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Comment by aazaa | Hacker News Reader

> More troublesome, the inherent flaw of having the global reserve currency, in a theme that goes back to economist Robert Triffin from over half a century ago, is that in order to maintain the global reserve currency, the country must supply the world with its currency via structural deficits in one form or another.

That "structural deficit" means allowing manufacturing to move overseas.

The trade war is a distraction. Trade imbalances with the rest of the world could be solved very quickly by making it clear the the dollar is going down in flames and that policies will be put in place to make that happen:

1. massive federal budget deficit spending

2. purchase of all the debt by the Federal Reserve (yield curve control)

Holders of bonds would be absolutely wrecked. That's a lot of institutions and wealthy individuals.

The only question is whether the political will to do this can be mustered. So far it hasn't.

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> Holders of bonds would be absolutely wrecked.

That's a lot of institutions and wealthy individuals. That's also a lot of people with 401k's, college savings for their kids, pension funds, and non-profit endowments.

I have a feeling that most wealthy individuals and institutions will be just fine, it's the little guy and middle class families that will feel the pain, as usual.

Yeah, it's people in the US who would be wrecked. Sure, people outside, too, but the point of the idea was to help the American workers. If you help them, but destroy their pensions and their 401ks and their IRAs... are they actually better off?

(And the answer is, some are and some aren't, but it's not a clearly good idea.)

> Holders of bonds would be absolutely wrecked. That's a lot of institutions and wealthy individuals.

Not only institutions, but those who are in power (government) who have risk-tolerant positions in the market with nothing to gain but their own discomfort and retirement.

Isn’t this happening now to a significant degree?

I’ve seen fretting for years about the collapse of the dollar as the global reserve. Lately I have started wondering if this might not be good in the long run, and if maintaining the dollar as a global reserve is actually a very costly and economically distorting thing.

I think the only reason that a global reserve currency hasnt changed yet is that there are no sound currencies to use. USD was selected as the global reserve because it was backed by gold. We went and fucked that up. Now there are no currencies left backed by anything but promises. If there was a large enough country with gold backed money the reserve currency would have switched decades ago.

I have not read one single serious justification (as in, empirical) for using gold as the backing of a currency. There are many indications that, historically, the boom and bust cycles that exist naturally are exacerbated when tying the value of currency to (often easily manipulated to be artificially) scarce things like gold.

The world has moved beyond tying the value of our currencies to material goods. Digital "coins" aren't any better, and the same group of fringe types who push the gold standard have taken that over as well.

The only credible one is that it limits certain kinds of bad behavior, but that may come at a substantial cost.

It doesnt have to be gold. But sound money is a necessity for a thriving economy. Gold standard prevented bad monetary policy that leads to runnaway inflation. Its not a perfect system but it stops power and greed from destroying the economy.

Addition: Every historical case of a government switching to fiat currency has resulted in runnaway inflation. The reason that gold and silver are the only constitutional money is it forces the government to do the right thing. No gold standard permits those in power to manipulate the currency for whatever reason they wish. The rules should force the wrong people to do the right thing. Relying on people in power to do the "right" thing will always fail.

Inflation inflation inflation, gold proponents always want to talk about inflation, never about the steering wheel that fiat currencies provide: Steering that allows us to right the course of our economic ships. When you link to gold, you go where the wind blows you. No control. No steering.

Moreover your historical argument is weak. By analogy, we should also not have government, because every society that has formed a government has failed to keep it: Every government falls, eventually, be it Rome or the Aztecs.

That steering wheel is driving us off a cliff. If the result of having a steering wheel is a loss of trust in the currency and ultimately the collapse of that currency I would rather be blown by the wind.

But it hasn't happened to our currency. The only thing that's happening to our currency right now is our political instability, which frankly is a little unsettling at the moment with all the talk of secession martial law, suspension of the Constitution, and religious fervor for Trump that we are seeing on the far right at this moment in time.

Yet...

1970 $1 is equal in purchasing power to $6.71 today. There is no indication from the Fed that this is going to turn around. With the rate the Fed is pumping out dollars, runnaway inflation is a near certainty.

