Over the last 10 years, the FED has more then doubled the amount of money they have out in the market. Other central banks have done the same.
Despite popular belief, the value of money decreased by about 50% during this time. It is not easy to say if this is a coincidence. But it looks a lot like there is causality at play.
The reason why inflation "officially" is lower then what one would expect given the amount of money printed lies in the way it is calculated.
The calculation includes mostly goods and services bought by people who live from hand to mouth. Not the goods and services bought by people with savings and high income.
Rent and real estate in desireable areas, gold, bitcoin, equities - all of these now require significantly more money to buy then they did in 2010. People who saved money lost about 50% of their buying power to inflation.
Apr 2000: $274/oz
Apr 2005: $425/oz (+55%)
Apr 2010: $1132/oz (+166% in 5 years, +313% in 10 years)
Apr 2015: $1175/oz (+3% in 5 years, +176% in 10 years)
Apr 2020: $1647/oz (+40% in 5 years, +45% in 10 years)
So we can see that Gold was massively inflating until 2010, when you say the fed started printing money, since then it's stabilised, even with the current panic
So 2010-2019 is a 46% increase, or 4.5% per year, so about 50% for 10 years. 2000 to 2010 is 36%, but the charts indicate we're nearing the top of another house price bubble (1998-2007 was an 80% increase over 9 years, or 7.5% increase per year)
So I'm not sure your assertions that the increase of these values are due to quantitive easing over the last 10 years holds.
You're quoting figures that a lump of rock has doubled and doubled in value since 2000 (plus a little bit). The BLS inflation calculator [0] tells me that inflation would have gotten the price to $420 by now (heh) which is not a doubling in anyone's book.
The trend is persistent, the rock is much the same as it has ever been. Do you have an alternate thesis to QE for why this is happening or are you happy to write it off as a mystery?
Gold gets used in electronics, so real world demand is up, and it's actually fairly hard to extract. This is being made harder by environmental protections that are making it illegal in many places to do things that are more efficient but come at a high environmental cost.
I wish we would actively foster panning for gold. It's environmentally friendly. It's "blue collar" work that doesn't require a college degree, spiffy resume and do forth and it doesn't take much gold per year to potentially support someone who otherwise might be homeless or flipping burgers (or both).
I don't know the answer to the land management piece. I do know that we live in a world that increasingly makes it hard for people just do a thing and make a living, without a college degree, a raft load of student loans and on and on.
I do know we have too little well-paid manual labor and too much of a divide between the have and have nots. I know you don't need much more than a gold pan to get started, which can be had for under ten dollars from places like Walmart.
I didn't research the land owenership/public management of rivers angle very much. I do know that it's not illegal in some places to dredge rivers on public land, which is extremely disruptive of the ecosystem.
This is more of less the summary of the research I did into the subject:
A richer world (both from more people and more economic activity) increases demand for things like jewelery, more use for gold (booming semiconductors) increases demand too.
There's then the perception that in bad times gold is a "safe bet". Low returns in savings accounts too.
Also, annualized S&P 500 Return with Dividends Reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1].
I did not say the FED started printing money in 2010. I said nothing about the time before 2010 or about the future.
Your argument would have been much more precise and useful if you focussed on the same timeframe as I did: 2010-2020. Mixing it with the time before and what you read in the charts for the future muddled it to a degree that I find it hard to reply.
I thought you implied that they started printing vastly more starting in 2010:
>The reason why inflation "officially" is lower then what one would expect given the amount of money printed lies in the way it is calculated.
I think comparing over a long period of time makes sense to see if something really fundamentally changed about the value of money lately.
>Your argument would have been much more precise and useful if you focussed on the same timeframe as I did: 2010-2020.
If things were really different over the past decade than any other, you'd expect to find discrepancies when comparing to previous decades. You're the one "muddling" it here in my (poorly educated) opinion.
I must add that you using Bitcoin, an insanely speculative asset, as an example of things becoming more expensive over the past decade didn't really help your point in my mind. It seems to imply that Bitcoin's value is somewhat stable and we can use it as a reference for the value of a dollar. If you used Beanie Baby prices instead we're in the middle of a huge deflation!
Real Estate is not quite as bad as a reference point, but we have to remember that the decade started right at the end of the mortgage crisis so that distorted the prices somewhat (in what direction? I'm not sure).
Inflation only reduces the value of money not other goods. So, if your savings is in wine, land, gold, or whatever then low levels are not that important. Put another way the difference between 1% and 2% inflation is roughly cutting the value of money in half over 70 or 35 years. But, it’s hard to really notice then difference between them on a month by month basis.
Inflation indices do include rent and real estate. Housing costs is the single largest component in CPI.
Equities have had a gigantic bull market since an incredible low after the financial crisis. Of course it costs significantly more to buy at the top of the market than at the bottom.
Rent and real estate are artificially low because of rent control. In a free market, the value decrease of money would be more visible compared to these assets.
Calling the prise increase in equities a "bull market" does not change the fact that the prise increased.
CPI includes owner-occupied housing as well, not just rent.
If you are going to define bull markets as inflation, then you are ruling out the possibility that the economy can ever just do well. We had a horrible crash a decade ago. In the last couple of years, the economy has done well with record low unemployment. Of course equity prices went up.
