5 ms·

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

by 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.
  - tsotha 11y ago
    In a fractional reserve system borrowing from the central bank is creating money.
    - koolkat 11y ago
      Thats what i said. Goverments can't print money they need to borrow it from the one that prints it. Also borrowing from normal banks is creating money.
      - tsotha 11y ago
        Why is printing money "not rare or bad by itself" when borrowing from the central bank is a problem? They're literally the same thing.
        koolkat 11y ago
        That is true for the goverment printing but the central bank printing its just printing i mean if you follow the chain to the creation maybe the BIS or something. Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. If you borrow you need to pay exponential sums. Using inflation to collect taxes was normal when the logistics were a nightmare. Its dangerous maybe but not necesarily bad and there are a lot of financial gambels done by goverments which are more dangerous.
        tsotha 11y ago
        >Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. >Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. While that's true technically, when governments borrow from the central bank they tend to roll over the debt instead of paying it back, so the interest is never really paid. The big advantage to borrowing from the central bank is the average person thinks you can only borrow deposited money and doesn't realize what's happening.
drcode 11y ago
> the assumption that inflation exists creates money itself. That seems like a claim that's hard to defend... If the government stopped printing money, it is true people would continue to adjust prices upwards for a while, but people would quickly realize that they were running out of actual money and stop doing this. This isn't the kind of situation where borrowing & lending is indirectly increasing the money supply, if no money is printed people would simply run out of bills and the inflation would stop, regardless of "assumptions" and "psychology".
- exelius 11y ago
  The assumption that inflation exists is taken into account when setting interest rates on loans. So borrowing / lending activity does create money in the form of an IOU. The money doesn't become "real" in a money supply sense until the IOU is paid out, but the effects of high inflation can linger long after the government stops printing money. Under normal inflation scenarios this would be largely restricted to the financial sector which can be managed by a central bank, but with the type of inflation Brazil saw at times, this permeated even simple business transactions. Something that would be as simple as "Oh, we've done business for 30 years so I know you're good for it, just pay me on Friday" becomes an interest-bearing transaction. Basically, because inflation is so high, individuals have to charge interest on even the smallest transactions. This makes people more reluctant to loan, but even the most basic real-world economies don't function without credit; and when you issue debt, you are creating future money supply. In stable, low inflation scenarios, the central bank can adjust to this by increasing the money supply accordingly. But if you stop issuing currency, money does not stop being created.
  - koolkat 11y ago
    >"The money doesn't become "real" in a money supply sense until the IOU is paid out" Debt=money When the lending is done by a bank the iou becomes real money since day 1.
    - roblev 11y ago
      debt does not equal money; there is money that is not debt (e.g. gold coins, fiat currency) there is money that is debt (e.g. bank account money, IOUs)

by exelius 11y ago

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.
- tsotha 11y ago
  In a fractional reserve system borrowing from the central bank is creating money.
  - koolkat 11y ago
    Thats what i said. Goverments can't print money they need to borrow it from the one that prints it. Also borrowing from normal banks is creating money.
    - tsotha 11y ago
      Why is printing money "not rare or bad by itself" when borrowing from the central bank is a problem? They're literally the same thing.
      - koolkat 11y ago
        That is true for the goverment printing but the central bank printing its just printing i mean if you follow the chain to the creation maybe the BIS or something. Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. If you borrow you need to pay exponential sums. Using inflation to collect taxes was normal when the logistics were a nightmare. Its dangerous maybe but not necesarily bad and there are a lot of financial gambels done by goverments which are more dangerous.
        tsotha 11y ago
        >Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. >Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. While that's true technically, when governments borrow from the central bank they tend to roll over the debt instead of paying it back, so the interest is never really paid. The big advantage to borrowing from the central bank is the average person thinks you can only borrow deposited money and doesn't realize what's happening.

drcode 11y ago

> the assumption that inflation exists creates money itself. That seems like a claim that's hard to defend... If the government stopped printing money, it is true people would continue to adjust prices upwards for a while, but people would quickly realize that they were running out of actual money and stop doing this. This isn't the kind of situation where borrowing & lending is indirectly increasing the money supply, if no money is printed people would simply run out of bills and the inflation would stop, regardless of "assumptions" and "psychology".

exelius 11y ago
The assumption that inflation exists is taken into account when setting interest rates on loans. So borrowing / lending activity does create money in the form of an IOU. The money doesn't become "real" in a money supply sense until the IOU is paid out, but the effects of high inflation can linger long after the government stops printing money. Under normal inflation scenarios this would be largely restricted to the financial sector which can be managed by a central bank, but with the type of inflation Brazil saw at times, this permeated even simple business transactions. Something that would be as simple as "Oh, we've done business for 30 years so I know you're good for it, just pay me on Friday" becomes an interest-bearing transaction. Basically, because inflation is so high, individuals have to charge interest on even the smallest transactions. This makes people more reluctant to loan, but even the most basic real-world economies don't function without credit; and when you issue debt, you are creating future money supply. In stable, low inflation scenarios, the central bank can adjust to this by increasing the money supply accordingly. But if you stop issuing currency, money does not stop being created.
- koolkat 11y ago
  >"The money doesn't become "real" in a money supply sense until the IOU is paid out" Debt=money When the lending is done by a bank the iou becomes real money since day 1.
  - roblev 11y ago
    debt does not equal money; there is money that is not debt (e.g. gold coins, fiat currency) there is money that is debt (e.g. bank account money, IOUs)