Ask HN: Lost Economic Theories: Printing Inflation-Free Money? | Hacker News Reader

Ask HN: Lost Economic Theories: Printing Inflation-Free Money?

Money in itself is a symbolic instrument used by governments to drive economy forward. Some Economic theories/ideas which claim to allow printing inflation free money, by taking advantage of the differential mobility of money (under different spending policies) and increasing production before increasing consumption.

Thoughts on this and on fiscal policy design for inflation free money ?

Some References :

https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1536-7150.1998.tb03376.x

https://www.semanticscholar.org/paper/Getting-and-spending-%3A-public-expenditure%2C-and-Pliatzky/85583927b96a989ffc18fb338033ea150cad70a2?p2df

https://www.nber.org/papers/w9437

https://www.sciencedirect.com/science/article/abs/pii/S0014292110001066?casa_token=E7Rgdo20hYoAAAAA:aFaQwzcXu_MTrABCz40HrqDcF2UqOcYqS61tlcDSYhAvm7xNdamIIp6FnWTmVx39j90LkyPU6Q

https://www.mdpi.com/2071-1050/5/6/2802/htm

View on HN

One orthodox and self-evident theory is:

  GDP = Money supply [x] Money velocity

If that velocity were constant (say a dollar gets spent 10 times a year) then the government could control the nominal GDP (counted in current-time inflating dollars) by simply controlling the money supply.

It's not constant, of course. The velocity changes, particularly when the system is under stress.

If the government doubled the money supply instantly, for instance, the real GDP would increase by (say) 5% immediately because people would activate productive capacity that was not there. It wouldn't double, however, because it takes time go to grow.

If velocity were constant prices would (almost) double right away. If the influx of money caused velocity to drop, however, the system could absorb extra money right away.

(Compare that to the theory of the Great Depression that when inequality puts all the dollars in the pockets of misers who save instead of spend, demand collapses.)

Another theory of inflation is that inflation happens if people expect inflation to happen.

If I think that prices are going to go up 5% next year, I am going to ask for a 5% raise, my employer will expect to raise prices 5% next year so it is ok...

People today do not believe in inflation so that governments can borrow and/or print a lot of money without provoking it.

That condition could go on for a long time until the psychology changes, in which case inflation returns.

The strongest datapoint that I know of that inflation can be driven by expectations of inflation is the introduction of the real in Brazil.

https://www.npr.org/sections/money/2010/10/04/130329523/how-... has the full story. The short version was that they made people list prices in both the existing currency, the cruzeiro, and the new one that didn't exist, the real. They then deflated the real at the same rate that the cruzeiro was inflating. (80% per month.) After a while everyone had internalized that the real did not inflate while the cruzeiro did. Then they started making the real and inflation went from 80%/month to approximately 0%/month.

> If the government doubled the money supply instantly, for instance, the real GDP would increase by (say) 5% immediately because people would activate productive capacity that was not there.

Perhaps we should increase the money supply by 300%, to unlock a 15% gain in productivity!!

Or, they might get pissed off and revolt, tanking the economy by 75%.

One can never really be sure.

Another important factor here is international currency exchange.

For a deeply simplified example: say you printed a bunch of money and handed it to Americans who wanted to buy electronics with the money. Factories in China would happily meet the extra demand for 80" TVs, and for their work they'd receive an influx of dollars, which they'd have to change into yuan to pay their workers and buy supplies.

Currency markets are subject to supply and demand of course, so this influx of people trying to exchange out dollars would make the dollar less valuable relative to the yuan. The devaluing of the dollar on international markets would make all imported goods more expensive, ergo inflation.

Money velocity equals money supply in a mutual credit system.

See https://en.m.wikipedia.org/wiki/Mutual_credit and p2p cryptocurrency implementation https://docs.offsetcredit.org/en/latest/intro/economic.html

yeah so Inflation-Free Money is possible when you slow down the velocity, like what is happening now with the pandemic lock down.

V cancels in the MV=PT equation - so no.

Could you be a bit more specific? That doesn't look like V cancels with anything.

What's the question?

If you're looking for more content, MMT is kind of a hot topic these days from what I gather. https://en.wikipedia.org/wiki/Modern_Monetary_Theory

In order to maintain its value (reputation), the amount of currency rewarded to an individual needs to be proportional to the amount of economic value produced by the individual.

If any group of people gets too much easy money, it will cause inflation in the price of whatever goods or assets these kinds of people normally buy.

People who receive money too easily lose respect for it because they eventually realize that the game is rigged in their favor.

People who work too hard for their money eventually realize that the game is rigged against them and it's easier for them to play a different game (e.g. Crypto).

The most rational people realize that capitalism needs an even playing field in order to work properly.

Mutual credit has a money supply that at all times equals the money used. Mutual credit has a money supply that is infinite and perfectly elastic, so presumably has no inflation or deflation.