The usual knee-jerk reaction to money printing is "omg inflation is coming". But it is not that simple - inflation is just the trend in average prices of things/services/whatevers (and there's a great deal of disagreement about what should those things be; the US has 6 measures of inflation none of which agree with any other).
All of those things are ultimately subject to the supply/demand pricing mechanism, so if you want to proclaim inflation you should be able to answer this question: why will demand outstrip supply? I'm not saying this cannot happen, it can, but most people just forget to even consider this basic supply/mechanism framework.
Instead of trying to judge the reality of production and consumption people often rely on some "magic" properties of accounting numbers of large institutions (central banks or governments). It is so much simpler to just eyeball some trillions and say "it's too much, the currency is dead!" rather than deal with the complexities of reality.
I disagree but I'm going to make my counterpoint a little indirectly:
I can name a couple of states in my lifetime where the government has collapsed in an inflationary manner and the people have suffered and starved. They are generally places people flee in large numbers.
There are no counters that I'm aware of that have suffered a deflationary collapse. If I look up the Wikipedia page for deflation I'm given hellholes like Hong Kong and Japa... no, wait, those are some of the places I'd actually prefer to live than where I am now. Pity I don't speak any Asian languages. Pretty civilised places, really. Advanced is the word I'd actually use to describe them.
There is literally one example of a deflationary collapse in the 1930s US Great Recession. Even then, that was the precursor to the modern US rather than, say, the Zimbabwe collapse through hyperinflation.
I can fathom why governments call deflation the big enemy. I can't fathom why people believe that. Even in the worst case suffering and deflation seem like a pretty good foundation for long term success. People really should stop flirting with inflation and try encouraging deflation as a response for once. Who knows, it might work. Governments keep encouraging inflation and we keep having mysterious debt-fueled collapses.
The usual ones that people name are Venezuela and Zimbabwe, and in those the hyperinflation isn't just a monetary phenomenon that the states decided to self-destruct with; it's a symptom of a whole cascade of failures, including economic sanctions on the country!
Hyperinflation in those cases is effectively a forex phenomenon. The country stops producing any useful export goods (or is banned from exporting, or in the case of Weimar Germany forced to export gold at gunpoint), so the value of its currency collapses. Because the country still requires imports, especially oil, the value of those goods shoots up - but you can't save the economy from this by printing local currency.
(Can someone name a 20th century country with hyperinflation that wasn't under sanctions or involved in a war?)
> (Can someone name a 20th century country with hyperinflation that wasn't under sanctions or involved in a war?)
But in contrast, can anyone name a 20th century country with deflationary policy who broke under sanctions or came off badly when involved in a war?
Flirting with deflation is much safer policy than flirting with inflation. Although a fair point that hyperinflation is associated with cascades of failures that still suggests that flirting with high inflation is more destabilising than flirting with very low credit levels. If anyone responded to cascades of failures by highly deflationary policy they don't seem to have made it into the well-known-failed-states pile.
Japan is a pretty classic tried-deflation example and they ended up a really stable, well organised society that honestly looks like a pretty nice place to live. Well educated. Modern. One of the leading countries on the Asian continent in fact. People complain that the rich aren't getting rich fast enough in Japan which I don't think is a great complaint.
(The relation of particular economic conditions on paper to how nice a country is to actually live in is a different and much more complicated subject!)
I don't think there have been countries which have tried deflation in response to dysfunctionality, because part of dysfunctionality is being unable to pick good policy options and make them stick; but there have been quite a few who've responded to currency trouble by giving up their own currency and either dollarising or joining the Euro. The consequence of that in Greece was deflation: https://www.reuters.com/article/us-greece-economy-inflation/... ... and the "austerity" that went along with it.
> Japan is a pretty classic tried-deflation example and they ended up a really stable, well organised society that honestly looks like a pretty nice place to live. Well educated. Modern. One of the leading countries on the Asian continent in fact.
All the exact reasons I don’t think anyone in the USA is keen to try deflation!
Yeah, look at many countries in latin america with the prime example being Argentina.
Just the same way you see drug dealers "cutting" down their product to skim some off the top and pass it on to the unknowing consumer, the newly created money becomes a way to skim money without the citizenry knowing exactly whats going on.
Monetary inflation isn't a natural law. If you don't do it, it doesn't happen.
> (Can someone name a 20th century country with hyperinflation that wasn't under sanctions or involved in a war?)
Maybe not hyperinflation, but Turkish inflation was rarely below 60% from the late 70s until 2002, and in the last few years has been in the 15-25% range.
>I can fathom why governments call deflation the big enemy.
The answer lies in who the governments are that are saying that. They're the advanced economies which are well developed and have good regulatory systems, the ones that have little to no risk of hyperinflation. And, for them, deflation is worse than some (non-hyper) inflation. It's also much harder to get out of, Japan is still sort of stuck 20-30yrs later despite taking more and more extreme measures.
To circle back to the parent comment topic, ie. people think printing money always causes inflation:
You mention Japan. They have printed so much that their central bank owns about 45% of the national debt. And they still have no inflation.
>we keep having mysterious debt-fueled collapses.
I don't think they're that mysterious. Most seem to be caused by human irrationality / group-think (bubbles), in combination with complex financial instruments that magnify the effects of a burst (ie. unwinding of massive leverage).