This argument fails. Dollars are to be used, not hoarded. Modest inflation encourages use of the currency. This is good. As far as an argument from authority, I'll take the Fed than random HN commenter. In any case, inflation is well controlled, perhaps over controlled, except for certain products with very real limits to production and supply (i.e. housing).

In any other field we see the same thing happen exactly the same way 20 time we assume it to be a hard rule until proven otherwise. For some reason with economics every government comes along and thinks they can guide the beast when no one has ever done so in history. I refuse to believe that a currency having 1/6 the buying power over 50 years is a good thing. Yet, under 150 years of gold standard the dollar maintained the same purchasing power.

Inflation does encourage spending. But, it also discourages saving. Everybody wants to get rid of their paper before it becomes worth less. Saving is a healthy part of an economy.

History is not a controlled experiment. The context changes with each iteration. We understand more about how currencies work than ever before.

If you want a long term store of value, choose a commodity, or gold I guess.

All I hear with your argument is "its different this time" and "we know better than everybody before". Anyway, I have been divesting my savings from USD to prepare for the coming dollar collapse.

Inflating the dollar is probably the only way we're going to get out of the hole we're in, so that'd kill two bird with one stone.

Suicide is an solution, but it's not a very recommended one.

Neither is keeping a patient on life support when they're persistently vegetative and you need the hospital bed.

If you have a non-austerity solution that doesn't assume infinite exponential economic expansion I'm all ears.

Default is another option. Inflation hurts everybody. Cutting spending is the only way to start repairing the economy for the long term. Government consumes 31% of the fruit of our labor. Money that could be left in the hands of people to drive the economy.

The beauty of inflation is that it hurts you in direct proportion to how well off you are, and it can't be dodged (i.e. it's like a wealth tax, only actually achievable). We could drive inflation while also ameliorating a lot of the pain it would cause by implementing UBI (in fact, I'm pretty sure big deficit spending is the only way UBI will ever happen).

Defaulting would screw a lot of institutional pension investors, while a lot of the super-wealthy could just dodge into less vulnerable assets, potentially worsening wealth inequality.

The effects of inflation are neither instantaneous nor uniformly distributed. Those who obtain the new money first are able to spend it before prices have had time to adjust. As that new money propagates, the prices of the relevant goods and services are bid up.

As such, inflation gives an economic advantage to those who receive the new money sooner, and the consequent higher prices harm those further down the flow.

In short, and contrary to the implication of the above comment, inflation benefits banks and corporations (and by extension, the wealthy and powerful), and harms workers and those on fixed incomes.

The rich (particularly banks) are always going to game any system, so saying anything is unworkable because the rich can partially game it is defeatism. If we use UBI to inflate the currency, everyone gets the same chance to use uninflated funds, which ends up benefitting those with less.

If we inflate via UBI, those on fixed incomes wouldn't be hurt unless it was a fat fixed income, in which case it's disingenuous to refer to them that way since they're basically just independently wealthy, and most people think of fixed income means pension/disability.

> so saying anything is unworkable because the rich can partially game it is defeatism

Thankfully I wasn't saying that. I was disagreeing with your claim that "[inflation] hurts you in direct proportion to how well off you are", arguing instead that:

1. inflation benefits those earlier in the flow of new money, and

2. at present, that new money enters the economy via banks, etc.

> If we use UBI to inflate the currency...

Indeed, this depends on #1 above: change how new money enters and propagates through the economy and you change the wealth transfer effects.

I propose a very new unconventional type of asset. It is effectively equivalent to a UBI but since it is also an asset the central bank can easily control it.

The central bank does an IPO and sells UBI tokens at a fixed price. Say $100. If you own at least one token then you will gain a dividend of 1 UBI token per month. To prevent abuse there is a government run exchange where this token can be bought on that verifies your identity. This means you are heavily incentivized to sell your tokens to other people for less than $100 yourself. It's basically an "anti" asset. It's relative utility shrinks the more you own. The central bank then can buy tokens back at any price it desires. The beauty of this system is that the wealthy are a minority so any money that the central bank distributes by buying UBI tokens will primarily go the less wealthy because they are the majority. Since you get one token per month and the central bank can set the minimum value of the token it is effectively a UBI. If consumer inflation heats up the central bank can always stop buying tokens because it isn't a true UBI that people depend on.

