> It's not just the size of Operation Gutt that is striking to the modern eye. It's also the oddity of the tool being used. Today, we control inflation with changes in interest rates, not changes in the quantity of money. To soften the effect of the global COVID monetary overhang, for instance, central banks in the U.S., Canada, and Europe began to raise rates in 2022 from around 0% to 4-5% in 2024.
It's a bit more interesting than 'the central bank sets interest rates'.
Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
What happens next is that they buy and sell government bonds in the open market. The interest rate can be seen as the inverse of the price of bonds.
If the central bank wants to see a lower interest rate, they buy bonds with freshly printed money to drive up their prices, ie drive down the interest rate.
If the central banks wants to increase the prevailing interest rate, they sell government bonds from their inventory and essentially destroy they money they receive in return.
So even when the language of modern central banking talks about interest rates, they still change the quantity of money to implement that.
(This is all simplified, especially with the interest on excess reserves that was popular with the Fed for a while. And there's also repos and reverse repos etc.)
That's just one mechanism, but not the primary way in which the Fed controls interest rates.
The Fed is a large provider of short-term loans ("fed funds") to cover interbank exchanges.
It also is the lender of last resort and lends to banks directly ("discount rate").
By changing these rates, the FED can influence the rates the banks charge each other for loans, and down the line to consumers.
> That's just one mechanism, but not the primary way in which the Fed controls interest rates.
Yes.
> The Fed is a large provider of short-term loans ("fed funds") to cover interbank exchanges. > It also is the lender of last resort and lends to banks directly ("discount rate"). > By changing these rates, the FED can influence the rates the banks charge each other for loans, and down the line to consumers.
And for those rates to take effect, the Fed still has to actually make (or receive) those loans at the announced rates. They don't just magically announce a rate, and then everyone charges that spontaneously.
So it's still about moving money in and out of circulation.
(Or at least the Fed needs to be ready to make and receive those loans, and anticipation does a lot of heavy lifting..)
You are correct. Striking how many HN commentors are so often confident and yet wrong...
You are wrong. Striking how many HN commentators are so often confident and yet wrong in their assumption that everything is about the US.
> You are wrong.
Wrong about what? This is about the US Fed, in context of...well you can read the thread.
In context of a thread about Finland? Anyway, it is true that interbank lending is a primary method of controlling interest rates and this is not limited to the US. The commenter who mentioned it above, probably was talking about the Fed specifically maybe just because that's what they are familiar with.
> Central banks work this way
>> Here's a biggish counter-example, setting fiscal policy for 25% of the world's economic output
>>> Right! How could the other poster have possibly missed that?
>>>> There are other central banks. Ignorant Americans...
It's easy to see why many commentators on a US company's forum would make said assumptions.
Theres not much about the forums that makes it Y combinator specific.
Unless youre talking more broadly, in which case this is the internet. Do Tik Tok videos have to assume everyone is Chinese?
“The Fed” is the US Federal Reserve
The Finnish central bank is called the “Bank of Finland”
Yes and the parent was talking about an american companys forums, which I think is logically flawed.
When it comes to the government treasury markets by volume (which back the global financial system), it objectively is.
But that doesn't (directly) impact inflation in other countries.
Was he really that wrong? Isn't a bond just another debt instrument? It's not obvious to me, that there is any fundamental difference between the operations that both comments describe.
While the effects may be similar, they are fundamentally different mechanisms.
Also, this statement is incorrect:
> Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
The Fed does in fact set interest rates and that decision directly impacts rates all down the line to mortgages and local loans. Intervening in the bond market is another tool that the Fed can use.
The Fed still has to make (and receive) loans at these rates, for them to have an effect on the market.
I think you're talking past each other.
A central bank doesn't directly set interest rates for your mortgage.
It can set rates at which it will lend to other banks, which in turn influences the rates banks will offer to mortgage borrowers, but this isn't necessarily so, see for example 2008.
Of course there are more contracts directly tied to the central bank rates, but thats just formalising the thing thats supposed to happen anyway.
Yes. Btw, I'm not sure how many contracts are directly tied to whatever rate the central bank announces these days? It used to be more common to tie contracts to eg LIBOR, which is or was a reported interbank lending rate, not a decreed one.
"What happens next is that they buy and sell government bonds in the open market."
This describes how central banks operated in the U.S. before 2008 and in Canada before the 1990s. The Federal Reserve and the Bank of Canada both set a target for the overnight interest rate, and then they hit that target by doing open market purchases (or sales) of bonds, effectively adding funds to (or draining funds away from) the overnight lending market. By changing the quantity of funds, they influenced the interest rate.
What changed is that both central banks introduced interest payments on balances that banks hold at the central bank. Previously, these balances earned 0%. With this new tool, they could directly set the overnight interest rate by adjusting the rate paid on these reserves, eliminating the need for regular open market operations.
You make it sounds like they aren't doing regular open market operations, but as I understand it... they still do?
https://www.newyorkfed.org/markets/domestic-market-operation...
The Fed still does purchases and sales, but not for the purpose of driving the overnight interest rates towards its target. The level of the overnight rate is not affected of any purchases or sales that the Fed does.
If the Fed makes or receives a loan at specific interest rates (even if only overnight), that's pretty much economicaly equivalent to buying or selling bonds.
For an international perspective: buying and selling government bonds is far from an universal mechanism for interest rate control (AFAIK when discussing central banks the US is almost always a special case)
For instance the Canadian, UK and European central banks provide systems for interbank short-term loans. It is almost entirely through these systems that they set their target rate.
For Canada the BoC doesn't do any open market operations to reach target interest rate (so almost only repos and reverse repos). Their target rate is in fact called the "target overnight rate" and only concerns overnight lending between Canadian financial institutions.
For the interested https://en.wikipedia.org/wiki/Interbank_lending_market#Monet... has more on it.
As far as I understand, the central banks intervene in this market by offering to loan or borrow above or below otherwise prevailing market rates. This has the effect of adding money to the system (or removing it). So that's pretty much the same mechanism as what I described.
They use an intermediate proxy like the 'target overnight rate' to help them decide how much money to add or remove to the system: exactly as much as needed to bring the market interest rate in line with their intermediate proxy.
Interest on reserves is very much still in place[0]. Open Market Operations haven't been a thing since shortly after the 2008 Financial Crisis.
https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
Ahh…no. The Fed sets the interest rate directly. What you are talking about is yields on treasury bonds, which are manipulated via bond buying to force money into assets by artificially dropping the yield of those bonds, thus creating a more attractive investment in the stocks, assets, etc.
They were entirely wrong about mechanism of setting the interest rate through the discount and fed funds rate, but this description also isn't comprehensive. The feds buying of treasury bonds isn't just to push them down, but is also a mechanism for increasing the monetary supply through the expansion of the fed's balance sheet. This mechanism for increasing the monetary supply is also why the linked article doesn't appear to be accurate either, as they don't seem to understand that the fed does have the ability to manipulate the monetary supply through its balance sheet.
I explained this in my other reply. They buy the bonds with printed money, thereby injecting that money into the economy.
I described Open Market Operations, see https://en.wikipedia.org/wiki/Open_market_operation
> The Fed sets the interest rate directly.
So which interest rate does the Fed set directly, and how does that setting have any effect on the economy?
(I know they have interest on excess reserves. I already accounted for those in my original comment. I know, they are annoying and misguided. I was mostly talking about the system they used before, ie up until about 2008.)
The Fed directly sets the Overnight Rate, also known as the Federal Funds Rate. It's the rate at which banks can borrow from one another overnight to satisfy reserve requirements. This rate indirectly affects the interest rate of all other lending instruments because the higher cost of overnight bank to bank lending is passed on to the customers in the form of higher loan rates, credit card rates, mortgage rates, etc.
The Open Market Operations you described (completely different from the Overnight Rate) are a form of stimulus. Because money always seeks higher risk-adjusted returns, the Fed will buy treasuries, which drives down their yield. This makes them an unattractive investment, so the money goes where it can get a better risk-adjusted return. That's usually in the market. So by adjusting treasury note yields, they can stimulate the economy. Furthermore, those treasury bonds are bought with printed money, so this is effectively a way to inject massive amounts (trillions of dollars) of printed money directly into the economy. It's pretty crazy when you think about the power that these policies have.