On a more global note, each economy is different and one can’t expect the same results from similar measures. The MMT advocates saying that ‘The economy is not a household’ and ‘Deficit does not matter’ advocate for a very dangerous path to walk for many countries that can’t print a strong currency.
>There are no counters that I'm aware of that have suffered a deflationary collapse.
Isn't that because long term deflationary currencies are quite rare? I'm genuinely asking, I was under the impression that deflationary collapse was rare because systemic deflation was rare, not because it was common and working just fine.
The arguments as to why deflation is bad always seemed fairly simple and common-sense (if you earn money just by having money without taking any risks nobody invests anymore and economy grinds to a halt, basically).
>If I look up the Wikipedia page for deflation I'm given hellholes like Hong Kong and Japa... no, wait, those are some of the places I'd actually prefer to live than where I am now.
You make it sound like these places became what they are because of deflation. That's a very peculiar read of that wikipedia entry IMO:
>Following the Asian financial crisis in late 1997, Hong Kong experienced a long period of deflation which did not end until the 4th quarter of 2004. Many East Asian currencies devalued following the crisis. The Hong Kong dollar however, was pegged to the US dollar, leading to an adjustment instead by a deflation of consumer prices. The situation was worsened by the increasingly cheap exports from Mainland China, and "weak Consumer confidence" in Hong Kong. This deflation was accompanied by an economic slump that was more severe and prolonged than those of the surrounding countries that devalued their currencies in the wake of the Asian financial crisis.
As for Japan, while it's definitely still a extremely important economy they lost a massive amount of ground since the 90's. I don't know if deflation made things better or worse, but it's not like it's been a massive success story.
On practical measures, Japan looks like a massive success story. It looks like the best >100mil population country outside the Anglosphere, with whom it is perfectly competitive.
My family jokes sometimes that we wish we could still afford Japanese goods. I heard that the reason we don't see many Japanese students in Australian universities is because the Japanese system is too good.
I mean, why are we avoiding this sort of failure? It looks a lot like our success. The Japan of today isn't the Japan of ten years ago, but is this the worst case scenario of deflationary policy? Where are the failures?
Your question for examples of severe deflation is a bit like questioning the social distancing measures against COVID-19: If the policies work, it looks like they are useless - after all, deflation never really happens, right?
The current deflational examples like Hong Kong and Japan are no hell holes because deflation was 0.1% (HK) or 2% (Japan) - because of monetary and fiscal interventions.
Whereas, we know the debt-fuelled-collapse-cycle works, insofar as it inspires economic-confidence in those that need that sort of thing.
My guess is that’s why we keep doing what we’re doing: there doesn’t appear to be any reason not to, and the alternatives might cause a whole lot a whole lot of discomfort.
>It's because the true, severe deflation is accompanied by mass unemployment and contraction of the economic output.
That's not the case with deflation in general; there were deflationary episodes before the 1930s where this didn't happen (e.g. https://en.wikipedia.org/wiki/The_Great_Deflation). The difference in the 30s is that a wage floor was imposed, so wages couldn't fall to adjust to the increased purchasing power of the dollar, so there was massive unemployment. Labour economists nowadays refer to this as "sticky wages".
Imagine if there was 90% deflation now. A dollar would buy ten times more, but a minimum wage worker would be ten times more expensive. If the minimum wage wasn't adjusted downwards to match the deflation, then suddenly nobody could afford to pay minimum wage, so a huge amount of people would be out of a job.
True. You're right that the topic of deflation is handled rather "bluntly". Also, I can see some benefits of inflation - for example to slowly dilute govt debt after some government gets over-indebted. My point is that it cannot be judged by a simple always good / always bad attitude.
I think it's particularly important to consider the velocity of money. When you consider that inflation is due to the change in (velocity of money * money supply / economic production), it's important to remember that even as economic production goes down, the velocity of money arguably goes down even faster as e.g. rent and mortgage payments are deferred, bill payments are deferred, etc.
So, the government has to expand the money supply to keep money flowing due to the decrease in velocity. One of the issues though is that asset prices are not dependent on the velocity of money - asset prices are roughly proportional to (money supply / aggregate assets), so while printing money won't necessarily drive inflation, it does drive asset prices up.
>asset prices are roughly proportional to (money supply / aggregate assets), so while printing money won't necessarily drive inflation, it does drive asset prices up.
A lot of people think of inflation as the consumer price index. ( Gas, bread, cars, toasters, etc) if those go up it puts pressure on wages because people cannot afford to live on existing wages at a certain level.
The price of collectibles like rare art or comic books could go up or down a lot but the general economy doesn't care about those assets.
The point isn’t about what you think the economy “cares about”. You mention commodity products which are a part of the picture, but they are all depreciating assets.
In the end, there is an increased amount of money in the system. That money is looking for returns. Investors flood into the asset classes where they think they can find returns. This means collectibles increase in prices, but other (more common) assets like education, housing, and stocks have also increase considerably.
The velocity of money (a terrible name IMHO) can be described as follows: how correct is the "more money = more inflation" statement in our current environment? In particular if it's low then more money != more inflation.
And yes, we've had terrible inflation in financial markets.
