies), while USD is a global currency held by everyone in the world. This policy would greatly benefit non-US entities, at the cost of US entities.
    • kelseyfrog 4y ago
      Interesting. It isn't obvious to me how the Fed(a US org) setting interest rates necessarily affects non-US entities. Could you explain the causal chain?
    • atq2119 4y ago
      Do non-US entities tend to have more assets in USD or more debts? I'd assume the former, which means that a US interest rate increase is actually net beneficial to non-US entities.
  • em500 4y ago
    The Federal Reserves implements interest rate increases by selling the bonds that they own (bought in the past) in the market in exchange for cash ("Open Market Operations"). This takes cash out of the hand of the public (in exchange for cash that can be spent in the future). That's about as direct as it gets. Removing cash in the public's hand via taxation has several drawbacks, as mentioned by other posters. It's a very slow legislative process, because it has much more direct distributional effects (who is going to be taxed?). Additionally, most academic economists believe more taxation reduces real, as opposed to nominal, economic activity ("distortionary effects of taxation").
• ryanisnan 4y ago
  I'm not very versed in economics, but can you explain "No inflation is bad because the economy stops."?
  • foobarian 4y ago
    There are some other comments that probably described it better, but as an example: let's say inflation is negative. That means it is good to keep cash. What happens is everyone starts hoarding cash under their mattresses and there is no liquidity around to help exchange goods, and everything slows down. With a small inflation, there is no incentive to hoard cash, and there is enough liquidity to make sure goods get exchanged without too much delay. At the end of the day that is what an economy is, exchanging goods.
    • IncRnd 4y ago
      But, the economy doesn't stop when there is no inflation or deflation. Well, I suppose that depends on your meaning of the word economy.
      • foobarian 4y ago
        Certainly I was wrong if you take those words literally. You got me. At the end of the day hopefully you got positive insight out of it. :-)
        • IncRnd 4y ago
          I didn't "get you". What is your non-literal definition of economy?
        • rolisz 4y ago
          No, I didn't get it either. People will still need food, electricity, gas, clothing. Buildings will need maintenance. Are you saying people will decide to not eat because deflation? Or not fix their broken windows?
• virissimo 4y ago
  > No inflation is bad because the economy stops. How much net inflation was there in Europe between the Napoleonic Wars and the start of WWI? Do you think "the economy stops" is a fair description of this time period?
• WalterBright 4y ago
  > Of course, that is almost a tautology Inflation lags the money printing, so it isn't a tautology. > So what do you do to get that sweet spot of about 1-2% inflation? I'm amazed that propaganda of a sweet spot gets so heavily embedded into the popular wisdom. If there is a sweet spot for inflation, it's 0%. Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower.
  • foobarian 4y ago
    I don’t know, the concept just makes sense to me intuitively. There are enough weird effects in systems and math when things are at zero that I just can’t tell what would happen. Example, in queueing theory when input rate is equal to output rate under reasonable randomness you get large backlogs. When everything drains at just a few percent over zero it just seems like a better system. The US also had a civil war during that period. And then repeated brutal boom and bust cycles until Breton Woods.
    • WalterBright 4y ago
      We still have boom and bust cycles, but with persistent inflation. As for the Civil War, the US government printed fiat money during it.
  • mixmastamyk 4y ago
    ^Became a superpower in the 1940s gearing up for WWII and then the only country left standing with brand new factories.
    • deleted 4y ago
      [deleted]
  • woodruffw 4y ago
    > Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower. This is grossly ahistorical: in 1914, 2/3rds of the US lived in abject poverty[1]. Individual farming, including subsistence farming, didn't peak until the 1930s[2]. The US's ascent to superpower status can be traced, at the earliest, to lending programs begun during WWI (and repeated, to fantastic effect, during WWII). The US's phenomenal ascent in international status and power is directly tied to its monetary policy, a policy that has more or less kept inflation around 2% since 1935[3]. [1]: https://web.archive.org/web/20150720050803/https://www.irp.wisc.edu/faqs/faq2.htm https://web.archive.org/web/20150720050803/https://www.irp.w... [2]: https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/farming-and-farm-income/ https://www.ers.usda.gov/data-products/ag-and-food-statistic... [3]: https://www.thebalancemoney.com/u-s-inflation-rate-history-by-year-and-forecast-3306093 https://www.thebalancemoney.com/u-s-inflation-rate-history-b...
• sidewndr46 4y ago
  I've never heard anyone tell me they were going to quit working because the US government wasn't printing money fast enough. I have heard people tell me they weren't making enough money to cover their expenses on a month-to-month basis as a result of cost increases. These happen to correlate with inflation. There is no way an economy would stop just because there was no inflation. Would Microsoft suddenly decree that if the US government won't print US dollars, it won't sell you a Windows license key? Even in the case of extreme deflation, it only becomes an issue when you have people trying to do weird things with physical currency like cut a penny into 1/4s and use it to buy different goods.
  • colinmhayes 4y ago
    The people who couldn’t afford their expenses due to rising costs likely would have lost their job in the recession that was averted due to inflation.
    • sidewndr46 4y ago
      I really don't think we can call something "averted" if people can no longer actually afford to live.
      • colinmhayes 4y ago
        The recession was averted. The outcome was still bad, but it would’ve been much worse.
• Consultant32452 4y ago
  Have you ever noticed you get raises roughly based on last year's inflation and not an estimation of next year's inflation? When the money printers print the people who touch the new money first get to buy assets before the price inflation occurs. Then, once the new money eventually circulates to the peasants, they get to use it to buy goods and services at the new, higher prices. Inflation is a wealth transfer from the poor to the wealthy. It is not, by any means, necessary. https://mises.org/wire/inflation-its-wealth-redistribution-scheme https://mises.org/wire/inflation-its-wealth-redistribution-s...
  • imtringued 4y ago
    Isn't it amazing that Austrian economists completely ignore that providing liquidity creates costs for the providers of liquidity? Businesses give money value by offering products and services, meanwhile the holder of money expects the business to keep providing this costly service at no cost. In other words, there is a constant flow of free liquidity provisioning services toward the holders of money which makes the providers of liquidity poorer and the holders of liquidity richer if they market that liquidity. After all, money is worth more than the purchasing power it represents, it can buy anything available in the payments network. Money that buys bananas and apples is more valuable than money that only buys apples even if both have the same amount of purchasing power. Since liquidity is paid for by the general enterprising public, the holders who have none of the costs can just loan out and market their liquidity for a price and they get to pretend that they are providing a service, even though they haven't done anything for it in any way. People who still have a need to transact must now pay the costs of liquidity to someone who doesn't provide it when they borrow money. The person who borrows money is now stuck with the costs of liquidity even if they spend it. When they spend it, they no longer benefit from liquidity but they must still pay for the liquidity that someone else owns. That person then can lend his liquidity out without paying for it. The end result is that liquidity costs must be paid twice. This is an endlessly compounding system. Like a pyramid scheme. Money acts like a perpetuity where the yield is paid out in liquidity which can through borrowing be turned into money. Previous perpetuities are paid by creating new perpetuities. Very interesting scheme and Austrian economists are even denying the above so they are complicit.