I think somewhere in the previous writing EY said that by printing money a central bank could increase prices, but it occured to me that it may be not true, because the prices will simultaneously fall in a harder currnecy, and thus hyperinflaion is deflation.
It reminds me the time when we in Russia had hyperinflation in 1990s, which also was deflation in more real assets. That is, Russian central bank printed so much money, that the prices constantly rose. However, the exchange rate to dollar grew even quicker and dollar prices constantly fell. Everybody started using dollar prices, written beneath ruble prices. The economy becomes a complete mess and collapsed in 1998 after failed attempt to stabilize ruble exchange rate using government short term debt.
The same could happen if too much dollars will be printed in the US—it could result in the deflation in gold and bitcoin prices.
Even now a lot of left economists, like Glaziev, ask Russian central bank to increase the money supply and to lend the money to money-starved factories. However, it is also well known that if money will be lended to the factories, they will be immideately converted in dollars, and this will crash russian ruble exchange rate. That is why left economists urges to ban dollar and other foreign currencies in Russia, and only after it to start to print money. However, such drastic measures will kill the economy as investment will stop.
You mostly seem to be noticing that there is a difference between the nominal economy (the numbers on the prices), and the real economy (what resources you can buy with currency). That’s certainly true—but actually beside the point. Because the point is that inflation (actually, NGDP) below trend, causes “business-cycle” recessions. The reason is that many contracts (wages, debts) are written in nominal terms, and so when the value of the Unit of Account (function of money) changes in an unexpected way, these fixed nominal contracts don’t adjust quickly enough. The result is disequilibrium, rising unemployment and bankruptcies, etc. The fix is to keep nominal prices rising on trend.
Having exchange rates fall, or gold or asset prices rise, is an independent thing. It only matters if the currency begins to be abandoned (as you suggest with dollar prices in Russia), and especially if wage and debt contracts begin to be written in a different Unit of Account. It is stability in the value of the Unit of Account which affects macroeconomic stability.
Summary: “printing money could increase prices” is the whole point, and it doesn’t matter if “prices fall in a harder currency” or there is “deflation in gold and bitcoin prices”. As long as the local currency is the Unit of Account, then changes in the value of the local currency (aka local currency aggregate demand) are what matter.
As soon as agents start to realise that you started to print money, they begin to change their contracts into a harder currency. It has happened in Russia in 1990s, as all contracts were in dollars, because everybody was afraid that the governemnt will print more money. Government fought back, by banning use of foreign currency names in contrats. People created “artifical units”, and everybody knows that any “artificial unit” in a contract = 1 USD. So one could increase price by printing money obly in small extent, as it undermines the believe of agents in your currency, and they will stop to use it.
I believe that EY’s main point with printing money is that central banks tend to not print enough money, even if some banks—such as Russia’s in the 90′s—print too much.
Just because you can do too much of something, it doesn’t mean that you shouldn’t do that thing more.
Yes, it looks like Western central banks try a Goldilock approach—to print enough money to start inflation but not enough to cause catastrophic consequences. However, nobody knows when the consequences will be become catastrophic as it is non-lineary event, when people lose the faith in the money stability and start to change all of them into a harder currency.
Basically, the idea is to print not too much and not too litle money, and pass between Scilla and Haribda of inflation and deflation. Also, the idea is to adjsut monetary policy of a central bank to act opposite to the business cycle, that is, to print more money during deflational recession and less during boom phase of economy. I have read about the idea in Dr.Roubini Econoblog during 2008 recession, and, in fact, it was presented as ideal policy, a dream, which ability to work is not known, but the dream is attractive to central banks.
If we look closer, we will find that we live in the period of unprecidented money printing, started after 2008. US government increased M1 (cash) money supply several times after 2008 - from around 1 trillion to 3.5 trillion in circulating bills. But it didn’t produce “good” inflation, as these money pured into speculative assets. (This is where economists start to disagree, and my point become more speculative.)
It also good to note that while official inflation is very low, the price of a lot of important things increased several times, including gold, education, housing (for a longer period given previous bubble), stock prices, medicine, phones and even TV sets (but it is not presented in official infltion data because of “hedonistic indexing”).
“Q. What if I say I’ll print ten dollars and the market still thinks that’s not enough?
A. Create even more money. Look, imagine creating a quadrillion dollars. Prices would go up then, right? I mean, a 12-year-old raised by goldbugs could understand that part… uh, it’s possible you might need to add a 12-year-old raised by goldbugs to your advisory staff.” https://www.facebook.com/groups/674486385982694/permalink/896559330442064/
It look like he thinks that after printing a quadilion dollars, it will increase prices, but in fact only nominal prices will grow, but the prices in a harder currency will fail, and the market will be able to find the harder currency. For decades it was gold, but after 1970s central banks did exacltly what EY advises—they incresed fiat money supply, while playing against gold. There was elaborated scheme for lowering gold price by using gold lending and virtual gold, but it failed around 2008, and the price of gold jumped from 300 to 2000.