I read somewhere that because of the USD's status as an international reserve currency, a safe currency in times of crisis, and one in which a huge amount of debt is denominated, there's close to $20 trillion worth of demand for USD, so the Fed can afford to print up to that much without any expected inflation. Other countries, on the other hand, have much less room to print money without causing inflation.
> the USD's status as an international reserve currency
There are several reasons for that.
There are very few industrial powers, mainly the US, Germany, China and Japan.
The Economist calls the rest of the European countries "sick men" with a population dependent on welfare. Most had to lie their way (with help from Goldman Sachs) into the EU since they didn't meet the financial milestones for admittance.
Of the large economies, China is known for both currency manipulation and political issues.
The US is the only superpower left. It's easy to see - the US has the only operational heavy aircraft carriers. That gives the USD legitimacy that the Euro doesn't have - there is no army behind the Euro.
The advantage of being the international reserve currency is that the US gets around 1% more economic growth than others, but we pay for the military might to defend the dollar.
Much of the US is dependent on welfare paid for by a few industrial/financial centers. As a whole, we are also known of late for currency manipulation and political issues. Ask anyone about the effectiveness of our military should there be a funding crunch, with how much is spent maintaining overpriced, underperforming equipment.
On the primacy of the dollar: we walk by faith, not by sight.
Contradiction != trolling. If you deign to respond please do it respectfully.
>That's internal.
The circumstances of EU members with respect to the EU is substantially similar to the circumstances of states to the US federal government.
>Yet we're the de facto global currency.
This is begging the question.
>Works great.
Hm.
>US doctrine is that money is no object. Ask UK about the alternative.
I'd rather ask the Axis powers about the topic in question.
>Plus a real military, funded by a real economy.
Again, hm.
I think you're proving my point. Real things can weather a period of stoppage. Castles built on data and debt disappear when the lights go out. Again, ask someone in-the-know what happens if funding or supply lines dry up, even temporarily.
Again, don't do magical thinking. Inflation is about things like tomatoes. The only way to make their prices go up is to reduce the amount of tomatoes produced per year, or increase people's willingness to eat them.
You’re only looking at one side of the equation. Assuming demand stays constant, if you reduce the number of tomatoes, their price will go up. Likewise if you increase the number of dollars, the price of tomatoes will also go up, because each individual dollar isn’t worth as much.
That only matters if people are prepared to pay more for tomatoes, which I don’t think they are as evidence by inner-city real estate prices going up way more than the price of tomatoes in inner-city groceries.
On the whole people are drastically more interested in paying more for real estate / assets / buying or starting a business than they are in giving dollars to tomatoes producers.
Tomato producers will take whatever they can get at market, because the produce is perishable, whereas real estate vendors can (usually) afford wait to for a greater-fool with deeper-pockets.
You're missing the point of the example. Substitute tomatoes with something with a long shelf life, like Spam. It doesn't matter. The point is that the people utilize leverage (loans) in order to fund investments that will yield a return greater than the interest rate paid on the loan. People don't use leverage to buy milk, cigarettes, and gasoline, which are the types of goods tracked in the Consumer Price Index (CPI). They use leverage to buy assets. So when people say that inflation has been low despite the unprecedented amount of money printed over the last 10 years, they're only looking consumer goods and not assets.
That assumes that everyone who wants to buy tomatoes is able to buy them at current prices, and that everyone who is buying tomatoes now would no longer buy them if the price went up.
If there are more dollars floating around in the economy, more people may be able to afford to buy tomatoes and more people become price insenstive (e.g. software engineers in SV do not care if tomaatoes are $2/kilo or $4/kilo, they'll still buy). As a seller you'll raise prices and see no drop in demand, ergo prices go up.
Price inflation is not some force of nature - it’s deliberately induced by the central bank out of a belief that falling prices are bad. The trend in market economies is for everything to get cheaper every year. Look at TVs for example.
There’s no “magic” in inflation. If you have more dollars chasing the same number of goods, those dollars will have less purchasing power. Because the Fed creates new money if the form of bank reserves, the things that to tend to be inflated the most are assets purchased with loans (real estate, equities, businesses, etc). Nobody takes out a loan to buy tomatoes but they will take out a loan to fund a new business.
How do you give consumers money and say "Do not spend this on toilet paper. The paper products industry is a max capacity and cannot produce any more TP. It will only cause inflation"
In a free market people are going to spend money on whatever they want. Maybe you offer refunds for industries which need to be restarted?
> How do you give consumers money and say "Do not spend this on toilet paper. The paper products industry is a max capacity and cannot produce any more TP. It will only cause inflation"
1. Where will people actually store this very bulky commodity?
2. Staring at the wall of TP that has been collected, people will realize 'I will have to poop a lot to use up all of this'.
3. Once they realize they have a nine month supply of TP, and the space it is taking up, they will not buy TP for nine months so TP manufacturers may experience a reduction in demand in the not-too-distant future.
It is certainly possible for a spike in prices (inflation) for TP (or whatever) to occur as people 'panic buy' supplies, but that spike will subside as people realize they've stock piled enough to last them the length of the shutdown.
Goodhart's law says that "When a measure becomes a target, it ceases to be a good measure." - This is what happened with inflation. The government's dual goal of attempting to measure inflation while at the same time keeping it low cannot possibly work.
