5 ms·

I like how you can easily miss this part: You have to slow down the creation of money, they explained. It's as if it wasn't instrumental when in actuality, it

I like how you can easily miss this part: You have to slow down the creation of money, they explained. It's as if it wasn't instrumental when in actuality, it's the entire reason why inflation stopped.

bryanlarsen 11y ago
According to the article, that had been tried and failed several times in the past. Slowing down the creation of money would have eventually stopped inflation, yes. But it would have taken a lot longer and created some really nasty side effects in the economy during the period when inflation exceeds monetary growth. Those side effects were nasty enough to topple several governments, and the government change stopped the slowdown before it had time to take effect.
outworlder 11y ago
Oh, they tried that before. Also tried to index prices. Which caused massive shortages of the most basic products. People were not happy about it.
Symmetry 11y ago
Yes and no. The quantity of money governs the price level in the long run but people's expectations about inflation are very important in the short run. Volker showed that you can simply slow down the creation of money to bring inflation under control at the cost of a certain amount of short term economic distress. What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.
- Alleluja 11y ago
  Fed's level of independence: Ever heard of Greenspan Put? Even much more so for Bernanke and Yellen. You can't call FED indpendent. They are not about inflation. They are not about full employment. They have been all about keeping asset bubbles afloat since 1990s: from nasdaq, through housing, ending on treasuries. All "indpendent" FED creation. And then obviously central bank is a failed idea. Market should determine price of credit. Not a bureaucrat. A bureaucrat setting the most important price in the economy - price of credit. As if he knew better from the market what the prices should be. The central banker will always set the price of credit wrong. Too low - bubble. Too high - burst. Let the market set prices. Especially the price of credit.
- kaonashi 11y ago
  > The quantity of money governs the price level in the long run The quantity of money is both nebulously defined, and also has absolutely nothing to do w/ price level; it's all spending relative to output capacity.
  - sergiosgc 11y ago
    A reduction to the absurd reveals that the quantity of money is relevant to the price level. Try to run the economy with one dollar changing hands and, since it can't change hands fast enough, that single dollar is priceless. Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value. Naturally, it is monetary mass coupled with circulation speed. If you change the monetary mass and no other economic variable, within the tolerance envelope, circulation speed will adapt and price levels won't budge. Exceed tolerance levels, and you will influence price levels. You saw this applied in practice recently. Quantitative easing is a correction using monetary mass to an abnormal reduction in circulation speed (via reduced lending).
    - kaonashi 11y ago
      >Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value. That only matters if those dollars are being spent and remain in the flow of funds. Say the Treasury printed a few trillion dollar notes and buried them in a hole, it's not going to affect the price level any (aside from the real resources used).
  - AnimalMuppet 11y ago
    Don't forget velocity (unless you include that in "quantity" of money).
exelius 11y ago
You have to slow down the creation of money, but in a hyper inflationary setting, the assumption that inflation exists creates money itself. So not only do you have to slow down the creation of money, you have to do it in a way that strips away the assumption that the government will just create more money. In this case, by embracing the fact that the government was just printing money and pegging a currency to the expected inflation rate, they were able to prevent people from doing this sort of math in every transaction they encounter. All of this only works if you have an economy that is otherwise relatively stable. Brazil happens to have an abundance of diverse natural resources (oil, timber, mining, etc.), which provides a lot of economic stability. Now if you tried the same tactics in, say, Argentina (which currently faces many of the same problems that Brazil did with regards to cyclic inflation/deflation) I would expect different results. Because Argentina has approx. 15% the population of Brazil, its economy is much less diverse.
- bernawil 11y ago
  Argentine here. Both economies are pretty similar. Both are pretty diverse in their composition but not in their contribution, so you have the fact that primary activities (farming, oil, etc.) are the great contributor to the tax base and basically all other activities receive subsidies. This is the reason ar & br have one of the highest tariffs for electronics. The root of the inflationary problem both in ar & br is, and has always been, the printing of money to cover for the fiscal deficit. Government hikes taxes every year and every year it consumes a bigger % of the pib.
  - ufo 11y ago
    I thing you want to say Gross National Product instead of Produto Interno Bruto here :)
  - koolkat 11y ago
    Printing of money to cover for the fiscal deficit is not rare or bad by itself. Inflation can be a form of taxation if the goverment fully controlls the creation of money. The problem is that goverments are stripped from their right to do so and evey cent they create is actually borrrowed from the central bank.

