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> History teaches us that inflation will continue as long as the government keeps printing fiat money. That's what you hear a lot, especially these days. But

> History teaches us that inflation will continue as long as the government keeps printing fiat money. That's what you hear a lot, especially these days. But is it really true? What exactly is the signal path, that leads from more money to a higher inflation? I guess, there is a fair amount of psychology involved.

rnernento 4y ago
I mean it's pretty straightforward right? There are now more dollars in play all after the same amount of goods, each dollar has less purchasing power. Why are you so quick to throw out the simplest explanation?
- fladrif 4y ago
  Because sometimes you lose the important details in the generalization. Counter example would be that the dollars created aren't spent depending on how they're distributed. If put under people's mattresses, put into the stock market, or sitting in a savings account, those don't enter circulation and increase the flow of money.
  - WalterBright 4y ago
    What happens to the dollars you put into a savings account or bought stocks with? Do they disappear?
- jollybean 4y ago
  Because the 'simple straight forward explanation' doesn't make much sense. As economies grow and expand, they need more money supply to keep prices stable. If you're using 100 tons of Gold as your 'fixed money supply' then you run into deflationary problems. Also, if there is a crisis in which people get really anti-liquid and tend to hoard and do other bad things, and/or the system needs to allocate resources somewhere fast or else face destruction - then if you only have a big pot of gold split between owners, you are screwed. Mad Max style. If a country is invaded or has a pandemic, most regular levers may not work. But helicopter money can help. It implies an 'unfair' re-balancing of who owns what, but so long as the community at large accepts that, then it's fine. It means a price adjustment for everyone.
  - WalterBright 4y ago
    Some good questions. The answer isn't simple, but I'll try. It comes down to how banks work with fractional reserve banking. (To keep this post short, I'll refer you to google if you don't know what it is.) Banks loan out a multiple of their deposits. In other words, banks create money when they make loans. Amazing, isn't it? But, banks don't loan money unless there is collateral. The next part is tricky to understand. If I, Picasso, create a painting I create value. I can use the painting as collateral for a bank loan, i.e. because I created value, I also indirectly created money! With me so far? Next, what happens when I repay the loan? The money disappears! If you think about it, you'll see that the money supply, through the blind forces of Supply & Demand, tracks the value in the economy, almost like magic. While the gold it represents can sit buried in a vault somewhere and needn't actually be traded. Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation.
    - jollybean 4y ago
      I think you are misunderstanding fractional lending and collateral. Fractional lending seems a bit odd, but it's not like there is 'no collateral' - rather, there ends up being 'partial collateral'. As it turns out, that 'partial collateral' is enough - it's actually reasonable thing to do, because the vast majority of loans are repaid, it's not necessary to fully collateralize everything on the whole. Banks have to have some capital requirements, which means, if they 'screw up' too badly, then they go bankrupt! So they are acting in a capitalist manner and have to be careful about how they lend, and at what rates. If random bank acts irresponsibly, then random bank will go kaput by regular market forces. Instead of thinking of fractional lending as 'missing