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But isn't an inflationary spiral / hyperinflation just as bad as a deflationary spiral? That wipes out a country's currency as well as the life savings of peop

by kqr2 18y ago

But isn't an inflationary spiral / hyperinflation just as bad as a deflationary spiral? That wipes out a country's currency as well as the life savings of people. In general, gross imbalances in the money supply vs. goods is not a desirable condition.

nostrademons 18y ago
It's easier to control. The cure for hyperinflation is to just keep raising interest rates and buying currency in open-market operations. Eventually, the supply of currency becomes tight enough that firms can no longer raise their prices without losing customers. It's painful (just look at 1980-1982), but it works. When countries don't do this, it's usually not because they can't or because they don't know how, but because there's another factor that will threaten the stability of the state if they do. For example, if a country has a large standing army, they can't shut off payments to those soldiers without risking revolution. Or if there's a large foreign-denominated debt, they can't stop payments without inviting war with the creditor nation. In past comment threads, I've gone looking for various instances of hyperinflation, and they all fell into one of the two categories above. I'd welcome counterexamples, but nobody's provided any yet. [Edit: Interesting, I found one. Bolivia in 1985. Like every other instance of hyperinflation I know of, it was caused by the government printing money to support expenditures that its tax base could not justify. However, in this case the expenditures were non-essential (things like subsidized gasoline), and so when the government eliminated the pork and committed itself to a balanced budget, the hyperinflation ended.] The problem with deflation is that interest rates can't fall below 0%, and there's no guarantee that infusions of currency will reach the people that will actually spend them. Once rates are at 0%, banks and savers will just hoard currency instead of circulating it, so even if there're lots of unemployed people that desperately need the money, it won't get to them. "Pushing on a string." I think that Bernanke's "helicopter" comment may have proved prophetic, and it may shortly become his best option.
- bokonist 18y ago
  there's no guarantee that infusions of currency will reach the people that will actually spend them Why not just print money and mail it to every American? If they don't spend it, keep printing. When the spending returns, then you can ease off.
  - nostrademons 18y ago
    Yummyfajitas has a good answer to this elsewhere on-thread. Basically, money collects at whichever firm needs it least. If you give it to low-income people and they spend it, then it's now in the hands of someone who probably just received a lot of money. If they don't need to spend it and expect its value to go up, they'll hoard it. You need consistent inflationary expectations across the economy to keep money flowing. Keynes actually suggested that this is why it took a couple thousand years after the invention of money for a modern industrial society to take hold. A manor lord has every incentive to hoard the rents his peasants give him, so instead of pumping them back into the economy by funding the promising waterwheel a bright upstart proposed, he sits on his treasure hoard.
- kqr2 18y ago
  Historically however, it seems that hyperinflation has been the more prevalent cause of economic woes, e.g. currency collapse, loss of people's life savings, etc. than hyperdeflation. There doesn't appear to be an upper limit to hyperinflation (e.g. trillions of Zimbabwe dollars for a loaf of bread) whereas oil even in a deflationary environment shouldn't go below 0. Personally, I am worried about the hyperinflation scenario and hope the government doesn't cause an overcorrection by its recent measures.
  - nostrademons 18y ago
    Hyperinflation causes more visible woes, because it's pretty obviously painful when your cash is worth 1/10th what it was yesterday. Deflation only causes that sort of visible pain when there're mass layoffs and bank failures, like in the Great Depression. However, in terms of lost opportunity cost, deflation is far worse. It encourages people not to invest, because they earn better returns on their cash than on productive projects. So the society stagnates. Think of the Dark Ages - a whole millenia lost, where nothing much happened. From everything I've read, it wasn't really a time of misery - people had enough to eat, they survived. But nothing much happened. If the Roman Empire had continued, even with its inflationary tendencies, we might've seen the industrial revolution a millenia earlier, and be writing these comments in 1008 instead of 2008.
- bokonist 18y ago
  Hyperinflation was a recurring problem in China from 1100 to 1450 when the government used paper currency - http://goldnews.bullionvault.com/china_paper_money_chinese_printing_ming_marco_polo_072120083 http://goldnews.bullionvault.com/china_paper_money_chinese_p... I don't think that the Chinese case fits either of your two categories. The Chinese situation is actually quite analogous to the U.S. The government began to rely on fiat currency and inflation to fund its operations, and the temptation to keep printing money was too great.

