[BlueTie]

Kings used to coin money, hand it out to the army and then collect taxes from the entire population that was paid in the same coin.

The Fed creates dollars, hands it out to bankers and then the US gov't collects taxes from the entire population in the same dollars.

Same strategy, different masters.

[bitxbitxbitcoin]

Continuing the analogy: Those coins used to be pure precious metals but whenever a king needed to coin more moneys than precious metals he could afford, he would engage in "money creation" by turning up the percentage of some non-precious metal.

Same strategy, different execution.

[nabla9]

There is difference.

King wanted the value of money stay stable or increase.

Fed wants to reach 2% average inflation target but it keeps failing.

[colejohnson66]

Can someone ELI5 why we want inflation?

[roenxi]

That is a very interesting question that I have never seen a satisfactory answer to. I suspect there is some broad-based misinterpretation of the Paradox of Thrift [0].

If everyone has enough that they don't need to work any more, then the economy will start signalling to people to stop producing resources because they aren't needed (by lowering prices and reducing production). Rather than making the obvious connection that most people have what they need and lower prices will free up resources for people with very limited means, the mainstream thought seems to list towards savings & retirement being an adversary that must be defeated because the GDP might drop.

Basically if people stop working because they don't have anything they want to work for, economic output will drop in a way that can only be described as good. My interpretation is economists & government aren't ready for that idea so have declared an ongoing war against retirement (and - by extension - savings).

[0] https://en.wikipedia.org/wiki/Paradox_of_thrift

[jdsully]

The reason we prefer inflation is because there is a history of wild swings going from boom to bust. We do not level out at a spot where people have “enough” and retire but instead the economy swings into deep recession and people can’t feed themselves and go homeless.

Around the early 1900s we discovered that with careful application of stimulus we can even out these cycles and soften their impact - an innovation that has dramatically reduced human suffering over the past 100 years.

[roenxi]

As arguments go, that one is unpersuasive:

1) People still can't feed themselves and go homeless, countries that have inflationary policy sill generally have well developed welfare policy. It also isn't obvious that purposefully increasing the price of food and housing is helping, the bar of evidence for such an unintuitive claim is higher than "it's just obvious, trust me".

2) There was a different monetary system in the early 1900s. The lessons learned about it might not apply to a fiat system. Lending, credit & and the nature of money all work differently now.

3) If the problem was wild swings, then the lessons to be learned were in how to moderate the booms. There needs to be a bit more explanation about how increasing the money supply does that, and whether it dampens the booms more than it helps the busts. Smoothing the cycle is a mistake if it lowers trend growth.

4) Lack of evidence cited. "we discovered" is handwaving the important part. I suspect that is like "discovering" means in the political sense where politicians lie about something obvious as cover for a policy that they want.

5) Ignoring technological innovation and all the oil that has been used over the last 100 years. It is likely that the dramatic reduction in human suffering is totally unrelated to inflation policy.

[jdsully]

We actually had a rare experiment to revalidate this in the 2008 recession. The US went with money printing and inflation while the EU chose austerity. The result was the EU suffered a prolonged and deep multi-year recession while the US had one of the longest growth periods in its history.

Economics as a field has lots of issues with respect to lack of validation. But this is one of its major successes and is repeatedly backed by empirical evidence.

[nly]

Because if you're the US Government and you owe China a trillion dollars[0] you want those dollars to be worth as little as possible when it comes time to pay. This is why real treasury yields (yields adjusted for inflation) are negative[1].

The US runs a ~$300bn/year trade deficit with China, and historically the Chinese have been counteracting this by buying US debt and foreign assets.

[0] https://ticdata.treasury.gov/Publish/mfh.txt

[1] https://www.treasury.gov/resource-center/data-chart-center/i...

[nly]

China currently has $3T of foreign reserves. To see the trend click the max button on the graph:

https://tradingeconomics.com/china/foreign-exchange-reserves

[ac29]

But ~$21T of the total ~$28T of public debt is held domestically, so if the government wants that debt to be worth as little as possible when it pays it off, US individuals and institutions will be harmed much more than China or other foreign holders.

https://www.treasurydirect.gov/govt/reports/pd/mspd/2020/opd... (source for $28T total debt, your link shows total foreign holdings of ~$7T.)

[Firecracker]

Three reasons often given:

(1) Gives an incentive to deploy money. "Use it or lose it." This stimulates investment and consumption.

(2) Some prices are "sticky down," like wages; people respond much better to nominal wage increases than pay cuts. Inflation lets these prices be adjusted down more easily if needs be.

(3) Stealth tax, not only on the holders of dollar-denominated wealth but also because inflation (a) pushes people into higher tax brackets and (b) creates more taxable "capital gains". If you're a politician, it's nice to be able to pass repeated tax cuts, even as government expenditures continue to grow as a fraction of GDP.

All that said, relatively stable price levels are important. Without them, contracts get tricky, particularly around inventory or agreements into the future.

[dnautics]

It lets you raise revenue by slowly devaluing the wages of the lower class. It's so difficult to notice that they blame the rich instead of the government. It's a perfect strategy.

[manbearpiggy]

most of the money in circulation is actually debt, or promises to pay for things like cars, phones, or anything you take out in credit. Since most of the world's money supply is debt between individuals and corporations, their needs to be a healthy supply of credit. The credit supply must exceed the demand from debt - so to speak. Inflation generally means there is more credit available in the system.

[paulmendoza]

Saving is bad because it slows down the economy. We need people spending their dollars. So a little inflations is like grease keeps the economic gears moving.

[djbebs]

Saving is not bad because "it slows the economy". Savings is bad in the views of governments and central banks because it removes their power over money. There is no meaningful practical diference between the fed printing money, and people using their savings in the event of a crisis, but only in the first case does the fed and government have control over it.

[MarkMc]

Why has it been so difficult for the Fed to increase inflation? Couldn't it have just printed more money?

[ssivark]

Not an expert, but imho this is because the money they are creating is not trickling down to the hands of consumers (hence low consumer inflation). OTOH we are seeing significant asset price inflation (stocks, housing, startup valuations, etc), which is a signal of where the created money is actually flowing. By now, I don’t think this ought to be a radical insight.

[jjeaff]

But the fed is not "giving" money to banks. They are loaning it to them. It has to be paid back with interest, albeit very low interest.