money' think of it more like leverage. Basically - the effect of fractional lending is that it's a 'multiplier' to whatever the Central Bank decides to do. So it exacerbates effects in one direction or the other but on the whole, it doesn't change the real nature of the system. The way we manage money is sound. We need money to expand and contract, and we have good ways to measure that. The 'danger' of fiat of course is political intervention, or a failure of controls. We had a broad intervention in 2008 that favoured home owners over others, and there are attempts to use the Central Bank to do 'Social Justice' type things, which I think is very risky. It's a bit like Nuclear Energy: it's very potent, you just have to watch it responsibly. Finally - currency should be a 'current' asset, not a store of value. We just want it as a medium of exchange. So as long as it's not shifting too much one way or another, then it should work. For 'stores of value' there are other things, like real estate etc.. "Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation. " This is misleading. The 'government' does not print money, the Central Bank does. And as you indicate, the bank ultimately creates credit via fractional lending. 'Inflation' happens when the cost of goods rise faster than the money in circulation. Thus 'inflation' can happen because 'stuff is more costly to make'. Like gas in Europe, is more expensive, not because 'money printing' but 'Russia'. Also, inflation can feasibly happen without money printing or even a rise in inherent cost of goods, if the economy shifts in a way that ends up in excess cash. But ultimately, if during normal course of 'growth' if there is no expansion in the monetary base, then you'll have deflation, which has bad externalizes. So the goal then is to adjust interest rates / print or extract money from the economy so that prices stay roughly flat, with just a tiny bit of inflation. That is a dynamic process, not a static process.
- lagrange77 4y ago
  Another example: A big tech company goes bankrupt, threatening thousands of jobs to disappear. The gov prints some billions to restore the liquidity of the company, which then recovers. After saving the company and its employees, those employees get the same salary as before and therefore aren't spending more. In that case the printing of money did not generate more demand, which could cause the prices to increase, or am i missing something?
nichohel 4y ago
The "signal path" is simply the presence of more money, which means that purchasers have more money to pay.
- saynay 4y ago
  That is a bit of an oversimplification. The presence of money is no sufficient, that money must be in circulation. For example, they can print all the money they want, if they just toss it all in a big bank account and never remove it, there will be no inflation. That was a big reason why printing a lot of money in the past did not contribute to a lot of inflation: most of that money ended up sitting in the accounts of a few big institutions, who then did not end up spending it on anything. This time around, we both gave that money directly to people (who then spent all of it), but also were dealing with global supply issues, an energy crunch, a food crunch, etc. Everyone had more money to spend, but there were less things to spend it on, leading to dramatic price increases.
  - nichohel 4y ago
    You have a sort of a point; what I should have said was, 'The "signal path" is simply having more money in the hands of buyers, which will then necessarily cause an increase in prices.'
    - lagrange77 4y ago
      > The "signal path" is simply having more money in the hands of buyers, which will then necessarily cause an increase in prices. So from that point on, the mechanism is supply & demand right? Buyers with money increase demand, therefore the prices increase.