The Fed can only 'set' the Overnight Rate by being ready to borrow or lend at the Overnight Rate. The Fed still has to stand ready to actually engage in these transactions.
As a counterfactual: we can imagine a world where the Fed 'sets' these rates by just announcing the rate but not engaging in any transactions and legislators pass a law that forbids banks from borrowing from one another at any other rates.
The interbank lending market would just not clear in that case, and you'd either have a glut of demand or a glut of supply.
The Fed sidesteps this by actually borrowing and lending in the interbank lending market. And that's economically equivalent to buying and selling very short term bonds, even if the legal form is different.
> Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
I get the simplified qualifier and I see what you’re saying but it’s more accurate to say this is not true, it hasn’t really been substantially true since February 1994.
> What happens next is that they buy and sell government bonds in the open market
Again i feel it’s better to say exactly what happens, not a model or simplification. What happens next is banks move to the new interest rate without any OMO (open market operations) - the announcement effect as it’s called. There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
Citation needed to support my statements above: https://www.newyorkfed.org/medialibrary/media/research/epr/0...
Yes, expectations and anticipation are very, very important in all markets, and especially financial markets.
But they only work, because the Fed can and will back up its announcements with large transactions at the announced prices and rates.
> There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
You'd hope so, but not all currency issuers are so confident. I remember the Swiss central bank recently giving up on its exchange rate target to the Euro: they let the Swiss Frank appreciate against the Euro in the end, even though they control the printing presses and could always print enough Franks to drive their price down as much as they want to.
We saw similar reluctance to do whatever it takes for Japan since the 1990s and the Fed and the ECB during the 2010s, when they all failed comically to push inflation up to their targets, and came up with various excuses.
(The failure of the Fed is particularly funny, because one of the guys in charge had earlier written a piece telling the Japanese exactly how to get out of their own trap in the 1990s, but then did not practice his own preaching.)
> Today, we control inflation with changes in interest rates, not changes in the quantity of money.
That is also not quite correct, I believe. The FED can invest money created out of thin air any time it wants („fiat money“ — „there shall be money“), usually it buys government bonds to help the federal government run its deficit. Sometimes this scheme is called „quantitative easing“ which is a charming euphemism. This is what drove and still drives inflation directly and indirectly (through the effect of our fractional reserve system private banks amplify this about tenfold by lending out 90% of their customers‘ deposits).
The interest rates everybody is obsessed about are just the target rates for the interest earned or paid for for money in the account of private banks at the FED. It is just a secondary adjustment. At least during major crisis.
>> This is what drove and still drives inflation directly and indirectly
QE is fascinating.
On the one side of QE you have central banks, absolutely baffled by the fact they create all these reserves, we’re talking utterly un-relatable numbers for a human, numbers that belong in the field of astronomy rather than finance. And yet they fail to hit their inflation targets for over a decade.
On the other side you have a bunch of folks shouting loudly this amount of QE will cause ungodly amounts of inflation.
Now they shouted long enough that inflation eventually did show up but it’s not clear that it relates to QE. The onset of inflation correlates more closely with global energy supply shocks than with changes in QE policy or “printing” money in Covid stimulus. However, energy, despite being an input to almost everything we care about, isn’t really considered in the context of inflation by most macroeconomic models. The models are less than helpful in the face of “externalities”.
>> through the effect of our fractional reserve system
We don’t have fractional reserve in the USA, the UK, Aus etc and haven’t had for a number of years at this point.
> The onset of inflation correlates more closely with global energy supply shocks than with changes in QE policy or “printing” money in Covid stimulus.
Hmmm. [1]
> USA, the UK, Aus etc and haven’t had for a number of years at this point
Indeed, the US abolished the 10% reserve requirement in 2020. Crazy. I hope you guys also save in inflation hedges.
Canada (and other places) never had a reserve requirement, and they are doing fine.
Reserve requirements are mostly bullshit anyway. What you want is for banks to have enough loss absorbing capital. Reserves are almost meaningless.
What is the difference between a reserve and loss absorbing capital?
In a practical sense - reserves can’t be spent in the economy but you could withdraw your capital (accepting the impact on banking operations that would have) and use it to buy something. They’re different types of money. Reserves are only good for exchange by a few institutions and the central bank.
In a “model” sense for want of better phrasing that eludes me right now… One is infinite (via the discount window for reserves) and the other is very much finite.
In a hard legislation sense, capital is complicated, Basel regs recognise different types of capital and value them differently. But the tier 1 stuff is the equity you put into the bank to get it started or to support expanding its operations.
Yes. To oversimplify, capital is what's left after you take all your assets and subtract all your debt.
So you take all the investments that the bank has made (loans, but also their brand value, the office buildings they own and operate in, etc) and subtract all the deposits and outstanding bonds etc, and what's left over is their capital.
Another related way to measure that is to look at total market capitalisation. (But market cap makes economic sense, that's not the definition of loss absorbing capital that's used in the regulations.)
In the really olden days: reserves were physical gold or cash in your vault. (These days, it's a bit more complicated.)
About loss absorbing capital: companies usually finance themselves from two sources equity and debt. (Normal companies get their debt from their bank, or they issue bonds. Banks get some of their debt in the form of deposits.)
To give an example, supposed you have 2 billion dollars lying around, and you start a bank. You take another 8 billion dollars in debt (say as deposits), and you use that to make 10 billion dollars of loans and other investments.
If you investments gain in money, you keep the profit. Your accountant will count it as an increase in your capital, from 2 billion to, say, 3 billion. Basically, capital is just what's left of your assets after you subtract all your debt.
If your investments lose money, your capital shrinks. Say your investments are now worth only 9 billion dollars, but you still have 8 billion in deposits. Then you only have 9 - 8 = 1 billion in capital left.
There's never any money in the vault, ie no reserves, in our example. When a depositor wants their money, you sell some of your investments to cover that. As long as your total investments are worth more than your total deposits, this is fine.
(For convenience, real world banks keep some reserves around even when not legally required, so they can satisfy withdrawal requests directly, instead of having to sell some investments for every little withdrawal request.)
Obviously, the more capital cushion your bank has the larger a decline in the value of your investments you can absorb as losses, before your depositors and other creditors need to get nervous.
Back in Scotland's free banking era, when financial regulation was very light, banks over there routinely kept around a third of their total balance sheet as equity and two thirds as debt.
Today because of all the regulation we have accumulated and especially the too-big-too-fail expectations, banks need to be forced to even keep around 8% of their balance sheet as equity.
(It doesn't help that interest on debt can be paid with pre-tax money, but return on capital (ie dividends) comes largely out of post-tax money. So debt is cheaper.)
We're also currently in a period of Quantitative Tightening as we slowly undo the QE done during covid, which should have a deflationary effect. But who knows over what time period and with what magnitude.
> We don’t have fractional reserve in the USA, the UK, Aus etc and haven’t had for a number of years at this point.
What do you mean by that?
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
EDIT hmm that doesn’t link directly to the relevant FAQ:
“Why did the Federal Reserve reduce reserve requirement ratios to zero percent?
For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework.
As announced (Off-site) on March 15, 2020, the Board reduced reserve requirement ratios to zero percent, effective March 26, 2020, in light of the shift to an ample reserves regime. This action eliminates the need for thousands of depository institutions to maintain balances in accounts at Reserve Banks to satisfy reserve requirements, thereby freeing up liquidity in the banking system to support lending to households and businesses.”
You still have fractional reserve banking, even with zero mandatory reserve requirements.
Btw, banks still keep plenty of reserves around. See https://fred.stlouisfed.org/series/TOTRESNS for the US.
Not GP, but there are two senses in which I think it could be meant:
- Currency no longer has to be backed by some fraction of shiny objects,
- Banks do not need to arrange CB reserves before making loans -- they make loans and then secure the needed CB reserves.