But raising nominal prices is economically useless if it is not the healthy inflation.
One could add 000 behind each prices number (thus 10 will be 10 000), something similar to denomination, but in the other diretion—thus nominal prices will grow 1000 times, but it will not affect economy.
“But raising nominal prices is economically useless” No, that’s not true. Raising nominal prices helps with sticky wages & debts. Failing to raise nominal prices causes recession, unemployment, and bankruptcies.
“the healthy inflation” That phrase doesn’t refer to anything. “Healthy” isn’t a modifier that applies to “inflation”. There is only one single thing: the change in the overall price level. There aren’t “healthy” and “non-healthy” versions of that one thing.
“One could add 000 behind each prices number” No, you’re likely thinking of a different hypothetical, something like an overnight currency devaluation. In those cases, wage and debt contracts are simultaneously converted from the “old peso” into the “new peso”. That’s a very, very different macroeconomic event. “Printing money”, on the other hand, changes the prices of goods … but sticky wage and debt contracts are unaffected (and thus devalued). It is exactly the fact that only some but not all prices are changed by central bank money printing, that causes “raising nominal prices” to have an effect on the real economy. (Exactly as you suggest, if all prices changed simultaneously, the real economy would be unaffected. It’s important to understand that central bank money printing is very different.)
I mean by the “health level of inflation” the level of inflation which is benefitial to the economy without destoying belief in your currency, or creating an assets bubbles. As I explained in another comment below, printing money destoys contracts as people start to rewrite these contracts in a harder currency, as it happened in Russia during money printing experiments. The contracts were rewritten in dollars, exactly because russian central bank could not print dollars. As a result, the central bank lost the ability to affect inflation in dollars contracts. It had to pay a lot later to return the people beilef in russian ruble, by constntly manipulating currency rate.
Nominal GDP also increases by 1000 times, and everyone’s currency savings increases by 1k-fold, but the things which are explictly in nominal currency rather than in notes will keep the same number. The effect would be to destroy people who plan on using payments from debtors to cover future expenses, in the same way they would as if their debtors defaulted and paid only one part in a thousand of the debt, but without any default occuring.
I think somewhere in the previous writing EY said that by printing money a central bank could increase prices, but it occured to me that it may be not true, because the prices will simultaneously fall in a harder currnecy, and thus hyperinflaion is deflation.
It reminds me the time when we in Russia had hyperinflation in 1990s, which also was deflation in more real assets. That is, Russian central bank printed so much money, that the prices constantly rose. However, the exchange rate to dollar grew even quicker and dollar prices constantly fell. Everybody started using dollar prices, written beneath ruble prices. The economy becomes a complete mess and collapsed in 1998 after failed attempt to stabilize ruble exchange rate using government short term debt.
The same could happen if too much dollars will be printed in the US—it could result in the deflation in gold and bitcoin prices.
Even now a lot of left economists, like Glaziev, ask Russian central bank to increase the money supply and to lend the money to money-starved factories. However, it is also well known that if money will be lended to the factories, they will be immideately converted in dollars, and this will crash russian ruble exchange rate. That is why left economists urges to ban dollar and other foreign currencies in Russia, and only after it to start to print money. However, such drastic measures will kill the economy as investment will stop.
You mostly seem to be noticing that there is a difference between the nominal economy (the numbers on the prices), and the real economy (what resources you can buy with currency). That’s certainly true—but actually beside the point. Because the point is that inflation (actually, NGDP) below trend, causes “business-cycle” recessions. The reason is that many contracts (wages, debts) are written in nominal terms, and so when the value of the Unit of Account (function of money) changes in an unexpected way, these fixed nominal contracts don’t adjust quickly enough. The result is disequilibrium, rising unemployment and bankruptcies, etc. The fix is to keep nominal prices rising on trend.
Having exchange rates fall, or gold or asset prices rise, is an independent thing. It only matters if the currency begins to be abandoned (as you suggest with dollar prices in Russia), and especially if wage and debt contracts begin to be written in a different Unit of Account. It is stability in the value of the Unit of Account which affects macroeconomic stability.
Summary: “printing money could increase prices” is the whole point, and it doesn’t matter if “prices fall in a harder currency” or there is “deflation in gold and bitcoin prices”. As long as the local currency is the Unit of Account, then changes in the value of the local currency (aka local currency aggregate demand) are what matter.
As soon as agents start to realise that you started to print money, they begin to change their contracts into a harder currency. It has happened in Russia in 1990s, as all contracts were in dollars, because everybody was afraid that the governemnt will print more money. Government fought back, by banning use of foreign currency names in contrats. People created “artifical units”, and everybody knows that any “artificial unit” in a contract = 1 USD. So one could increase price by printing money obly in small extent, as it undermines the believe of agents in your currency, and they will stop to use it.