rnernento 4y ago

I mean it's pretty straightforward right? There are now more dollars in play all after the same amount of goods, each dollar has less purchasing power. Why are you so quick to throw out the simplest explanation?

fladrif 4y ago
Because sometimes you lose the important details in the generalization. Counter example would be that the dollars created aren't spent depending on how they're distributed. If put under people's mattresses, put into the stock market, or sitting in a savings account, those don't enter circulation and increase the flow of money.
- WalterBright 4y ago
  What happens to the dollars you put into a savings account or bought stocks with? Do they disappear?
jollybean 4y ago
Because the 'simple straight forward explanation' doesn't make much sense. As economies grow and expand, they need more money supply to keep prices stable. If you're using 100 tons of Gold as your 'fixed money supply' then you run into deflationary problems. Also, if there is a crisis in which people get really anti-liquid and tend to hoard and do other bad things, and/or the system needs to allocate resources somewhere fast or else face destruction - then if you only have a big pot of gold split between owners, you are screwed. Mad Max style. If a country is invaded or has a pandemic, most regular levers may not work. But helicopter money can help. It implies an 'unfair' re-balancing of who owns what, but so long as the community at large accepts that, then it's fine. It means a price adjustment for everyone.
- WalterBright 4y ago
  Some good questions. The answer isn't simple, but I'll try. It comes down to how banks work with fractional reserve banking. (To keep this post short, I'll refer you to google if you don't know what it is.) Banks loan out a multiple of their deposits. In other words, banks create money when they make loans. Amazing, isn't it? But, banks don't loan money unless there is collateral. The next part is tricky to understand. If I, Picasso, create a painting I create value. I can use the painting as collateral for a bank loan, i.e. because I created value, I also indirectly created money! With me so far? Next, what happens when I repay the loan? The money disappears! If you think about it, you'll see that the money supply, through the blind forces of Supply & Demand, tracks the value in the economy, almost like magic. While the gold it represents can sit buried in a vault somewhere and needn't actually be traded. Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation.
  - jollybean 4y ago
    I think you are misunderstanding fractional lending and collateral. Fractional lending seems a bit odd, but it's not like there is 'no collateral' - rather, there ends up being 'partial collateral'. As it turns out, that 'partial collateral' is enough - it's actually reasonable thing to do, because the vast majority of loans are repaid, it's not necessary to fully collateralize everything on the whole. Banks have to have some capital requirements, which means, if they 'screw up' too badly, then they go bankrupt! So they are acting in a capitalist manner and have to be careful about how they lend, and at what rates. If random bank acts irresponsibly, then random bank will go kaput by regular market forces. Instead of thinking of fractional lending as 'missing money' think of it more like leverage. Basically - the effect of fractional lending is that it's a 'multiplier' to whatever the Central Bank decides to do. So it exacerbates effects in one direction or the other but on the whole, it doesn't change the real nature of the system. The way we manage money is sound. We need money to expand and contract, and we have good ways to measure that. The 'danger' of fiat of course is political intervention, or a failure of controls. We had a broad intervention in 2008 that favoured home owners over others, and there are attempts to use the Central Bank to do 'Social Justice' type things, which I think is very risky. It's a bit like Nuclear Energy: it's very potent, you just have to watch it responsibly. Finally - currency should be a 'current' asset, not a store of value. We just want it as a medium of exchange. So as long as it's not shifting too much one way or another, then it should work. For 'stores of value' there are other things, like real estate etc.. "Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation. " This is misleading. The 'government' does not print money, the Central Bank does. And as you indicate, the bank ultimately creates credit via fractional lending. 'Inflation' happens when the cost of goods rise faster than the money in circulation. Thus 'inflation' can happen because 'stuff is more costly to make'. Like gas in Europe, is more expensive, not because 'money printing' but 'Russia'. Also, inflation can feasibly happen without money printing or even a rise in inherent cost of goods, if the economy shifts in a way that ends up in excess cash. But ultimately, if during normal course of 'growth' if there is no expansion in the monetary base, then you'll have deflation, which has bad externalizes. So the goal then is to adjust interest rates / print or extract money from the economy so that prices stay roughly flat, with just a tiny bit of inflation. That is a dynamic process, not a static process.
lagrange77 4y ago
Another example: A big tech company goes bankrupt, threatening thousands of jobs to disappear. The gov prints some billions to restore the liquidity of the company, which then recovers. After saving the company and its employees, those employees get the same salary as before and therefore aren't spending more. In that case the printing of money did not generate more demand, which could cause the prices to increase, or am i missing something?

nichohel 4y ago

The "signal path" is simply the presence of more money, which means that purchasers have more money to pay.

saynay 4y ago
That is a bit of an oversimplification. The presence of money is no sufficient, that money must be in circulation. For example, they can print all the money they want, if they just toss it all in a big bank account and never remove it, there will be no inflation. That was a big reason why printing a lot of money in the past did not contribute to a lot of inflation: most of that money ended up sitting in the accounts of a few big institutions, who then did not end up spending it on anything. This time around, we both gave that money directly to people (who then spent all of it), but also were dealing with global supply issues, an energy crunch, a food crunch, etc. Everyone had more money to spend, but there were less things to spend it on, leading to dramatic price increases.
- nichohel 4y ago
  You have a sort of a point; what I should have said was, 'The "signal path" is simply having more money in the hands of buyers, which will then necessarily cause an increase in prices.'
  - lagrange77 4y ago
    > The "signal path" is simply having more money in the hands of buyers, which will then necessarily cause an increase in prices. So from that point on, the mechanism is supply & demand right? Buyers with money increase demand, therefore the prices increase.