That's still all fractional reserve banking.
Btw, in the US there's lots and lots of bank reserves: https://fred.stlouisfed.org/series/TOTRESNS
We don't control inflation with interest rates; we do some economic theatre with interest rates that some people believe controls inflation in a predictable way.
The evidence is very strong that we do actually control it, because in many countries you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band.
It's not a perfect control system because the cost is "NAIRU": non accelerating rate of unemployment. That is, economic growth and wage growth are constrained to avoid a wage-price spiral. And sometimes you get a shock from outside the system.
Please do show this very strong evidence that the effect is any more than the supply chains sorting themselves out. Even some within the CBs are doubting the causality.
Japan had the lowest inflation of any major economy post COVID, and yet persisted with essentially a ZIRP. There's a good argument that in our high reserves world, interest is actually inflationary.
>There's a good argument that in our high reserves world, interest is actually inflationary.
How's that working out with Turkey?
It will probably work out just fine as they become a key player in European LNG.
Turkey couldn’t have serviced their debt with rising interest rates and continued government spending on expansion.
Being inflation averse makes sense when you can’t reasonably make use of funds. It’s not clear how much of that is actually related to the business cycle and how much is related to MMT, regardless of what adherents would have you believe.
UK historical investigation: https://www.elibrary.imf.org/display/book/9781557758897/ch07... - written in 2000, but you can see on this graph https://www.macrotrends.net/global-metrics/countries/gbr/uni... how flat it is from 1992 to 2020. That's a very good record for any piece of policy. Inflation control works for controlling business cycle inflation. However, it's not perfect and the COVID+war shock resulted in unavoidable inflation.
It's a ""plant"" in the https://en.wikipedia.org/wiki/Control_theory sense.
(my original comment: "you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band".
The US graph is similar https://www.macrotrends.net/global-metrics/countries/usa/uni... - although the adoption of inflation targeting wasn't fully formalized, it was definitely used in setting interest rates from the 90s.
Now show the UK plot for the 2010s. Also, show the one for Japan. It's easy to cherry pick data to show whatever you want. It doesn't constitute strong data for a casual and reliable link between interest rates and inflation.
Plot the days when your air conditioner is on with the temperature of your room. It will have many concrete examples and a long-term correlation showing that actually, the air conditioner is associated with the temperature going up.
All feedback/control systems are like that.
Your argument would have more weight if the inflation predictions were accurate. Here's the prediction report for the BoE in Aug 2014: https://www.bankofengland.co.uk/-/media/boe/files/inflation-...
(It's worth noting that even with the assumption of the models used being useful, the spread on those inflation rates is wild).
Here's what actually happened: https://www.ons.gov.uk/economy/inflationandpriceindices/time...
It very rapidly hit the bottom end of the prediction range before jumping up again pretty high. All that time interest rates were held constant and low.
Given they claim feedback lags of two years or so, one wonders what the point of all this is... (one cannot run a control loop with control lags substantially longer than the time constant of the system; that's basically the recipe for an unstable control system, assuming of course the control system is doing anything).
There's an argument that it's inflation expectations that matter, but there are dissenters within the temple that disagree: https://www.federalreserve.gov/econres/feds/files/2021062pap...
The second link https://www.macrotrends.net/global-metrics/countries/gbr/uni... is from 1960 to 2023.
This is the result of demographic crash and stagnation more than anything else...
You mean interest rates don't necessarily control inflation?
Japan is the worlds first steady state economy and got that way due to a sudden stagnation in trade and then demographic crash over a generation.
They've tried just about anything (except unrestrained foreign immigration or forced breeding) to jump start the economy but nothing has worked.
Inflation is effectively zero...
They haven't tried just about anything. They haven't tried printing enough money.
As a counterfactual: if you can print arbitrary amounts of money without raising inflation, you can just gradually buy up all the assets in the world with newly printed money. As far as I can tell, the Japanese central bank does not own the US stock market or all the gold in the world or all bitcoin etc, yet, so they haven't printed enough money.
Btw, what makes you think Japan is a 'steady state economy'? https://fred.stlouisfed.org/series/NYGDPPCAPKDJPN says their real GDP per capita grew fairly steadily over the years. It's just the price level that has been relatively steady, but if that's your yardstick, than just about any economy that used to be on a gold standard would also fit that idiosyncratic definition.
Exactly, but read many macro textbooks and they will tell you that interest rates control inflation. You've eloquently described a counter example and made the point I was trying to make.
Correct, it's mostly theater , and people nerding out on the numbers. The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills. The lower this figure, higher is the inflation.
>The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills.
This rapidly falls apart when you try to actually calculate it. Whose income do you use? Is inflation lower for doctors than burger flippers? What do you use as the retirement age? Does inflation go down if the retirement age is raised? What counts as "survive"? Does that mean the price of smartphones don't count toward inflation because you can theoretically survive without them?
Huh? What does this have to do with inflation at all?
Unless I miss something, it's very much not a standard measure of inflation. That said, leaning on that "at all": If wages are stickier than expenses, then the gap between wages and expenses will represent recent inflation to some degree.
If inflation is stable (and low-ish), then stickiness doesn't matter.
Sticky prices are only important, when expectations are invalidated.
So to fix your sentence:
> If wages are stickier than expenses, then the gap between wages and expenses will represent recent unexpected inflation to some degree.
> Simplified: the central bank decide on an interest rate that they want to see.
This is incorrect.
Using the US central bank example, the Fed has a target for inflation. It uses interest rates to try and hit that target. If inflation is higher than 3% the Fed will raise rates to cool the economy.
The Fed sets interest rates directly because lending money to the Fed is viewed as "risk-free" (as the US government has never defaulted on a debt). So if the Fed offers a risk-free 4%, banks will need to offer more because they are not risk-free. So banks no longer really lend savings out for loans. They borrow money and lend it out at a higher rate (eg mortgage-backed securities).
So when you could get a mortgage at 2.5%, it was because the Fed was offering 0%. When the Fed offers 5%, mortgage rates will go up to 7-8%.
There is another mechanism that the government could use to control inflation: fiscal policy, specifically taxation. A criticism of monetary policy to control inflation is that it's indiscriminate. People will go out of business and lose their houses. Taxes only target profits.
So in 2021-2022, we should've just passed a windfall profits tax of 80%. That would've cooled off inflation real quick and given the governments funds to distribute to those most adversely affected. But that will never happen because the corporations and wealthy who own both parties will never stand for wealth redistribution to the poor.
They will however demand wealth be transferred from the government to the rich.
The false equivalence of a profits tax and redistributing wealth to the poor is quite funny.
Fascinating piece of financial history I hadn't heard about. Imagine your government telling you to literally take scissors to your money, it's like a weird mix between arts & crafts hour and monetary policy. Though I suppose we're already halfway there with our modern central banks, just without the satisfying snip-snip sounds.
The Finnish experiment failing because people just deposited their cash in banks first is a classic example of Goodhart's Law in action. Or as I like to call it, "If you tell people you're going to cut their money in half, they'll find a way to keep it whole."
What's really interesting is Belgium's more successful approach, they went full scorched earth on 2/3 of their money supply and somehow managed to pull off an economic miracle. Makes our current inflation-fighting tools look rather tame in comparison. "Sorry, best we can do is nudge interest rates up a quarter point at a time.
Well, as fascinating as your government telling you to surrender all gold you might hold [1].
How about your puppet government colluding with the soviet union to print a new currency in secret and surprising everyone with a currency reform over night:
https://english.radio.cz/when-savings-were-lost-and-dreams-s...
Turkey dropped six zeroes off their currency in the 2000s.
Technically, you could describe that as cutting 999,9999/1,000,000 of their money supply. (Especially if they had done a funny dance like the Finnish, where you would use some scissors to only keep the tiny top left corner of your old notes, and can exchange that for new ones.)
In practice, people saw the Turkish currency reform as merely a cosmetic change, not an actually reduction in the money supply.
See https://en.wikipedia.org/wiki/Revaluation_of_the_Turkish_lir...