>In short, and contrary to the implication of the above comment, inflation benefits banks and corporations (and by extension, the wealthy and powerful), and harms workers and those on fixed incomes.

Yes but going by central bank policy that money isn't supposed to end up in their hands first. The goal of the central bank is to increase consumer inflation. Of course the actions of the central bank don't match their stated goals but this is primarily a policy failure. The rest of the government is supposed to use the cheap money to increase demand for labor through public spending. It's completely failing to do so.

> The beauty of inflation is that it hurts you in direct proportion to how well off you are

This seems opposite of reality. During inflation, prices of assets rise, as the currency with which to procure them becomes devalued; those who possess assets are in a much safer position than those who exchange their labor for currency, since inflation will happen far more rapidly to the necessities of life (food, shelter, etc.) than to wages.

Cf. the price of houses, cars, etc., in the U.S. and worldwide vs. the corresponding increases in wages.

Rent and wages are both negotiated prices, there's no reason one should rise faster than the other besides workers not asking for what they're worth, assuming there isn't a shortage of housing and a glut of workers.

Stocks will rise in response to inflation, but that will result in additional taxation since the initial investment is uninflated.

Inflation can easily be dodged by those with foreknowledge (hold your wealth in assets whose value will inflate). Borrow lots of money at a low fixed rate to buy property and you might even make a profit. Unexpected inflation is a wealth tax on people who loan out their wealth at fixed rates or store most of it in cash, and an sales tax on people and organisations unable to renegotiate salary or contracts. Exactly who is negatively (and positively) affected is complicated, but it certainly isn't directly proportional to how well off people are.

It depends on where the money arrives first. Right now all of it goes straight to assets while completely skipping over workers. Whatever asset inflation happens, consumer inflation will always be behind.

If the money arrives on the consumer side first then asset inflation will follow but only after consumer inflation has caught up. All the asset inflation that happens will be caused by productive growth. Encouraging the wealthy to get rich off the backs of rich workers is exactly the situation that we want to achieve. Right now they have no need for domestic workers because the central bank tap is wide open and workers in China manufacture all the widgets (such as iPhones) they need.

"The beauty of inflation is that it hurts you in direct proportion to how well off you are, and it can't be dodged (i.e. it's like a wealth tax, only actually achievable). We could drive inflation while also ameliorating a lot of the pain it would cause by implementing UBI (in fact, I'm pretty sure big deficit spending is the only way UBI will ever happen)."

I think you misunderstand ...

Generally speaking inflation can be managed and avoided by asset holders and business owners. They can adjust their rents and prices to match the inflation in a way that wage earners and renters cannot.

Generally speaking it is deflation that hurts asset holders and business owners. We have made desperate attempts since the financial crisis to stave off deflation and even then we're barely treading water. Financial assets and real property (and also silly things like paintings) have benefited but look at the price of oil ... look at the price of other basic commodities and services like shipping.

Our 21st century landscape is deflationary and elites are frantically doing everything possible to avoid it.

>Generally speaking inflation can be managed and avoided by asset holders and business owners. They can adjust their rents and prices to match the inflation in a way that wage earners and renters cannot.

If there is consumer inflation you can't manage inflation in a way that doesn't productively employ workers. If there is asset inflation you can have an unproductive business and still grow without doing anything of value. The latter is what many people object to. The former would benefit workers far more than it would benefit the rich. If your wages increase by 10% but Bill Gates' net worth merely catches up with inflation who gives a damn? If you can somehow double the income of the poorest members of society then you effectively cut the relative wealth of Bill Gates' in half. He has more to lose from expensive workers that demand reasonable salaries than he can gain from catching up with consumer inflation.

>Generally speaking it is deflation that hurts asset holders and business owners. We have made desperate attempts since the financial crisis to stave off deflation and even then we're barely treading water. Financial assets and real property (and also silly things like paintings) have benefited but look at the price of oil ... look at the price of other basic commodities and services like shipping.

