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This all reminds me of what we've learned about forest management. You see, for a long time we thought that all forest fires were bad, and set out to extinguis

This all reminds me of what we've learned about forest management. You see, for a long time we thought that all forest fires were bad, and set out to extinguish fires whenever even a small one broke out in a forest. After a few decades of almost no fire, a huge amount of burnable debris collected in the forests, and now, when fires break out, they're gigantic and far, far more damaging than normal forest fires. Likewise, central banks have been working very hard to keep interest rates near zero. Any interest is perceived to be a bad thing (the big piles of money held by the large private interests become relatively smaller under inflation), and has thus been held in check. Normally, when things go somewhat badly for a country, they can issue a bunch of bonds and inflate their currency a bit to take up the flack. But with the Euro, there's no opportunity for member countries to inflate their own currencies to smooth out the bumps, and strong pressure from the overall Eurozone to keep interest rates low. The normal control mechanisms are suppressed, leading to bigger explosions when things go really wrong...

JamesBarney 11y ago
Hey sdenton, I agree with a lot of what you say about how Greece needs it's own currency to inflate, but sometimes I don't know if someone has a non-mainstream opinion or just needs a little help with consensus economics. So if you are like me a student of economics this post will hopefully help clear some things up. If not then I guess we disagree and the next person to read this post will have a better understanding of the different views of monetary policy present in economics :). The consensus view in economics about issuing bonds is that it moves the needle away from inflation and towards deflation. Think of money in a very simple supply and demand model. More (supply)money means it is worth less. When the government issues bonds it auctions them off and takes money from people(out of circulation) in return, reducing the supply of money. This leads to less money, which is worth more(deflation, or disinflation). The consensus view about lowering interest rates is that it leads to inflation. Imagine a country with a long term interest rate of 10%, then the FED turns the dial down to 0%. Vick the VC, previously had to average 10%+ on all of his start up investments because investors would move their money to banks(and make 10%) if he made less. So Vick previously only invested in the best start ups, all ex-googlers and previous entrepreneurs. But now he only needs to break 0%, so he invests in all the maybes. This leads to more start ups and more dev positions. Now if we go back to supply and demand, more openings(demand) means greater price. This same things happens across the entire economy. Many projects/start ups/buildings get funded that weren't before because of the drop in interest rate. And these projects create openings, leading to higher wages. Since labor composes most of the goods and services we consume, when we pay more labor, we pay more for good and services call it inflation.
- mike_hearn 11y ago
  > When the government issues bonds it auctions them off and takes money from people(out of circulation) in return, reducing the supply of money. Where did you get that idea? Governments usually borrow money so they can spend it. That money isn't deleted or burned, it heads right back out of the government into the economy.
verinus 11y ago
this is wrong. in the Eurozone the target value for inflation rates was 3%. problem was that while most countries got over 3% Germany was much lower, thus damaging the relative competitiveness... recently the euriborturned negative- the reason for that was to increase the money available to the economy as saving on bank accounts lost attraction and turned to stock exchanges...

JamesBarney 11y ago

Hey sdenton, I agree with a lot of what you say about how Greece needs it's own currency to inflate, but sometimes I don't know if someone has a non-mainstream opinion or just needs a little help with consensus economics. So if you are like me a student of economics this post will hopefully help clear some things up. If not then I guess we disagree and the next person to read this post will have a better understanding of the different views of monetary policy present in economics :). The consensus view in economics about issuing bonds is that it moves the needle away from inflation and towards deflation. Think of money in a very simple supply and demand model. More (supply)money means it is worth less. When the government issues bonds it auctions them off and takes money from people(out of circulation) in return, reducing the supply of money. This leads to less money, which is worth more(deflation, or disinflation). The consensus view about lowering interest rates is that it leads to inflation. Imagine a country with a long term interest rate of 10%, then the FED turns the dial down to 0%. Vick the VC, previously had to average 10%+ on all of his start up investments because investors would move their money to banks(and make 10%) if he made less. So Vick previously only invested in the best start ups, all ex-googlers and previous entrepreneurs. But now he only needs to break 0%, so he invests in all the maybes. This leads to more start ups and more dev positions. Now if we go back to supply and demand, more openings(demand) means greater price. This same things happens across the entire economy. Many projects/start ups/buildings get funded that weren't before because of the drop in interest rate. And these projects create openings, leading to higher wages. Since labor composes most of the goods and services we consume, when we pay more labor, we pay more for good and services call it inflation.

mike_hearn 11y ago
> When the government issues bonds it auctions them off and takes money from people(out of circulation) in return, reducing the supply of money. Where did you get that idea? Governments usually borrow money so they can spend it. That money isn't deleted or burned, it heads right back out of the government into the economy.

verinus 11y ago

this is wrong. in the Eurozone the target value for inflation rates was 3%. problem was that while most countries got over 3% Germany was much lower, thus damaging the relative competitiveness... recently the euriborturned negative- the reason for that was to increase the money available to the economy as saving on bank accounts lost attraction and turned to stock exchanges...