See https://en.m.wikipedia.org/wiki/Mutual_credit and p2p cryptocurrency implementation https://docs.offsetcredit.org/en/latest/intro/economic.html

The reason we don't have massive inflation right now is because the velocity of money has crashed despite massive QE.

So the main type of inflation we're seeing right now is in financial assets, not everyday consumer goods.

There is no such thing as inflation free money. Whatever you use the money on will see inflated prices. Governments and central banks decided to exclusively use the newly created money supply on assets even when those assets are already overpriced.

Inflation is merely what happens when demand exceeds supply. When people talk about inflation they do not just mean the increase in money supply but they actually talk about consumer inflation which is indexed through a basket of consumer goods. The money entering the economy is not driving up demand for consumer goods and therefore it results in no consumer inflation. There is no surprise.

Basically what we are seeing is supply oriented monetary policies in demand starved economies.

One should look at the reasons for why demand is decreasing and try to solve problems on the demand side.

Isn't the whole idea of "money" for the government to provide a "stable currency", as a store of value and means to make financial transactions? How is it a good store of value when you take 2 to 3% of the value away every single year? Imagine, you're a retiree with 200K in savings and you loose 6K every single year, just to what's considered "moderate inflation"!!!???

People will tell you, you need to invest in real assets, like real estate or equities. In other words, barter, which defeats the whole purpose of using a currency in the first place.

Honestly, How is it that 2% inflation is so acceptable?

Richard Werner's [famous author of the 'Princes of Yen'] ideas are very much along these ideas - he even came up with the term 'Quantitative Easing'.

I saw this video ("Princes of Yen") pop up on my Youtube feed (maybe because of watching too many finance videos?). I didn't realize that the producer also had a book and came up with the QE term.

I got curious after your post and looked up the book on Amazon ... and jeez, $130 for a copy??? Did they stop printing the book version?

The video version appears to be available on Youtube as well as some streaming channels (Amazon Prime etc).

Money is a proxy for attention. Average lifespan of a particular currency implementation is ~30 years. What matters, is a distribution of assets between actors, not number of digits of currency units on bank accounts. Every complex phenomena is impermanent. There is no money without inflation, there is no hot without cold, life without death. But there are centrally governed currencies and distributed ones.

How do you define inflation, and what benefits do you see with inflation free money?

Inflation itself is a policy, intended to generate incentives. In addition, the central bank mechanisms for inflation are themselves "biased" in various ways.

Mechanically, it would be trivial to have a zero-inflation policy, but there are just too many stakeholders for it to be possible.

I have always considered inflation to be a natural result of our model of constant growth and the need to inject new funds into the market, not a policy per se, can you elaborate?

A zero-inflation policy would correspond to matching the money supply growth to productivity growth. This would, ideally, result in approximately stable prices. Relative prices would still vary. A more efficient candy-bar machine would lower prices of candy-bars, whereas hourly wages would be unchanged.

Defacto, there is a policy to aim for consumer price inflation of around 2%.

Many justifications can be thought of, but one is the tendency that prices and wages rarely adjust downwards. So instead of expecting the economy to lower prices due to productivity increases, the central banks depreciate the currency. This means flat wages in stagnating industries, instead of falling wages. One could argue there is some psychological benefit to this.

Another justification is because cash savings depreciate, there is need to invest them. In a textbook world, savings become investments, which creates growth.

Inflation as a policy is just a treadmill. It makes working tomorrow more valuable than working yesterday.

Imagine 100% inflation. You're going to get paid 100k in 2020 but 200k in 2021. Working in 2021 is more lucrative than working in 2020 but since you have to live through 2020 to get to 2021 you will keep working through the entire period and you will never stop because each year is better than the next.

Now imagine the opposite. 50% deflation. In 2020 you get 100k and in 2021 you get 50k. Working in 2020 is more lucrative than in 2021.

When you consider that food has to be grown every year then the second scenario is a disaster. People will work a lot in the beginning and then they work less or not at all because the 100k+ in your bank account are worth far more than the 1k per year salary in 2026. If nobody is working then where is all the food and all the other products supposed to come from?

You're assuming inflation in wages, but not in prices. And there are relative differences in price inflation. Nowadays, assets typically inflate first, then wages and consumer prices. Prices can move faster than wages, so wages would inflate/deflate last.

So you have to imagine that your wage is fixed for the year, while your prices change every month or week.

I don't believe in money without inflation, such a system is not stable. Every physical asset depreciates (loses its use value), due to physics. So if money, which can be exchanged for something of value, wouldn't depreciate, the corresponding value not lost would have to be created just for the money holders. So it wouldn't pay off to give money away and the economic activity would decrease. The result would be deflation.

