Yes and no. The quantity of money governs the price level in the long run but people's expectations about inflation are very important in the short run. Volker showed that you can simply slow down the creation of money to bring inflation under control at the cost of a certain amount of short term economic distress.
What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.
A reduction to the absurd reveals that the quantity of money is relevant to the price level. Try to run the economy with one dollar changing hands and, since it can't change hands fast enough, that single dollar is priceless. Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value.
Naturally, it is monetary mass coupled with circulation speed. If you change the monetary mass and no other economic variable, within the tolerance envelope, circulation speed will adapt and price levels won't budge. Exceed tolerance levels, and you will influence price levels.
You saw this applied in practice recently. Quantitative easing is a correction using monetary mass to an abnormal reduction in circulation speed (via reduced lending).
>Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value.
That only matters if those dollars are being spent and remain in the flow of funds. Say the Treasury printed a few trillion dollar notes and buried them in a hole, it's not going to affect the price level any (aside from the real resources used).
According to the article, that had been tried and failed several times in the past. Slowing down the creation of money would have eventually stopped inflation, yes. But it would have taken a lot longer and created some really nasty side effects in the economy during the period when inflation exceeds monetary growth. Those side effects were nasty enough to topple several governments, and the government change stopped the slowdown before it had time to take effect.
You have to slow down the creation of money, but in a hyper inflationary setting, the assumption that inflation exists creates money itself. So not only do you have to slow down the creation of money, you have to do it in a way that strips away the assumption that the government will just create more money. In this case, by embracing the fact that the government was just printing money and pegging a currency to the expected inflation rate, they were able to prevent people from doing this sort of math in every transaction they encounter.
All of this only works if you have an economy that is otherwise relatively stable. Brazil happens to have an abundance of diverse natural resources (oil, timber, mining, etc.), which provides a lot of economic stability. Now if you tried the same tactics in, say, Argentina (which currently faces many of the same problems that Brazil did with regards to cyclic inflation/deflation) I would expect different results. Because Argentina has approx. 15% the population of Brazil, its economy is much less diverse.
Argentine here. Both economies are pretty similar. Both are pretty diverse in their composition but not in their contribution, so you have the fact that primary activities (farming, oil, etc.) are the great contributor to the tax base and basically all other activities receive subsidies. This is the reason ar & br have one of the highest tariffs for electronics.
The root of the inflationary problem both in ar & br is, and has always been, the printing of money to cover for the fiscal deficit. Government hikes taxes every year and every year it consumes a bigger % of the pib.
Printing of money to cover for the fiscal deficit is not rare or bad by itself. Inflation can be a form of taxation if the goverment fully controlls the creation of money. The problem is that goverments are stripped from their right to do so and evey cent they create is actually borrrowed from the central bank.
Thats what i said. Goverments can't print money they need to borrow it from the one that prints it. Also borrowing from normal banks is creating money.
> the assumption that inflation exists creates money itself.
That seems like a claim that's hard to defend... If the government stopped printing money, it is true people would continue to adjust prices upwards for a while, but people would quickly realize that they were running out of actual money and stop doing this.
This isn't the kind of situation where borrowing & lending is indirectly increasing the money supply, if no money is printed people would simply run out of bills and the inflation would stop, regardless of "assumptions" and "psychology".
No, if the quantity of money stays the same, but the velocity of money increases, that's still inflationary. And if the velocity increases because people know there's inflation, that's a positive feedback loop.
But it will eventually fix itself, because there are physical limits to how high the velocity of money can go. Once that's reached, then the velocity-caused inflation stops, and then the velocity no longer becomes necessary, and things start to return to normal.
The assumption that inflation exists is taken into account when setting interest rates on loans. So borrowing / lending activity does create money in the form of an IOU. The money doesn't become "real" in a money supply sense until the IOU is paid out, but the effects of high inflation can linger long after the government stops printing money.
Under normal inflation scenarios this would be largely restricted to the financial sector which can be managed by a central bank, but with the type of inflation Brazil saw at times, this permeated even simple business transactions. Something that would be as simple as "Oh, we've done business for 30 years so I know you're good for it, just pay me on Friday" becomes an interest-bearing transaction.
Basically, because inflation is so high, individuals have to charge interest on even the smallest transactions. This makes people more reluctant to loan, but even the most basic real-world economies don't function without credit; and when you issue debt, you are creating future money supply. In stable, low inflation scenarios, the central bank can adjust to this by increasing the money supply accordingly. But if you stop issuing currency, money does not stop being created.
Fiat currency is debt. Its in its definition. Gold coins is gold. But you are right i should have said fiat currency not money. Thanks.
Edit maybe fiat currency is only debt when created through borrowing (like most of the currencys right now). But its a bit ambiguous to me because if it was diferent and goverments were alowed to produce money instead of borrowing it from the ones with the monopoly of money creation. The first time they introduce a surplus of currency to the system or the first time the currency apears the party accepting the currency in exchange for value would be making a loan of value to the goverment or an investment.
What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.