In our fiat monetary system, there are plenty of incentives for people to hide the real inflation numbers. The kind of inflation we have right now mostly affects the stock market - That's why speculative investments like Bitcoin, Snapchat and Uber are so valuable; not being backed by any net intrinsic value makes them a good benchmark against which to measure real inflation. You could even argue that Bitcoin is backed by negative value (since it costs Bitcoin owners money to keep miners and the network running). So the problem is worse than you think.
Stocks are also a good measure of inflation. Many public companies are backed by real economic value but the value of this activity is often greatly exaggerated... Also, some stocks produce net negative value for society.
Being able to earn revenue or even profits doesn't necessarily mean that a company delivers net positive value to the economy. If the money is obtained through trickery or coercion, then the company adds net negative value. For example, companies like Oracle which derive most of their earnings from socially counterproductive litigation and ill-gotten government contracts add significant negative value to society and yet they are highly profitable. I would argue that companies like Facebook add close to 0 net value; they add a lot of positive value and also a lot of negative value.
There is no doubt that the fiat monetary system is to blame. big companies are essentially getting free money from the rest of us; when the Fed injects new money into the economy, big corporations are the first to get their hands into the pot. Big companies know where the newly printed Fed credit is flowing and they have the political and business connections to extract it. If we don't do something it will get worse. Big companies have shown over and over again that they cannot be trusted.
It's deeply frustrating that, as an honest working citizen, I constantly have to bear witness to the elites receiving free credit over and over while I am enslaved to them under some pretext that they somehow deserve their share. The fact that the information is out there in the public domain and yet nobody seems to be doing anything about it is disturbing.
My conclusion is that people are either evil, stupid or both. I guess people have not changed much since the time of slavery or the holocaust. Exactly the same kind of people running the show it seems. Even if you disagree with what I'm saying, you should at least support the intent.
Unfortunately, I don't have any research to back my claims... Can you think of a single corporation who would sponsor such research? Exactly. This perspective that I'm sharing is doomed to remain in the domain of 'fake news'. The idea of 'fake news' is a weapon invented by the elites to discredit any information that is not aligned with hypercapitalist incentives.
> The kind of inflation we have right now mostly affects the stock market
Annualized S&P 500 Return with Dividends Reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1]. I wouldn't call that inflation.
How is a guaranteed risk-free average return of 10% per year normal in any way? How is it not an indication of inflation at the top? Why is it so hard to believe that corporations may in fact be extremely inefficient and subsist and thrive almost entirely because of free credit from the Fed?
It's no coincidence that the stock market started to rally and corporate monopolies started to form at around the same time as the gold standard was abolished. We have never had so many massive companies in the history of mankind.
Most employees who work there don't feel that they're adding value (e.g. https://www.newyorker.com/books/under-review/the-bullshit-jo...), most of their customers don't feel that they're getting value (how long do they have to put you on hold on the phone? How many times do we only choose a company because there are no other alternatives?)... Who is getting value out of their existence?
If you invested 2 months ago, you are down 20%. It is definitely not risk free.
> It's no coincidence that the stock market started to really pick up, and monopolies started to form at around the same time as the gold standard was abolished.
Annualized DJIA Returns with Dividends Reinvested from 1897 to 1970 was 9.536% [0].
I said 10% average per year is risk free. If it collapses and never recovers for 50 years, then I'll agree with you but we both know that's not going to happen.
It's not going to happen precisely because the system is a scam and in reality there is no risk. The only real long term risk to stock prices is total societal collapse.
If the government keeps bailing out inefficient corporations, eventually they will get exactly that. Now there are many less painful options available, but by constantly brushing them under the carpet, the government and the fed are making total socio-economic collapse an increasingly appealing option to solve our systemic problems.
They could just try to solve the problems now, but instead they prefer to let the tension build... Just like it did before WW2.
Even though the consequences are going to be economic, I suspect that the helicopter money being offered by the various governments of the world has more to do with stopping a domino effect that would lead to social collapse. A decimated economy with it's institutions more-or-less intact may be a low price to pay.
As for all of these economic predictions whirling about: they are speculation based upon people's pet theories. Quite frankly, there isn't enough data to go on. There are very few economic crises that have progressed on this scale and at this pace. When there has been a crisis of similar magnitude, the initial conditions are vastly different. Go ahead and present your predictions, but also take the time to realize that its validity is more likely to be based upon luck than data.
> Helicopter money is irreversible since it increases the monetary base of the end-users.
This is inaccurate. If the government pumps $x into the economy today, tomorrow it can take $x out by levying a tax.
> He also suggested that blockchain technology and digital currency opportunities allow central banks to transfer money directly to citizens’ accounts. In this case, the regulator will be technically able to limit the time during which the money can be spent.
Can anyone explain what "blockchain" brings to the table here compared to traditional banking? If you want to distribute money to everyone, you want to verify real-world identities, which seems like the exact opposite of the typical use case blockchain is paraded around for.
> Can anyone explain what "blockchain" brings to the table here compared to traditional banking? If you want to distribute money to everyone, you want to verify real-world identities, which seems like the exact opposite of the typical use case blockchain is paraded around for.
Private, permissioned "blockchain"-like technologies (the kind being discussed in the enterprise market) would give you exactly the type of identity solution you need.
A shared inter-bank ledger that individuals could register accounts with, which also incotporates the appropriate level of privacy and authorization, would enable seamless verification and transfer activities at scale.