bryanlarsen 11y ago

According to the article, that had been tried and failed several times in the past. Slowing down the creation of money would have eventually stopped inflation, yes. But it would have taken a lot longer and created some really nasty side effects in the economy during the period when inflation exceeds monetary growth. Those side effects were nasty enough to topple several governments, and the government change stopped the slowdown before it had time to take effect.

outworlder 11y ago

Oh, they tried that before. Also tried to index prices. Which caused massive shortages of the most basic products. People were not happy about it.

Symmetry 11y ago

Yes and no. The quantity of money governs the price level in the long run but people's expectations about inflation are very important in the short run. Volker showed that you can simply slow down the creation of money to bring inflation under control at the cost of a certain amount of short term economic distress. What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.

Alleluja 11y ago
Fed's level of independence: Ever heard of Greenspan Put? Even much more so for Bernanke and Yellen. You can't call FED indpendent. They are not about inflation. They are not about full employment. They have been all about keeping asset bubbles afloat since 1990s: from nasdaq, through housing, ending on treasuries. All "indpendent" FED creation. And then obviously central bank is a failed idea. Market should determine price of credit. Not a bureaucrat. A bureaucrat setting the most important price in the economy - price of credit. As if he knew better from the market what the prices should be. The central banker will always set the price of credit wrong. Too low - bubble. Too high - burst. Let the market set prices. Especially the price of credit.
kaonashi 11y ago
> The quantity of money governs the price level in the long run The quantity of money is both nebulously defined, and also has absolutely nothing to do w/ price level; it's all spending relative to output capacity.
- sergiosgc 11y ago
  A reduction to the absurd reveals that the quantity of money is relevant to the price level. Try to run the economy with one dollar changing hands and, since it can't change hands fast enough, that single dollar is priceless. Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value. Naturally, it is monetary mass coupled with circulation speed. If you change the monetary mass and no other economic variable, within the tolerance envelope, circulation speed will adapt and price levels won't budge. Exceed tolerance levels, and you will influence price levels. You saw this applied in practice recently. Quantitative easing is a correction using monetary mass to an abnormal reduction in circulation speed (via reduced lending).
  - kaonashi 11y ago
    >Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value. That only matters if those dollars are being spent and remain in the flow of funds. Say the Treasury printed a few trillion dollar notes and buried them in a hole, it's not going to affect the price level any (aside from the real resources used).
- AnimalMuppet 11y ago
  Don't forget velocity (unless you include that in "quantity" of money).

exelius 11y ago

You have to slow down the creation of money, but in a hyper inflationary setting, the assumption that inflation exists creates money itself. So not only do you have to slow down the creation of money, you have to do it in a way that strips away the assumption that the government will just create more money. In this case, by embracing the fact that the government was just printing money and pegging a currency to the expected inflation rate, they were able to prevent people from doing this sort of math in every transaction they encounter. All of this only works if you have an economy that is otherwise relatively stable. Brazil happens to have an abundance of diverse natural resources (oil, timber, mining, etc.), which provides a lot of economic stability. Now if you tried the same tactics in, say, Argentina (which currently faces many of the same problems that Brazil did with regards to cyclic inflation/deflation) I would expect different results. Because Argentina has approx. 15% the population of Brazil, its economy is much less diverse.

bernawil 11y ago
Argentine here. Both economies are pretty similar. Both are pretty diverse in their composition but not in their contribution, so you have the fact that primary activities (farming, oil, etc.) are the great contributor to the tax base and basically all other activities receive subsidies. This is the reason ar & br have one of the highest tariffs for electronics. The root of the inflationary problem both in ar & br is, and has always been, the printing of money to cover for the fiscal deficit. Government hikes taxes every year and every year it consumes a bigger % of the pib.
- ufo 11y ago
  I thing you want to say Gross National Product instead of Produto Interno Bruto here :)
- koolkat 11y ago
  Printing of money to cover for the fiscal deficit is not rare or bad by itself. Inflation can be a form of taxation if the goverment fully controlls the creation of money. The problem is that goverments are stripped from their right to do so and evey cent they create is actually borrrowed from the central bank.