This is one of those measures that hyperinflation countries have to adopt for sanity, re-numbering the money.
The surprising case that worked is the Brazilian "Real": by renaming the currency as well as switching it to semi-controlled exchange rates, inflation was drastically reduced. https://en.wikipedia.org/wiki/Plano_Real
> Combined with all previous currency changes in the country's history, this reform made the new real equal to 2.75 × 1018 (2.75 quintillion) of Brazil's original réis.
(!)
Renaming didnt drastically reduce inflation. If it were that easy everybody would do it. It just allowed the government to reduce inflationary expectations while they did the legwork of throttling spending, etc.
If they hadnt done the legwork to reduce inflationary pressures this parlor trick would not have worked.
And, arguably, if they hadnt done it at all, inflation would still have gone down simply by reducing the inflationary pressures.
Romania dropped several zeros in 2005, so 1,000,000 became 100. As someone who was around at that time, I still tend to think of prices in the old system, which makes me look ridiculous to younger people and even most of my same-age peers.
Albania dropped a single zero way back in the mid-20th century, and yet even generations born long after that still think of prices in the old system. The first time I went to Albania, I was paranoid and made a scene in shops, thinking every shopkeeper was trying to rip me, a foreigner, off by quoting a price an order of magnitude higher. My face was red when someone finally explained how the country works.
>In practice, people saw the Turkish currency reform as merely a cosmetic change, not an actually reduction in the money supply.
Because it is just cosmetic. Governments chronically think they can directly legislate more value into existence. They fail to understand that currency is just an intermediary for trading labor.
No, no, at the time Turkey had actually done all the hard work of getting their currency (mostly) in order. They (or at least the technocrats running the central bank) knew perfectly well that they can't "directly legislate more value into existence".
The extra zeros were just a bit of an embarrassing hangover from wilder times in the past.
Alas, the quality of Turkey's monetary policy has since dropped again.
Brazil has cut 3 zeroes from the currency many times.
It's actually no big deal if you change the currency name. Cutting the zeroes isn't supposed to have any impact except on making prices easier to write, so you only need to avoid confusion.
Would've been funny if you had been expected to literally cut out six zeroes from the notes.
In 1963 Finland also ended up shifting markka to the right by two, so that the old markka became the new penni (1/100 markka).
So it's not quite the same thing but the US government has historically performed a sovereign devaluation of its currency.
I am of course talking about FDR (Executive Order 6102). This made it illegal to own gold. You had to hand it in and get paid at ~$20/oz. After doing this, the US dollar (nominally on the gold standard at the time) was revised to ~$35/oz.
A recent similar example was the Indian move in 2016 to demonetize the ₹500 and ₹1,000 notes with very little notice, which is in retrospect widely viewed to have been a disaster.
https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetis...
IIRC the reasoning was that only criminals have large amounts of valuable notes and by demonetising them they'd hit the criminals where it hurts.
But it turns out that tons of people in rural India had their life savings under mattresses in large denomination bills...
It essentially forced people into getting a bank account.
Yea and caused massive queues of people desperately trying to deposit their cash before the deadline :)
I imagine Finland's would be similarly branded a disaster if the present-day internet/social media megaphones had existed..
History books on 1945 aggressive monetary policy change: "The public didn't like it"
History books on 2025 aggressive monetary policy change: "The public went frigging bananas, doxxed their leaders, coordinated widespread disobediance on the scale of GME, etc"
(Granted I live in the US, and that's putting it mildly how the US would react)
There were multiple motives for that move, notably however not among those an attempt to curb inflation.
Wasn't that contemperaneously viewed to be a disaster?
I have to wonder if there was a unspoken real reason they did it, because it was obvious anybody with lots of demonitized bills would farm out the redemption if necessary, and wikipedia reports 99.3% of notes were redeemed. Maybe the 0.7% was (some of) the black money that was targetted, or maybe that's a normal amount of lost and damage beyond redemption.
Otoh, maybe there was some highly classified but credible advance notice that the crimimal underground was about to start printing credible 500 INR notes en masse.
Mentioning the war on COVID but not the actual war between Russia and Ukraine that caused a huge spike in European energy prices is a big omission, since that caused a lot of global inflation.
Extreme hike in energy prices was about four months before the war began. It’s when EU decided to abandon long term gas contracts and turned to spot prices (~11.2021). The war started in 02.2022.
From your perspective the war started in 2022.
In reality that phase of the war started before. Russia did not improvise this war. They started disrupting the supply in 2021 to ensure that Europe would not fill their strategic reserves / winter storage during the summer, thus insuring maximum leverage when they needed it. This is well documented [1]
Note that this is just talking about this phase of the war. Hostilities started in 2014 when parts of Ukraine "suddenly self-liberated" themselves. Helped by mysterious soldiers in professional but unmarked uniforms.
[1] https://www.banque-france.fr/en/publications-and-statistics/...
Nobody has sabotaged European energy security more than European governments. The divestment from nuclear and reliance on LNG was an obvious disaster in the making. Taiwan has made a similar blunder and will pay the price at the next whiff of geopolitical instability.
You've just read how Russia literally sabotaged European energy security and you compared this to... some European countries taking a suboptimal decision?
And Europe is not a single country. My country still happily digs out and burns tons of coal (annoying our neighbors in the process). I hope you're proud of us.
It's not suboptimal, it's a geopolitical disaster that people in 50 years will look back on and ask "how did this happen?"
Well, the full scale portion of the war started in February 2022.
But you are right otherwise.
Yes. I was surprised to find out that Russia had been conducted sabotage operations against UA artillery ammunitions dumps for many years prior to full scale invasion, and the Ukrainians had already lost the majority of their artillery ammunition reserves this way by the time invasion began.
And they conquered Crimea in 2014--partially, if I remember right, to get a port that doesn't freeze over in the winter, something they have wanted for literally hundreds of years.
They already had https://en.wikipedia.org/wiki/Port_of_Novorossiysk for that.
Yes, but Sevastopol is a better port, and any naval position in the Black Sea is less secure, when you don't control Crimea yourself.
(Russia got into more trouble than it was worth it, even by their own standards, I'd say. And that's not even getting into the moral dimensions.)
To be more precise, they already had the port, but were afraid to lose it to the new government of Ukraine.
This is also a big reason why Crimea, by and large, supported annexation - it has very large proportions of the population that are either active or retired Soviet/Russian navy.
The Russia Empire and the Soviet Union ran concerted efforts to Russianise the population of Crimea by various means, like moving in ethnic Russians, removing the locals (to put it mildly) etc.
removing the locals (to put it mildly) etc.
Virtually the entire indigenous and otherwise non-Slavic population (some 30 percent of the total population of the peninsula) to be precise, according to this graph:
https://upload.wikimedia.org/wikipedia/commons/6/6a/Ethnic_P...
The original Russian colonization of Crimea brought in many Ukrainians as well, though, so that alone did not make it lean Russian so strongly by itself. The naval facilities in Sevastopol, though, meant a lot of military personnel with their families from all over the country would come and settle in the city, and that specifically tilts the popular opinion there today strongly towards imperial Russian irredentism.
The embargo caused the spike. Which makes having thrown away a workable peace deal a criminal act.
There was no "workable peace deal".
As unrealistic as it may be, “Russia gives back the stolen land and pays reparations” sounds like a workable deal if Russia itself suffers for long enough. Or maybe Russia will leave Ukraine if we give them all the land and assets owned by the “Ukraine should make a deal with Russia” people, as they're of the opinion that placating an invading army is the best way to peace.
> if Russia itself suffers for long enough.
Do you want Russia, a geopolitical entity, to somehow measurably suffer, or do you want an end to pointless bloodshed? Are you willing to put your own life to this lofty goal?
> placating an invading army is the best way to peace.
If you're not capable of repelling the invasion effectively, then yes, this is absolutely true. How could it not be? There's no reason that you can't have peace today and sue for justice tomorrow.
Did US appeasement of Russia after the annexation of Crimea bring any kind of lasting peace?
Why anyone would think this time it would be different when what Russia wants hasn't changed is beyond me.