So I believe some inflation rate is natural, by virtue of money being medium of value exchange. Now if the economy is exchanging more goods and services, i.e. growing, it is certainly possible for the government to increase amount of money temporarily without causing additional inflation. But in general, it requires exploitation of some new resource that was previously unexploited, so it cannot be done indefinitely and it's often hand-waved away by assuming equilibrium.

However, during economic recovery, the economy is not in equilibrium, the crisis by definition creates untapped resources, such as unemployed labor, and new possibility to grow again, so the government can apply this as an economic policy.

Interesting point of view. What about land? It typically does not depreciate, especially if nothing is built on it.

One can often make money by purchasing a plot of empty land in a growing city and doing nothing with it while the city grows around it. Property tax is typically quite low on unimproved land.

Actually Bitcoin is inflation free by design

Inflation free money is possible if it’s only used for barter or at least for non speculative economic activities.

That’s my initial thought. I will have to ponder more about this.

Yup. Multilateral barter has no inflation or deflation because there can be no “money” that isn’t used.

Why would a government do this? Inflation is a sneaky way to steal from the poor and give to the rich. Why give that up?

Inflation is also a mechanism for paying off debt. This is one of the reasons why governments abhor deflation - it makes paying off publicly held debt more difficult.

Yeah, I should have been more specific. Raising taxes lets you pay off debt, often by hitting the rich harder. Inflation lets you devalue debt, making it easier to pay it off, by hitting the poor harder.

In both cases, debt is accrued mostly by paying middle class bureaucrats and already-rich contractors to perform the "functions of government".

If you inflate, you are sneakily transferring wealth from the poor to the rich. So, why stop?

Governments have the right to print money.

Inflation actually hurts the middle class.

The poor are much more likely to be in debt, which actually means debt becomes less of a problem as inflation occurs.

The rich tend to have diversified non-cash assets (investments, property, etc) that are immune to inflation.

The middle class -- Joe and Sally with a savings account -- actually have a significant amount of their net worth in cash and that's who suffers.

The reason it hurts the middle class is that the size of their mortgages are the first to be affected by inflation, whereas their wages are among the last.

Mortgage holders are stakeholders in inflation, hoping for appreciating property prices.

This makes no sense. Mortgages give you a fixed monthly price locked in at closing time. With inflation this payment has less and less real cost, and your home value goes up.

Asset inflation is not the same as wage inflation.

Consider the relative size of new mortgages to wages. Since asset prices are typically leveraged on wages (through mortgages), assets will inflate faster than wages (unless the interest rate is set to counteract this.)

But inflation is only beneficial to /new/ buyers if wages inflate faster than assets. Otherwise the relative debt of all mortgage holders increases over time.

Whether asset inflation is beneficial to a home owner is debatable, since all properties appreciate at the same rate. "Moving up" still means increasing the relative size of the mortgage.

Not necessarily true. If you have a fixed mortgage you might be privileged.

Even adjustable rate mortgages do not change the value of the principal.

>The rich tend to have diversified non-cash assets (investments, property, etc) that are immune to inflation.

This is not strictly true. It's a matter of how money enters the economy. Right now money enters the economy on the supply side through assets which means assets experience inflation. If that money was actually entering through jobs programs or some other demand side mechanism then inflation would happen at the demand side first and on the supply side later.

It's actually the opposite. Consumer inflation is bad for the wealthy. It means wages are catching up and making the amassed wealth less valuable. If Bill gates is worth 100 billion and you go from 20k to 40k yearly wages then the purchasing power of his wealth has halved.

The only way his wealth can keep up with inflation is by employing workers which means he has to pay the increased wages. So he ends up worse off than if we had deflation and he could just sit on money.

That's very naive. Do you think bill gates net worth is tied up in dollars? By contrast. If you go to bayview hunters point and look around the houses, what do you think the net worth of any given person around you is going to look like?

Also, inflation is explicitly a policy designed for wages NOT to keep up. I don't know where you got the idea otherwise.

https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...

I don't really see how this is true. inflation primarily hurts creditors (when it rises unexpectedly) and people who hold large amounts of cash. cash is a small fraction of my net worth (compared to what I would expect for a poor person), but I also have way more cash in my checking account. if you only have <$1000 cash buffer that you routinely run down to pay for emergencies, it doesn't much matter whether inflation is 0% or 5%.

One typical scenario; (rich people) take loans to buy assets. The loan itself causes inflation, and asset prices will rise. Then wages and cash savings have less relative value. Wages won't be affected until the firms can increase prices, which might happen much later.

The wealthy have access to low interest credit, not the poor (both directly and indirectly via options, derivatives, forex, etc). When the poor have access to credit it's usually in very short term high interest vehicles (credit cards or loansharks), which are not as benefitted by inflation as you think.

Reply on news.ycombinator.com