Why the complexity of a "private, permissioned blockchain" compared to the traditional databases subject to periodic audits that the world already runs on, are proven to work and are conceptually much simpler? It seems like a solution in search of a problem.
It's a fair question. The answer is that systems like this - that are real in their offering and not a pipe dream - are not promoting to replace traditional databases. Blockchain is a terrible term with tons of baggage so let me describe what I mean in more detail.
These solutions in my mind are better described as distributed systems that allow independent verification and audit of data and transactions from within the system itself.
This is useful when the data being shared involved spans multiple entities in terms of responsibility, ownership, value, and other impacts. Rather than having to rely on other mechanisms of verification the system itself is able to provide that verifiability at scale.
Essentially you're using a technology layer, which is a collection of existing concepts put together in a somewhat novel use, to disintermediate more expensive verification solutions.
I think it makes a lot of sense if you examine the value chain of securities lending (from creation of the instrument, custody, to lending, custody transfer, and finally audit and compliance).
> Money enters the economy via government spending. Money leaves the economy through taxation.
Dollars enter the economy when the Federal Reserve creates reserves out of thin air and trades those new reserves for treasuries or other assets.
Dollars are destroyed when the Federal Reserve sells off assets on its balance sheet.
Taxation plays absolutely no role in this process. The Federal Reserve controls the monetary base. This would be true even if the federal government levied zero taxes.
> Governments don't need to tax in order to spend, they are the issuers of the currency.
Governments can earn revenue entirely from selling bonds or printing money - you're absolutely right that they don't need to tax in order to spend. However, this statement doesn't back up your assertion that governments destroy money through taxation.
The effect of taxation is precisely the same as that of destroying money - it means that the money is no longer available for non-government entities to use. On the other side of the transaction, for the government, as you recognize, taxation presents no increase in buying power.
To directly compare the two scenarios - taxation and burning money - private entities can no longer use the money and government can still spend as much as it wants subject to self imposed limitations. There is no functional difference.
> The effect of taxation is precisely the same as that of destroying money
No it's not. The effect of taxation is the same as theft. The thief gains and the victim loses, but the overall purchasing power of the dollar is unchanged. Destroying money would increase the purchasing power of the dollar.
> On the other side of the transaction, for the government, as you recognize, taxation presents no increase in buying power.
Taxation is one of three ways the government can earn revenue (taxation, selling bonds, or printing money), so yes it does increase buying power.
> To directly compare the two scenarios - taxation and burning money - private entities can no longer use the money and government can still spend as much as it wants subject to self imposed limitations. There is no functional difference.
Those two aren't comparable. Burning money would mean that nobody can spend that money. Money gained through taxation can still be spent (and is spent).
If the government collected taxes but never spent that money, I would concede that the net effect is the same as destroying money. But that clearly doesn't happen. The government DOES spend the money it garners through taxation. So the claim that taxation destroys money doesn't make any sense.
The government can spend as much as it wants without needing your tax money. It doesn't matter how much money the government collects in taxes, it can spend as much as it wants regardless, because it can print as much money as it wants.
> The government DOES spend the money it garners through taxation
The government can spend the money regardless of how much it raises in taxes. Your taxes do not fund government spending.
Money is fungible. If government taxes $x and then spends $y, it is the same result as if it burns $x and then spends $y of newly printed money. In both cases the money supply changes by $y-$x
I don't disagree with you that the government is unconstrained in regards to how much it can spend. The government doesn't need to tax or sell bonds at all. It can just print money and force everyone at gun point to use it.
But you still haven't provided an argument as to why you believe taxation destroys money. Taxation merely transfers dollars from one entity to another. It doesn't change the amount of base money in existence.
The government doesn't need to tax you to get dollars to spend. They are the source of your dollars, they can will as many dollars into existence as they wish, subject to self-imposed limitations. Where do you think dollars come from? Why would an entity with an infinite supply of dollars need your dollars?
The purpose of taxation isn't to fund government operations, its to maintain demand for dollars.
> The purpose of taxation isn't to fund government operations, its to maintain demand for dollars.
Yes, taxation is one of the ways to create demand for an otherwise worthless fiat currency. So are legal tender laws. This still does not explain your assertion that the government destroys dollars through taxation.
That is precisely what taxation is. Taxation takes money out of the economy, government spending puts money into the economy. For all intents and purposes, government spending creates money, and taxation destroys it.
The government doesn't need your tax dollars in order to spend. As the issuer of currency, it can will as much money into existence as it wants. So collecting taxes is simply a way to regulate the money supply, control inflation and provide a base level of demand for the currency.
> That is precisely what taxation is. Taxation takes money out of the economy, government spending puts money into the economy. For all intents and purposes, government spending creates money, and taxation destroys it.
> The government doesn't need your tax dollars in order to spend. As the issuer of currency, it can will as much money into existence as it wants. So collecting taxes is simply a way to regulate the money supply, control inflation and provide a base level of demand for the currency.
A tax does not remove money from the money supply, it simply transfers money to the government. Taxes could be increased and government spending increased yet further, and the net result is an increase in money supply, disproving your claim because the only causal factor is what government is doing with the money supply. Similarly, in a non-fiat system, such as a gold standard or even just specie, taxation does not reduce the money supply any more than storing the money under a mattress. This is a distortion or at least a misconception of what money is. The better analysis of these considerations would be as Cantillon effects.