What makes you so confident in the absence of something? In particular given that there is a massive amount of reporting that conflicts with your single sentence assertion?
I'm Russian, and I've been following the mess in Ukraine very closely since 2014.
The key word in my single sentence is "workable". All Russian peace deals so far essentially amount to 1) they get all the territory they claim, and 2) they pinky promise to not invade Ukraine again, but 3) Ukraine is forbidden from taking actions - such as joining NATO - that would actually guarantee that such an invasion wouldn't re-occur.
Knowing Russian politics and discourse inside the country around imperial ambitions in general and Ukraine in particular, I'm firmly convinced that any peace deal that would be signed on these terms will last only as long as it'll take for Russia to build up enough to resume hostilities with a much stronger upper hand. Most Ukrainians seem to be of the same opinion.
Appreciate the clarification.
That said, I'd be curious to know why you seem to implicitly accept the Russian regime's currently stated (or reasonably inferable) terms as the only "workable" terms.
Is it because you think it has that much of an upper hand in the situation (to get its way no matter what the West does in the coming months) -- or because the Trump administration will likely simply cave in to pretty much whatever it asks for?
Given the latter's proudly and loudly stated "We don't give a fuck about Ukraine" stance, and all.
GP was talking about "having thrown away a workable peace deal", which in this context almost always refers to the purported peace deal that fell apart in 2022. In any case, the only other peace deal that is currently officially on the table as far as Russia is concerned is basically the same.
What's actually workable in the end depends solely on how far the West is willing to go, IMO. There's no realistic scenario in which Ukraine retakes all the captured territories without direct Western military involvement - air at the minimum - which is certainly not politically tenable in either US or Europe (although my personal opinion is that both will eventually regret not getting directly involved now, because they will be forced into a larger war later anyway).
Russia will definitely not give up Crimea without getting military defeated there; quite aside from any military value of Sevastopol, the symbolical and political value is just too high, especially for a regime that desperately needs to be seen as "patriotic" by the populace - that is their only real source of legitimacy in the absence of real democracy. Abandoning LNR and DNR would be easier in some ways, but harder in others because the government agitprop has already spent so much time vividly describing how "Ukrainian Nazis" are supposedly ethnically cleansing Russian speakers to justify the invasion, abandoning them now would also be very costly in terms of popular support.
OTOH I could see the pre-2022 de facto borders as something Putin would accept. They could still justify the war then by claiming that, at least, LNR and DNR were "rescued" and are now safe from further depredations, and that people from other regions that couldn't be "liberated" will be resettled, so - mission complete, oooorah etc.
However, I don't see why they would do that if the West keeps dragging its legs on military support to such an extent that Ukrainians can't even reliably hold what they already have. The way things are going, Russia can keep doing what it's doing, even despite the insane cost in human lives, for longer than Ukrainian military can hold the line. Ukrainians have less of basically everything - artillery, drones, people. They make do by making much more efficient use of what they have than Russians do, but it's still too skewed to be sustainable.
And meanwhile the West hasn't even drawn any clear red lines on how much of Ukraine Russia would need to take before the support would be seriously ramped up - if at all. So then, when Russia sees that support is already at levels insufficient to sustain Ukraine, and it's likely to dwindle significantly with Trump, and it has the upper hand in terms of momentum right now... I don't see why they'd suddenly want a deal.
OTOH if US and Europe doesn't get involved directly but start treat their role as the "arsenal of democracy" in this conflict seriously, it might just be enough for Ukraine to hold the line in the east and in Kursk. And then they might be able to trade that captured Russian land for a peace deal with some concessions - maybe not quite pre-war borders, but at least push the new border away from large cities like Kharkiv and Kherson. However, any such deal would be pointless for Ukraine unless they get proper security guarantees; and, given the whole history with Budapest Memorandum, the only guarantee that Ukraine will actually believe in at this point is NATO membership. AFAIK that is the main reason why popular support there is still in favor of continuing the war and rejecting the current Russian offer - they elected Zelensky largely as a peace offering to Russia and effectively acknowledged the de facto existence of LNR and DNR, and all they got for that is an even larger invasion, so it's a "fool me twice" kind of deal now.
Appreciate the detailed response, and it seems we are very broadly on the same page.
Assuming no further military push from the West -- do you think the Russian side would acquiesce to some form of "Cease fire along current lines, but no legal recognition of the territorial claims, and no lifting of sanctions or arrest warrants, and no return of seized foreign assets"?
(That's very far from my own ideal outcome, but I'm just trying to get sense of how you see the situation).
It's hard to say. It would be essentially the same thing they already did back in 2015, so there's precedent. But back then it happened IMO because they didn't think they were sufficiently prepared in economic and military terms to openly wage war, so Russia took as much as it could with the "northern wind" (the euphemism separatist forces used to refer to direct Russian involvement in combat) and then took a break to prepare for the real deal.
So I think now they would do it if they believe that taking another break would benefit them more than it benefits Ukraine. But, again, looking at post-2015 developments, it's not clear to me why they'd think that. The reason why their advance in the east was so much slower than elsewhere is that Ukraine had a massive effort to build fortifications and infrastructure around them under Poroshenko. It's why Ukraine could hold Avdiivka for so long despite it being less than 10 miles away from Donetsk, and it's partly why Russian losses are so high. Russia has managed to punch through that line in several places in this past year despite those high costs, but if they stop the advance now, that kinda defeats the purpose of that. And meanwhile if Ukraine could get some respite, they would surely spend a lot more resources on another defensive line along the new border, probably with significant Western assistance this time, as well (since "defensive" military aid generally enjoys higher popular support, countries like Germany might be more willing to do that even if they aren't willing to send more tanks and missiles). As well as building new munition factories etc, likely also with Western defense companies involved. It would also mean the return of millions of Ukrainian refugees, reinvigorating their economy.
This all assumes that Russia wants to take as much Ukrainian territory as they can get away with, in the long term. But, given that the war literally started with them trying to capture Kyiv, I think it is a safe assumption. If they gave up on that goal since then, they wouldn't be pushing so hard now despite the losses.
Especially since the Finnish experience is the only direct comparison to Ukraine today, where both their army and government are fighting Russia.
False. Inflation was mainly caused by the central banks(especially the US FED but also the ECB who followed suit) devalued the currency by over-issuing it during the pandemic, not due to the post pandemic high energy prices which are not that high when you adjust for the crazy Inflation the excessive money printing generated.
In short, they barrowed money in your name with you as a guarantor and now you're paying for it, it's that simple.
The war caused by Russia is just a convenient scapegoat that's easier to sell to the financially illiterate population to deflect the blame. Keep in mind most voters don't understand basic economics and how currency supply affects inflation, but they do understand "Russia dropping bombs = bad".
When 80% of the entire world supply of USD (the world reserve currency that the EU also has to use) was printed during the pandemic, how can anyone say that Russia's war caused the inflation? Do people not know arithmetic anymore?
Money supply increased significantly in 2020 for sure but that's NOT what you're seeing in the M1 graph. M1 was revised to include savings accounts at the same time and this is the major source of the discontinuity:
https://fredblog.stlouisfed.org/2021/05/savings-are-now-more...
M2 captures the pandemic influx better and is significantly less dramatic: https://fred.stlouisfed.org/series/WM2NS
Do you think that since M1 is down 13% since peak we should be seeing deflation right now, or does M1 growth only impact inflation one way?
It would be stupid to discount the effect that artificially limiting energy exports and using it for blackmail before and during the full-blown Russian invasion is naive. IIRC my nat gas prices went up like 10x compared to the previous year.
Utter nonsense, and I say this as nicely as I can.
Check the price of Russian gas before and after the invasion, and the resulting price of electricity: https://ec.europa.eu/eurostat/statistics-explained/index.php...
Combine with the fact that Russia and Ukraine are some of the biggest exporters of many critical raw materials, like importantly, foodstuffs (wheat, sunflower oil, etc), and steel, aluminium, oil, gas. Hell, there was a crisis in availability of mustard and snails in France due to the invasion of Ukraine (and on the mustard, a series of bad harvests in Canada which further complicated things).