I believe that EY’s main point with printing money is that central banks tend to not print enough money, even if some banks—such as Russia’s in the 90′s—print too much.
Just because you can do too much of something, it doesn’t mean that you shouldn’t do that thing more.
Yes, it looks like Western central banks try a Goldilock approach—to print enough money to start inflation but not enough to cause catastrophic consequences. However, nobody knows when the consequences will be become catastrophic as it is non-lineary event, when people lose the faith in the money stability and start to change all of them into a harder currency.
That is not how it works.
How does it work instead? I don’t know much about this and your response doesn’t seem to explain why you think that or what you think happens instead.
Basically, the idea is to print not too much and not too litle money, and pass between Scilla and Haribda of inflation and deflation. Also, the idea is to adjsut monetary policy of a central bank to act opposite to the business cycle, that is, to print more money during deflational recession and less during boom phase of economy. I have read about the idea in Dr.Roubini Econoblog during 2008 recession, and, in fact, it was presented as ideal policy, a dream, which ability to work is not known, but the dream is attractive to central banks.
If we look closer, we will find that we live in the period of unprecidented money printing, started after 2008. US government increased M1 (cash) money supply several times after 2008 - from around 1 trillion to 3.5 trillion in circulating bills. But it didn’t produce “good” inflation, as these money pured into speculative assets. (This is where economists start to disagree, and my point become more speculative.)
It also good to note that while official inflation is very low, the price of a lot of important things increased several times, including gold, education, housing (for a longer period given previous bubble), stock prices, medicine, phones and even TV sets (but it is not presented in official infltion data because of “hedonistic indexing”).
https://en.wikipedia.org/wiki/Goldilocks_economy
He wrote:
“Q. What if I say I’ll print ten dollars and the market still thinks that’s not enough?
A. Create even more money. Look, imagine creating a quadrillion dollars. Prices would go up then, right? I mean, a 12-year-old raised by goldbugs could understand that part… uh, it’s possible you might need to add a 12-year-old raised by goldbugs to your advisory staff.” https://www.facebook.com/groups/674486385982694/permalink/896559330442064/
It look like he thinks that after printing a quadilion dollars, it will increase prices, but in fact only nominal prices will grow, but the prices in a harder currency will fail, and the market will be able to find the harder currency. For decades it was gold, but after 1970s central banks did exacltly what EY advises—they incresed fiat money supply, while playing against gold. There was elaborated scheme for lowering gold price by using gold lending and virtual gold, but it failed around 2008, and the price of gold jumped from 300 to 2000.
The point was to raise nominal prices in the first place
But raising nominal prices is economically useless if it is not the healthy inflation.
One could add 000 behind each prices number (thus 10 will be 10 000), something similar to denomination, but in the other diretion—thus nominal prices will grow 1000 times, but it will not affect economy.
“But raising nominal prices is economically useless” No, that’s not true. Raising nominal prices helps with sticky wages & debts. Failing to raise nominal prices causes recession, unemployment, and bankruptcies.
“the healthy inflation” That phrase doesn’t refer to anything. “Healthy” isn’t a modifier that applies to “inflation”. There is only one single thing: the change in the overall price level. There aren’t “healthy” and “non-healthy” versions of that one thing.
“One could add 000 behind each prices number” No, you’re likely thinking of a different hypothetical, something like an overnight currency devaluation. In those cases, wage and debt contracts are simultaneously converted from the “old peso” into the “new peso”. That’s a very, very different macroeconomic event. “Printing money”, on the other hand, changes the prices of goods … but sticky wage and debt contracts are unaffected (and thus devalued). It is exactly the fact that only some but not all prices are changed by central bank money printing, that causes “raising nominal prices” to have an effect on the real economy. (Exactly as you suggest, if all prices changed simultaneously, the real economy would be unaffected. It’s important to understand that central bank money printing is very different.)
I mean by the “health level of inflation” the level of inflation which is benefitial to the economy without destoying belief in your currency, or creating an assets bubbles. As I explained in another comment below, printing money destoys contracts as people start to rewrite these contracts in a harder currency, as it happened in Russia during money printing experiments. The contracts were rewritten in dollars, exactly because russian central bank could not print dollars. As a result, the central bank lost the ability to affect inflation in dollars contracts. It had to pay a lot later to return the people beilef in russian ruble, by constntly manipulating currency rate.
Nominal GDP also increases by 1000 times, and everyone’s currency savings increases by 1k-fold, but the things which are explictly in nominal currency rather than in notes will keep the same number. The effect would be to destroy people who plan on using payments from debtors to cover future expenses, in the same way they would as if their debtors defaulted and paid only one part in a thousand of the debt, but without any default occuring.
And is it good?