The government already has an infinite supply of money for itself, by virtue of being the issuer of the currency. Money supply means the money in circulation in the non-government sector. Then by definition, taxation takes money out the economy and government spending adds money to the economy.
Discounting foreign trade, private sector surplus is exactly equal to government deficit.
> Sectoral balances analysis states that as a matter of accounting, it follows that government budget deficits add net financial assets to the private sector. This is because a budget deficit means that a government has deposited more money into private bank accounts than it has removed in taxes. A budget surplus means the opposite: in total, the government has removed more money from private bank accounts via taxes than it has put back in via spending.
> Therefore, budget deficits, by definition, are equivalent to adding net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is represented by the identity: (G – T) = (S – I) – NX
> where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.
> The conclusion drawn from this is that private net saving is only possible when running a trade deficit if the government runs budget deficits; alternately, the private sector is forced to dis-save when the government runs a budget surplus and the trade deficit exists
In the above equation, increasing T has exactly the same effect as decreasing G by the same amount.
> The government already has an infinite supply of money for itself, by virtue of being the issuer of the currency. Money supply means the money in circulation in the non-government sector. Then by definition, taxation takes money out the economy and government spending adds money to the economy.
> Discounting foreign trade, private sector surplus is exactly equal to government deficit.
> > Sectoral balances analysis states that as a matter of accounting, it follows that government budget deficits add net financial assets to the private sector. This is because a budget deficit means that a government has deposited more money into private bank accounts than it has removed in taxes. A budget surplus means the opposite: in total, the government has removed more money from private bank accounts via taxes than it has put back in via spending.
> > Therefore, budget deficits, by definition, are equivalent to adding net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is represented by the identity: (G – T) = (S – I) – NX
> > where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.
> > The conclusion drawn from this is that private net saving is only possible when running a trade deficit if the government runs budget deficits; alternately, the private sector is forced to dis-save when the government runs a budget surplus and the trade deficit exists
> In the above equation, increasing T has exactly the same effect as decreasing G by the same amount.
Stating that the government has "an infinite supply" of money is not relevant because the money has to be created because the potential to create money is not the same as money that has been created. (I may also note that article must be implying a fiat currency, even though it is not stated.)
You statements and quote from Wikipedia do nothing to address Cantillon effects and I'm tempted to say, based on the quote provided, the editors of that article have never heard of such a thing. This is why Wikipedia is not a source.
I can make the same arguments about mattresses:
Money going underneath a mattress is removed from the equation of money in "circulation" until it has been placed into a pocketbook. If an entire population decides to remove 80% of the money in "circulation" by placing it under their mattresses, the prices for everything will fall though the floor as the population is only willing to spend the money remaining in "circulation".
Then, the population decides, all at once, to move the money from underneath their mattresses into their pocketbooks, and prices shoot through the roof because of the huge expansion of money in "circulation".
This is, conceptually, no different than the activities described in the quote and is best attributed to Cantillon effects (i.e., money flows through an economy).
The difference between you stuffing money under a mattress and the government doing so is that the government controls the money printers and you do not. There is no point to the government stuffing money under a mattress because it can conjure up as much money as it desires when it so desires. On the other hand, you have no much magical ability, so the situation is quite different.
And yes we are talking about fiat currencies because most currencies in use today are fiat currencies.
Government debt is not like household debt, and government saving is not like household saving.
> The difference between you stuffing money under a mattress and the government doing so is that the government controls the money printers and you do not. There is no point to the government stuffing money under a mattress because it can conjure up as much money as it desires when it so desires. On the other hand, you have no much magical ability, so the situation is quite different.
> And yes we are talking about fiat currencies because most currencies in use today are fiat currencies.
> Government debt is not like household debt, and government saving is not like household saving.
Yes, the money printers are the exclusive exception and the only factor in inflation or deflation. Taxes are not a factor any more than mattresses. I don't know if you recognize it, but you are supporting my position.
Taxes take money out of the economy. Government expenditure puts money into the economy. Its a basic accounting truism. The rate of inflation/deflation is proportional to the difference between the two.
Think of it this way. If one day the government decides to tax 99% of the money in the economy, you have barely any money left circulating for anyone else and you get deflation(less money chasing the same goods). On the other hand, if the government decides to add a billion dollars to everyones bank account, you have too much money in the economy and inflation(more money chasing the same goods. The government can decide to put either of the policies(or anything in between) into effect at any time, it isn't constrained by its own "savings under the mattress" at any point. If there are restrictions on government action in this direction, they are legislative, not fiscal(because, again, the government is the source of all money, it can never be fiscally constrained, no more than the referee in a tennis match can run out of points to award).
RE mattresses: If you owned a money printing machine, you would not be stuffing money under your mattress, because it would just take up space. You would just destroy money you do not need at the moment, and print more as and when you need it.
RE cities going bankrupt: Of course, the city of Stockton doesn't control the money supply, we are only talking of entities who can issue their own currency, i.e. the federal government. This is also why Greece went bankrupt, because it doesn't control the supply of money its debt was denominated in.