We can even clearly see it in the inflation charts, first there was growth in energy inflation towards the end of 2021 (as things were ramping back up from Covid), then a big spike in 2022 due to Russia's invasion, and then over 2022-2023, related spike in other sectors: https://ec.europa.eu/eurostat/statistics-explained/index.php...
To pretend none of this had no impact whatsoever is wilful ignorance.
Bruh, 80% of all USD in existence was issued during the pandemic alone. How the hell can you tell me with a straight face that that didn't cause the inflation? I feel like I'm taking crazy pills.
Read the notes in the link you posted. I don’t think it says what you think it says.
In May 2020, the definition of M1 (monetary supply in “cash”) was changed to include savings deposits. They changed this not due to some conspiracy, but because savings accounts were deregulated to remove withdrawal limits, effectively rendering them cash-equivalent, and thus necessary to include in M1 metrics.
I.e. the 80% spike has nothing to do with money being printed.
The relationship between the money supply and inflation is mostly one of perception causing action, not some kind of primal law of economics. Debt and interest rates, trade friction and availability of goods, and availability of energy and labor are all more closely related to inflation rates, especially for monetarily sovereign currencies.
Bad faith argument again, or at least terrible tunnel vision.
So what? In the EU a lot of that money went into the Recovery fund, which released the funds in multiple steps (only the first one was in 2021), and a lot of it is still remaining in the fund.
How do you explain the massive inflation in the EU then?
And are you seriously that centred on "money printing" that you cannot imagine gas and oil prices raising multiple times, and the disappearance of multiple critical raw material suppliers, had _no impact whatsoever_?
>Bad faith argument again
Stop saying this whenever somebody disagrees with you. That's not what that term means at all.
I'm not saying this because they're disagreeing with me. Inflation is probably one of the most talked about topics of the past few years, I find it impossible that people haven't heard about the multi-layered complexity of it, and thus anyone blaming it purely on "money printing" has to be acting in bad faith.
It's not really complex, GP is correct.
High energy prices cause high transportation and manufacturing costs which causes everything else to rise.
But the main cause of inflation is printing of money, especially when you introduce such a large amount in such a short time.
People used to know that, they either pretend it's not true now or they're ignorant.
And yes the "bad faith" parrot line is really annoying and doesn't contribute to the conversation. It's what people say when they don't have a rebuttal.
> It's what people say when they don't have a rebuttal
Only I have a rebuttal, and came with receipts from Eurostat. So what exactly are you trying to argue?
> But the main cause of inflation is printing of money, especially when you introduce such a large amount in such a short time.
The original premise (which is still in bad faith, however much you dislike that part) was that money printing was the main cause. And this is fundamentally and provably wrong (check my comment upthread, Eurostat inflation per sector with the timeline). Inflation was kickstarted by energy inflation which coincides with the Russian invasion.
Did money printing contribute? Of course. Did Russia's invasion of Ukraine and all the issues it brought in energy prices and food prices? Of course. Did the Houthis contribute with their attacks disturbing supply chains? Probably. Did Covid contribute with all the supply chain issues it caused? Of course.
Trying to pin it solely or mostly on one single reason, especially when it is a global phenomenon that many countries suffered from regardless of their exact specifics (e.g. Sweden's monetary policy was not the same as the EUs nor Canada's, yet they all suffered from serious inflation) is arguing in bad faith. It's so trivially provably wrong, it's not even funny entertaining people who are wrong.
This is due to people being taught that inflation is about the money supply as a matter of faith in (US at least) grade schools and colleges. It's rare for other causes to discussed or for the quantity-of-money argument to be questioned.
While I would also lean towards blaming the US Fed, how can you be so confident in precisely what caused inflation?
One of my big issues with economics as a "science" is that they try to boil down massively complex systems into a handful of numbers. When it comes to global economics and geopolitics the system is even more complex. How would we ever be able to say any particular time of inflation was causes by exclusively, or primarily, any one factor?
At best looking at historic data and seeing graphs that move together show correlation, they will never show causation.
The European Central Bank said it’s due to energy.
The people who caused the problem say they weren't responsible for the problem.
Do you see the issue here?
That goes both directions, though. Central banks are prone to understating their responsibility for bad things; the gold bugs and crypto hodl folks are prone to overstating it.
The answer likely lies somewhere in the middle. The US's relatively soft landing post-pandemic seems to demonstrate some use of monetary policy in this fashion works.
Of course they'd say that. Did you expect them to just say "yeah, we fucked you over by devaluing the currency causing your wages to be worthless"?. Don't be naive please and look into how much currency was issued during the pandemic and see for yourself.
It all comes down to math:
https://stephaniekelton.substack.com/p/how-to-cut-2-trillion...
> To ensure that interest expense falls toward zero over time, Congress could instruct the U.S. Treasury to stop issuing anything with duration beyond a 3-mo T-bill. Voilà! It wouldn’t just save $2 trillion, it would save tens of trillions of dollars over time.
umm, not sure if her recipe is meant as a joke (I mean the world is rapidly turning into a bad joke anyway so people getting facetious might be a defense mechanism) but eliminating risk-free money for anything beyond 3 months seems like very... short-termist? No idea what kind of volatility that would do to the broader financial / economic system (including e.g. mortgage finance) but somehow it doesn't sound good.
Reducing inflation always results in pain somewhere, pretty much by definition. Wage decreases, job demand reductions, taxes, higher interest rates, etc. Comes down to a decision about where you want to spread the pain and how, and how you weight that against "time to impact".
Unfortunately this compounds misunderstanding of the public because politicians can cause inflation, leave office, then come back to office after saddling the other person with the problem. Fighting inflation rarely results in popularity in the near term.
>Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two
That's a bold prediction. On par with prediction of how much memory will be enough for personal computing devices in the future.
>Today, we control inflation with changes in interest rates, not changes in the quantity of money.
That's not full truth. In the last 20 yeas central banks do their big and sudden moves using "Open Market Operations". They buy or sell money like assets in market and effectively increase or limit the quantity of money.
Open market operations are the mechanism by which the interest rate is controlled.
Basically, the central bank sets an interest rate target and then performs open market operations until the interest rate matches the target.
That obviously affects the quantity, but the point is that the target is the interest rate. The quantity just ends up being whatever happens to be necessary to hit the interest rate.
The target is inflation in both.
When you reduce the volume of assets available, or the price renting the asset, you increase it's value. In this case the asset is money.
Market interest rate is a signal how effective the action is long before inflation statistics is available.
This is all very interesting historically.
However the rise of repo markets has rendered the money=medium of exchange, bond=store of value belief pretty much redundant. Rehypothecation more so.
Banks are liquidity providers. If they think they can make a turn they'll discount any asset into money for you.
Somehow this author has come to the conclusion that price controls are the "solution" to inflation.
This is a fundamental misunderstanding of why inflation is viewed as bad.
The article talks about history of alternatives to the interest rates, mainly controlling the currency supply and how it might be implemented in the future. How you discovered price control as the solution in there is still a mystery to me.
I think they are considering the last part of the article to be "price controls". If the government prevents people from buying certain goods by selectivity freezing certain purchases I'm not sure I'd call that a price controls -- more like a prohibition.
But I could see how this could be done similarly more like a price control. If the control was this granular, then maybe car purchases could be limited to $30,000 instead of blocked fully. This is effectively a price control.
Also - the author notes in the comments the post is a prognostication, not endorsement.
That said, much like the original Finnish plan, I have no idea how you'd implement this without massive loopholes. I'd imagine even if there were merits to the policy it would fail on account of the difficulty in implementation.
I wonder if it is more reasonable if there was equally a carrot to go with the stick - something analogous to the bond portion of the Finish approach.
In this context, all European countries including Finland were subject to rationing during the war; the question is about how to phase out both rationing and price controls without having a huge discontinuity at that moment.
Or you can just accept the discontinuity, because sometimes the cures are worse than the disease.
