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.
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.
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.
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.
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).
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).
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.
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.
>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.
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".
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.
Debt=money
When the lending is done by a bank the iou becomes real money since day 1.
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)
Edit maybe fiat currency is only debt when created through borrowing (like most of the currencys right now). But its a bit ambiguous to me because if it was diferent and goverments were alowed to produce money instead of borrowing it from the ones with the monopoly of money creation. The first time they introduce a surplus of currency to the system or the first time the currency apears the party accepting the currency in exchange for value would be making a loan of value to the goverment or an investment.
Fiat currency is simply currency that is not backed by something physical - in itself it has nothing to do with debt.
In modern economies, a central bank can and does create fiat currency out of nothing - literally declaring it into existance. This has nothing to do with debt. And yes it is an advantage for the central bank / government to be able to do this - this advantage is called seigniorage.
Usually the central bank creates money to increase financial liquidity in the banking system, and as such it wants the newly created currency to enter the financial system. The most common way to do that is for the CB to buy something - usually a bond, but it could be anything. The person selling just gets the market value for their product - no special advantage in selling to a central bank vs anyone else. But the total amount of fiat money in the system goes up. In this way the creation of money is often seen to be linked with debt but is not a fundamental link.
Then there is a second, entirely seperate kind of money that is not fiat money which is called bank money. Bank money is entirely based on debt - it is the debt of fiat money. And bank money is the most common sort of money we use, much more common than fiat money e.g. I typically buy larger purchases with bank money (a bank card transferring the IOU of my bank to a shop) instead of with fiat money (notes and coins).
I agree this stuff is entirely not too obvious & the misconception that all money is based on debt is incredibly common.
But it will eventually fix itself, because there are physical limits to how high the velocity of money can go. Once that's reached, then the velocity-caused inflation stops, and then the velocity no longer becomes necessary, and things start to return to normal.