> Taxes take money out of the economy. Government expenditure puts money into the economy. Its a basic accounting truism. The rate of inflation/deflation is proportional to the difference between the two.
The same effect is seen with the mattresses. Your argument has no way to address this.
Also consider: why did the city of Stockton, California have to declare bankruptcy? It collects taxes, yet it couldn't pay its bills. Again demonstrating the only causal factor is the ability to control the money supply and taxes are not a control on the money supply.
The point is that the statement in the article is just plain wrong. You are advancing quite a different argument. Some junkies do in fact clean up their act, so saying that becoming a junkie is an irreversible process is also wrong.
> In this piece, we take a look at the helicopter money model, its role in the economy, and the related shortcomings that may emerge in the long-run.
> What’s Helicopter Money?
> The concept of helicopter money first appeared in 1969 in The Optimum Quantity of Money by a famous monetary theorist and Nobel laureate Milton Friedman. It implies transferring money to individuals or cutting taxes for households.
This section tells me everything I need to know: the person who wrote this article has no idea what they are writing about.
The "helicopter money" phrase was used satirically, and every economist at the time and through, apparently, until today, knew this because of how absurd the term is. I haven't read the piece sited, but I'm going to go out on a limb and state that Milton Friedman would not have stated that the term was even equivalent to "cutting taxes" and definitely stated the term as creating money and giving it to households (via a helicopter).
Please ignore this article. It is absolutely awful and is probably effective at tricking people who have never read about these things before.
ah yes, a nice discussion of the central bank toolkit when policy rates are at their effective lower bound
wait, what's this? Bitcoin and ethereum tickers at the top of the page? A section titled 'Helicopter Money on Blockchain'? hold on a minute...
In fairness, the article did avoid a few of the 'not even wrong' pitfalls you might expect to see written about QE and other sovereign currency monetary operations
Printing money is not the same thing as creating resources. Resources are the backbone of wealth! No resources, no wealth. All resources begin with human activity. No activity, no resources. Reduced activity, reduced resources, reduced wealth. Even hunter gathers had to hunt and had to gather.
I find this a pretty poorly written piece. It seems to have forgotten about the headline question after the first few paragraphs, and doesn't make any other clear point in the end.
Here's a very traditional economist answer.
Helicopter money is neither a way of of the current crisis, nor a fallacy. It is good to do it now, but it won't "solve" the crisis. It's still much better to do it than not.
Macro-economic recessions/crises, defined as a temporary drop in aggregate income/production (= GDP = GDI), are caused by a drop of (some combination of) aggregate demand (how much people will buy at a given price level) or aggregate supply (how much people produce at a given price level) [1], in economic parlance, negative supply- or demand shocks. If we have a pure supply shock, demand side measures such as lowering interest rates, helicopter money, government stimulus, will mostly just increase prices. OTOH, with a pure demand shock, most of such measures will probably help[2]. With demand shocks, the productive capacity is still there ("potential output"), but the demand needs to increase to "close the output gap".
Most post-WW2 recessions in advanced economies are negative demand-shock recessions (we haven't been able to identify short-term economy-wide drops in production capacity), so demand side stimulus is by and large helpful (except when they really overdid it in the 1970, when it did cause high inflation).
The current crisis is a combination of both a big demand shock and a big supply shock. This means that demand side measures such as helicopter money will help (in the sense that things will be much worse if we did't do it). But things will also become more expensive (either nominally in sticker prices if the demand stimulus is large enough, or just in real terms compared to people's incomes) due to the supply shock. The supply side shock can only be remedied by really controlling the pandemic.
All of this is very moderate traditional undergraduate level economics, and will explain most of the upcoming economic upheavals perfectly fine. Keep this in mind when you read stories cherry picked to make some point about current/upcoming economic or monetary policy.
[1] A drop in aggregate supply could be cause by e.g. a big natural disaster, war, pandemic. What might cause a drop in aggregate demand is still somewhat of a mystery.
[2] Most of the economic debate is which form of stimulus is more effective, and about more esoteric second order effects. But there might still a minority of hard core "Real Business Cycle" economists who doubt the existence of demand-side shortfalls.
* If citizens approve money printing to citizens, then it helps them out.
* Money printing to the privilege class (investors), creates permanent theft to citizens going forward, for these two reasons:
1) Salaries don't go up with inflation for low income and middle class. Only Gold-color workers.
2) That money going to privilege class has them bid up equities/stocks (and other) asset classes. Workers with 401k get far smaller percent of the stock market. Instead of 10% YoY return from the stock market for their retirement, they get a lower percentage.
2008 had US Dollars at $800b (monetary base). 5 years later, it was $3.6 trillion. That is 450% as many USDollars as before. That money printed $2.8 trillion went to the privilege class. Workers adding to their 401ks get robbed for the rest of their life, on lower growth.
Despite popular belief, the value of money decreased by about 50% during this time. It is not easy to say if this is a coincidence. But it looks a lot like there is causality at play.
The reason why inflation "officially" is lower then what one would expect given the amount of money printed lies in the way it is calculated.
The calculation includes mostly goods and services bought by people who live from hand to mouth. Not the goods and services bought by people with savings and high income.
Rent and real estate in desireable areas, gold, bitcoin, equities - all of these now require significantly more money to buy then they did in 2010. People who saved money lost about 50% of their buying power to inflation.