Yes, the solution he advocates is "we freeze your assets, allot you a certain basket of consumer goods, and take what we consider the appropriate price out of your frozen assets".
If you'd rather describe that as "communism" than "price controls", feel free.
The theme of the whole piece is that, if you don't allow people to pay more for things, then the price of those things won't rise, and that this is some sort of policy victory. It's a very stupid viewpoint; seeing prices fail to rise because you redenominated the currency means nothing. Seeing prices fail to rise because you prohibit that, on the other hand, doesn't mean nothing - instead, it means your economy is collapsing.
The post is not a study or a solution or a suggestion or anything of the sort. The author clarified in the last portion that it is a prediction. Someone predicting the bad consequences of the current direction is not advocating for that direction.
price control would be if they forbid some goods to be paid beyond certain price where the goal is to regulate the distribution of those goods. Currency supply control is a general policy targeted at the total of goods one can pay for in order to maintain the overall economic activity. This is the difference between heating certain rooms in the house and causing global warming.
I live in Norway, most people I know in private life that are of working age do not actually work, and for the most part they have better lives than I do, and I do work. The amount of people on sick leave have absolutely skyrocketed. 60% of welfare benefits in Norway go to immigrants and the population in cities grows faster than new homes are built.
The causes and solutions of inflation are not complex. People just don't want it fixed.
Seems like most people work? Who do you hang out around?
https://data.worldbank.org/indicator/SL.TLF.CACT.NE.ZS?locat...
> So it would seem that the whole operation failed. This surely draws into question the quantity theory of money, one of the basic tenets of monetary economics. A decline in the money supply, all things staying the same, is supposed to cause a fall in prices. Here is a glaring case in which it didn't.
Anthropologist Christoffer Gregory (backed up by the Swedish central bank and others) posits a companion to the quantity theory of money, which is the quality theory of money. Gregory studied how it is that people come to value the things they do[1] and brings up several clear cases where people don't value money as highly as they should according to domninant theory.
Is it possible that this Gutt operation had a negative effect on the perceived quality of Belgian currency, that this decreased demand for it, and thus lowered its value enough to offset the effect of the reduction in supply?
Seems sensical to me that if people worry about the government cutting their notes in half they will request more notes in exchange for another commodity than if they had more faith in the currency.
> To our modern sensibilities, this is a wildly invasive policy.
is it? not really
cutting the "value" of money in half always had been a important emergency tool countries had and sometimes used
and "moving" half of the value into a found which even pays out some years later is tbh. quite a fair way to do it (instead of just literally halving the money value permanently)
Fixing inflation is simple, people keep voting for it to not be fixed, so the inflation remains and gets worse.
The uniquely invasive aspect is forcing people to spend half their money to buy bonds. That doesn't happen very often.
It reminds me of "trillion dollar coin".
In both cases, the average person loses their buying power.
> quite a fair way to do it
Are your parents retired? Ask them if they think this was fair.
it's fair compared to the standard solution of fully cutting the value in half making everyone lose half their money for good or the other alternative of politicans not making necessary unpleasant decisions and in turn making everyone lose their savings, rent and more through a hefty inflation
is it grate, no, obviously not
but it probably the best thing they could do, or at lest relatively close to it
like ware economics are tricky as while they boost economy, especially on paper, they also hollow out a countries economical foundation and avoiding a huge crash when transitioning to peace economy is really really hard
I mean why do you thing the US government helped rebuild (west) Germany after WW2? Good will? German immigrants insisting on it? Maybe on personal level, but not really on governmental decision making level. But what it did was to help them avoid a huge post war economy crash by directing overproduction/monetary value from the US into west Germany. (It also helped in the cold war to not have a weak potentially failing state at the border to the Soviet union, helped geopolitical, and gave them a very huge influence in Europe for decades to come, much much more then they otherwise would ever have been able to get. So a win win win for everyone involved. Still moving monetary value from the US out of it to avoid a huge post ware economy crash was a huge part of it. Through you could argue the US is permanent stuck in a partial war economy and as such their move from war economy wasn't to peace economy but to partial war economy and as such less dangerous, but that is a totally different topic.)
Not everything which is necessarily and in context of the issues of a specific time one of the more fair solutions is fair in other times or good, or liked. But taking things out of context never helped.
Yes it is. It's the biggest wage theft in history.
if it's the biggest then what with the cases where monetary value was cut in half without giving anything back? No bonds no nothing.
Because that would have been on of the alternatives.
With another being to not do anything and everyone losing as much or more due to inflation and a post war economy crash.
Did it suck badly, sure, obviously. But the alternatives weren't exactly better.
Indonesia's government also implemented this exact policy in 1950. The policy was called "Gunting Sjafruddin" or "Sjafruddin Cut" after the minister Sjafruddin Prawiranegara. Not sure about the impact though.
This article wrote about it: https://yohanesnuwara.medium.com/most-thought-provoking-mone...
Why did finland expect that to work when >90% of money was in banks? When the article described cutting money in half, my very first thought was wondering what the banks did -- were the bills there also cut on half or were all accounts artificially divided in half? It didn't cross my mind that all money other than physical cash was completely unaffected.
Now clearly I'm not smarter than the top economists in a country of millions, so what am I missing? Why did they think it would work?
I wonder if anyone left his uncut so he could show it off later? It would certainly be more attractive to numismatics later on.
The convenience of cutting paper money in half is a really anachronistic element of this tale - I’ve got a fair amount of money saved up, and approximately none of it exists as paper, so much as it exists ‘on paper’ - that is, as figures marked in a bank’s digital ledger, somewhere in a server farm.
How would an effort like this be handled today?
… a new crypto currency?
The tricky part isn't money on a digital ledger. That's easy enough to handle with e.g. a one-off deposit tax (IIRC used as recently as the Euro crisis). There's no operational problem here, it just needs to be legislated to happen. Executing the operation properly might take a while (it's not something they'd have a process for), but banks must already have in place systems for e.g. freezing assets which could be used to buy time.
Bonds can just have a haircut on their nominal value, which is pretty much standard operation procedure during a financial bailout.
The real problem is deposits in foreign banks in foreign currencies. In the modern world by the time a country would be looking into this kind of a measure, a lot of the capital will have already fled. In this case the blocker is jurisdiction / sovereignty, not any kind of technical limitation.
> The real problem is deposits in foreign banks in foreign currencies.
Well, money abroad doesn't contribute to local inflation, does it?
I took the question to be on the logistics of executing this kind of operation with digital ledgers, not on when/whether those operations make sense.
Confiscating foreign assets would do little[0] to reduce inflation. But it's the same for local assets. Obviously just chopping off a zero from every note and bank balance doesn't actually reduce inflation, unless accompanied by some other structural changes.
[0] I say "little" rather than nothing, since it could have the effect of repatriating the money -> increasing the exchange rate -> making imports cheaper. But I can't imagine the effect being strong.
It can do; everyone you export to and import from still has the same money with which to buy and sell, and the same goods have different prices than you'd expect from just exchange rates in different markets.
as the article states, it didn't really work back then either as the bank accounts were not touched.
> This stock of notes only comprised 8% of the total Finnish money supply
That is basically one of the conspiracy theories I have heard related to central bank digital currencies.
As the tale goes, eventually major banks will run into another financial crisis (possibly intentionally if you really like conspiracy theories). The government will say they have no choice but to step in, and their solution will be to open the federal reserve to the public as a government-run bank. All funds lost in the crisis would be covered under an extended FDIC program and the money would be waiting for you in your new Fed bank account, denominated in the newly created CBDC.
---
In no way am I vouching for the theory, just sharing it as it is very relates to you question of how it could be handled.
The weirdest problem I see with this conspiracy theory is that I don't see the actual conspiracy?
Like, USD is a fiat currency, it's backed by taxes. The only difference between a paper dollar in your hand, a dollar in a traditional bank account, and a dollar on the hypothetical FedCoin blockchain is how easy it is to spend, what gatekeepers are involved, and what anti-fraud/anti-theft tools you can avail yourself of. Moving from a traditional bank account to a CBDC doesn't make it any easier for the government to seize your funds - they already can do that just fine with basically anything.