That would be true if there was no central bank intervention. But the central bank is intervening in a way that gives the rich what they want without giving anything to the poor. Deflation on the asset side basically doesn't exist.

Actually, all you have to do to dodge inflation is dump your idle currency into literally anything else. Rich people hang in the circles where these plans are made so you'll never take them by surprise. (It'd be interesting to look at Cyprus' banking records and see who would have been impacted had the haircut happened suddenly, two months earlier.)

So inflation is irrelevant for the little guy, and easily dodged by the rich, leaving the middle-class to get shafted.

No argument against the rich having the most time to prep for inflationary policy, but the middle class has their wealth mostly tied up in mortgages, so in no way would they get shafted. Pensions and social security would be garbage, but they're garbage now for most people anyhow.

>Actually, all you have to do to dodge inflation is dump your idle currency into literally anything else.

It doesn't work that way. If you want to protect yourself from inflation you have to deploy that capital productively or alternatively be close to the source of the inflation (the central bank). If you are actually doing productive work then workers will see their incomes grow and if workers are underpaid relative to assets then wage growth will continue until both assets and incomes are roughly on par. After that assets will keep up with inflation. The benefits to workers massively outweigh the benefits to asset holders.

When you consider that the central bank is just blindly handing out money to public companies it's basically the opposite. It's actually perverting and distorting the economy because the money isn't going where it is truly needed. If you are rich this is what you want. You want to have lots of money and a workforce that works for peanuts to make your relative wealth even bigger.

It sounds like you're saying that to avoid drowning you merely need to swim upstream carrying all your workers. Anyways, by rich I mean the 3%, not the 0.001%. Those who are very comfortable, but who aren't captains of industry. Professionals vs business people.

Can't they (and this is an honest question) do well by locking their income into things that will get more expensive, when measured in currency? Sure their purchasing power will fall, $ for $ with everyone else's, but by selling that real property when needed they'll have more of those $s than people who rode the currency into the ground. Right?

>The beauty of inflation is that it hurts you in direct proportion to how well off you are,

This is the opposite of true. In practice, inflation is wealth transfer to the upper class. Inflation benefits debt holders, the people who are most levereged (with debt) into inflation proof assets are those who are rich.

>This is the opposite of true. In practice, inflation is wealth transfer to the upper class. Inflation benefits debt holders, the people who are most levereged (with debt) into inflation proof assets are those who are rich.

It may be counter intuitive (it actually isn't, it's perfectly logical) but inflation is merely what happens when demand exceeds supply. This means if you constantly increase demand for labor you will get to see consumer inflation. Since there is barely any consumer inflation there is very little demand for labor. This isn't surprising because a lot of the jobs are now abroad and domestic training opportunities are poor (companies don't provide them) or inaccessible (college is expensive and time consuming). If you could somehow make every American highly educated so that they can work in the highly profitable sectors of the economy that remained (there is no shortage of those) you would still get to see decent economic growth (2% YOY) in developed countries. The reality is that not everyone can get such a job and some need a secondary career after they lost their first. Since there are not many low skilled jobs that can't be done abroad there is little demand for these workers. If you can increase consumer inflation you will directly increase the wages of those unneeded workers because the consumer inflation is excess demand for (low skilled) jobs.

> the people who are most levereged (with debt) into inflation proof assets are those who are rich.

Yeah but here comes the trick. If there is consumer inflation the only way you can make your assets inflation proof is by productively employing workers. If you are owning real estate then the value of your assets will grow but only insofar that workers can afford to pay rent.

The rich won't make money off of sitting on assets, they will make money off of using those assets productively by renting them out. In our current twisted reality you can often make more money off of just letting the property sit empty so that you can have a quick sale 5 years down the line. The idea of unused real estate growing in value is insane but it only happens because there is asset inflation and mismanagement by the central bank.

The beauty is that you have absolutely no idea what you are talking about.

Defaults are much worse than inflation. They stop the economic machine by randomly taking players out.

Inflation can be managed.

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