by kqr2 18y ago

nostrademons 18y ago

It's easier to control. The cure for hyperinflation is to just keep raising interest rates and buying currency in open-market operations. Eventually, the supply of currency becomes tight enough that firms can no longer raise their prices without losing customers. It's painful (just look at 1980-1982), but it works. When countries don't do this, it's usually not because they can't or because they don't know how, but because there's another factor that will threaten the stability of the state if they do. For example, if a country has a large standing army, they can't shut off payments to those soldiers without risking revolution. Or if there's a large foreign-denominated debt, they can't stop payments without inviting war with the creditor nation. In past comment threads, I've gone looking for various instances of hyperinflation, and they all fell into one of the two categories above. I'd welcome counterexamples, but nobody's provided any yet. [Edit: Interesting, I found one. Bolivia in 1985. Like every other instance of hyperinflation I know of, it was caused by the government printing money to support expenditures that its tax base could not justify. However, in this case the expenditures were non-essential (things like subsidized gasoline), and so when the government eliminated the pork and committed itself to a balanced budget, the hyperinflation ended.] The problem with deflation is that interest rates can't fall below 0%, and there's no guarantee that infusions of currency will reach the people that will actually spend them. Once rates are at 0%, banks and savers will just hoard currency instead of circulating it, so even if there're lots of unemployed people that desperately need the money, it won't get to them. "Pushing on a string." I think that Bernanke's "helicopter" comment may have proved prophetic, and it may shortly become his best option.

bokonist 18y ago
there's no guarantee that infusions of currency will reach the people that will actually spend them Why not just print money and mail it to every American? If they don't spend it, keep printing. When the spending returns, then you can ease off.
- nostrademons 18y ago
  Yummyfajitas has a good answer to this elsewhere on-thread. Basically, money collects at whichever firm needs it least. If you give it to low-income people and they spend it, then it's now in the hands of someone who probably just received a lot of money. If they don't need to spend it and expect its value to go up, they'll hoard it. You need consistent inflationary expectations across the economy to keep money flowing. Keynes actually suggested that this is why it took a couple thousand years after the invention of money for a modern industrial society to take hold. A manor lord has every incentive to hoard the rents his peasants give him, so instead of pumping them back into the economy by funding the promising waterwheel a bright upstart proposed, he sits on his treasure hoard.
kqr2 18y ago
Historically however, it seems that hyperinflation has been the more prevalent cause of economic woes, e.g. currency collapse, loss of people's life savings, etc. than hyperdeflation. There doesn't appear to be an upper limit to hyperinflation (e.g. trillions of Zimbabwe dollars for a loaf of bread) whereas oil even in a deflationary environment shouldn't go below 0. Personally, I am worried about the hyperinflation scenario and hope the government doesn't cause an overcorrection by its recent measures.
- nostrademons 18y ago
  Hyperinflation causes more visible woes, because it's pretty obviously painful when your cash is worth 1/10th what it was yesterday. Deflation only causes that sort of visible pain when there're mass layoffs and bank failures, like in the Great Depression. However, in terms of lost opportunity cost, deflation is far worse. It encourages people not to invest, because they earn better returns on their cash than on productive projects. So the society stagnates. Think of the Dark Ages - a whole millenia lost, where nothing much happened. From everything I've read, it wasn't really a time of misery - people had enough to eat, they survived. But nothing much happened. If the Roman Empire had continued, even with its inflationary tendencies, we might've seen the industrial revolution a millenia earlier, and be writing these comments in 1008 instead of 2008.
bokonist 18y ago
Hyperinflation was a recurring problem in China from 1100 to 1450 when the government used paper currency - http://goldnews.bullionvault.com/china_paper_money_chinese_printing_ming_marco_polo_072120083 http://goldnews.bullionvault.com/china_paper_money_chinese_p... I don't think that the Chinese case fits either of your two categories. The Chinese situation is actually quite analogous to the U.S. The government began to rely on fiat currency and inflation to fund its operations, and the temptation to keep printing money was too great.