I believe the conspiracy portion of that theory is that the financial crisis would be triggered, or allowed, intentionally to create the excuse for a CBDC and fed bank.
I don't see it as likely, just a theory I've seen floated.
Interesting read but the theory about cash going away in 10 years
> Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two
Is a risky one. The are many culture where cash is the way to pay, you use credit card for internet but everything else is cash. I'm thinking of North Africa, which we have many of these people in Europe. There are also the old people, of course they will be gone in 10 to 20 years but then then I'm not sure it would be ok with the general population. Removing cash would have to bring advantage to be accepted.
Yet, in Sweden, I have legitimately forgotten how money looks.
I haven't handled cash in about 7 years (I’m not even embellishing).
Maybe it's more of a Mediterranean thing. When I ran my own business i have not one single time been paid with anything else than cash from Arabians.
On the other hand, getting cash from regular white people was the exception.
Combatting hyper-inflation is unsustainable and ultimately symptomatic of a hypo-inflationary urge to short fiat with an epidermic poised at early warning signs.
Setelinleikkaus as a negative-feedback control mechanism to stop printing bak notes.
Without getting political, please, does anyone have a good argument for the expected inflationary pressures of the next year or two? Tariffs will make prices go up, investment in infrastructure will make prices go up… but on the other hand, AI & robotics seems to be a deflationary pressure… where does one go for scenario analysis of the next year or two?
This article scared me a bit with the notion of banks implementing “quantitative freezing.”
> Without getting political
> inflationary pressures of the next year
You can't really separate these two. If central bank targeting is left alone and the policies implemented aren't too disruptive (i.e. not the wild claims of the campaign), then it won't move much. If some of the wilder claims are implemented, all bets are off.
In addition to tariffs, expelling millions of people out of the country will have inflationary effects as well, in many different ways [0].
0 - https://www.nytimes.com/2024/11/13/business/economy/trump-im...
Ok, you mean on the US...
Keep in mind that the US government (like almost the entire world) has control of inflation, and through more means than you will think of.
Anyway, all of those are real factors, but inflation is a monetary phenomenon. Those two don't need to have any kind of correlation.
Personally, I have not follow US news closely enough to understand what Trump wants to do with monetary policy.
I wonder what the cleansing element of it in Finland was, given that they voted to join the Axis.
Soviets attacked Finland, and brought it in to the war. Finland didn't want to become a part of Soviet Union (btw no-one did willingly) and Axis was fighting against Soviet Union.
Enemy of your enemy is my friend.
you mean WWII? If so, this is just wrong, no-one in Finland "voted" to join the Axis, she was not technically a part of Axis and didn't want to side with Germany at all. GB and Sweden were first asked but they weren't able to help in the defence from Soviet Union. AFAIK they weren't fighting anywhere but their own territory
Finland did cross the old borders in parts, but we specifically didn’t participate in the Siege of Leningrad and refused all German demands for assistance.
Finland had quite a few far right figures in its government at the time who were obsessed with "Greater Finland", for which they needed to occupy and annex East Karelia:
https://en.wikipedia.org/wiki/Finnish_military_administratio...
> ... snipped their cash in half ...
Actually, they snipped their cash in two, not in half.
This is one of several afflictions that lurk in modern language, ignored by nearly all. Another is the use of phrases like "similar effect to ..." where "effect similar to ..." is the correct form. Notwithstanding how it grates on one's ear, this second egregious malaprop seems to be the preferred form.
Oh, well. Since print is today either dead or dying, largely replaced by chatbot-generated prose, this kind of complaint might be likened to critical assessment of a cave drawing.
This is a standard English idiom: https://dictionary.cambridge.org/thesaurus/cut-in-half. You may not like it, or think it's illogical, but that doesn't make it incorrect.
> This is a standard English idiom ...
Certainly true.
> ... but that doesn't make it incorrect.
Also true, and not a claim I made.
> Another is the use of phrases like "similar effect to ..." where "effect similar to ..." is the correct form.
They have slightly different meanings. Use the first one when describing the actions that cause the effects, use the second one when describing the effects themselves. Though I suppose "effect similar to" could be used in either case, depending on what came before it.
a bunch of failed monetary experiments that the author gives charitable explanations for
If this second thing last paragraph doesn't make your skin crawl then I don't know what will:
"Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two, leaving the public entirely dependent on bank deposits and fintech balances which, thanks to digitization and automation, can be easily controlled by the authorities. To rein in a jump in inflation, central bankers will require commercial banks and companies like PayPal to impose temporary quantitative freezing on their clients' accounts, but unlike Finland's 1945 blockade, the authorities will be able to rapidly and precisely define the criteria, say by allowing for spending on necessities — food, electricity, and gas— while embargoing purchases of luxury cars and real estate"
The quiet part is that you will not be able to spend on those necessities when your politics no longer align with the regime.
Total control over money is a guaranteed path to totalitarianism.
I'm quite confident that governments aren't that powerful.
They can issue money, and manage their currency. But I've never heard about any government actually controlling what currency people use. Not even extremely authoritarian ones.
Can you pay your taxes in another currency?
I think this idea is more about using technology and a digital currency to restrict what can be purchased with a specific digital currency. You said "controlling what currency people use" which I take to mean something different. They are both pretty terrifying and I'm not as optimistic as you.
Indeed makes my skin crawl. How can one reasonably protect himself from such draconian freezing? Asking for reasonably, not bunker full of gold bars.
Bunker full of gold bars. Or foreign currency. Or silver.
The problem with all these is that money is kinda worthless if you're unable to spend it, and regimes that are likely to enact such monetary policies will often regulate the use of gold etc as well. A bunker full of gold bars does you no good if actually trying to spend any of it is a crime in and of itself.
I agree, and when I see foreign currency as an option I think of two possibilities. First, moving to the country that hosts that currency. Second, waiting for the US currency to slide into obscurity and switching to whatever takes over as the global currency.
Both are tough choices that rely on either too much time or too much space.
It's not a fantasy scenario that we need to speculate about. Currencies collapse all the time, just pick any country and it has happened to them within the past 200 or even 100 years. There's millions of people alive right now who avoided having their life savings destroyed by having foreign currency or bullion or both.
I'm not disagreeing with that part; I grew up in Russia in the 90s, where, if you had any significant amount of money, you'd have a dollar or euro account, and ideally both. This provides security against currency collapse, yes; but if the government decides to be actively confiscatory, it doesn't really help, unless their plan is particularly poorly designed.
If we're talking about physical paper money bills, then the government will not be able to confiscate these from people, they can't search every nook and cranny for something which is so easy to hide. The way the Finnish government confiscated money was by imposing rules on how their currency could be used and the value of the bills. For foreign currency, they can try to impose rules and a fake exchange rate, but the rest of the world is not going to care, neither will the black market.
If we're talking about digital foreign currency, it's a matter of having that money in a foreign bank account, where your government can't touch it. Everybody should have some or most of their money in foreign bank accounts, otherwise you're practically begging your government to ruin you.
By "confiscatory" I mean any policies that amount to taking your money or preventing you from using it as money. With physical paper money bills, making them outright illegal to hold is actually surprisingly effective - you don't need 100% enforcement rates, just high enough to make it impractical for most people. One historical example of such a society was the USSR.
I didn't know we were talking about "most people". They will do whatever their government tells them to do: hand over any property the government demands, and send their children to the trenches to die.
If you want a solution for most people, the solution is to not have a communist government or any other government that will confiscate your wealth.
If you want a solution for yourself, it is bullion and/or foreign currency. If the government declares their own currency as being illegal to hold, then that currency now has a value of 0. For you and for everybody else. If they declare foreign currency as being illegal to hold, that only has implications within the country. And the black market does not care about borders.
If most people won't take your dollars/gold/... because they fear getting caught, then what use is it to you? You won't be able to spend it. There were actually people like that in early Soviet days, guys who managed to preserve a stash of their former wealth, but without the ability to use it meaningfully.
The best mitigation you have for that kind of government is having a ticket out.
