[drcode]

> 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".

[AnimalMuppet]

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.

[exelius]

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.

[koolkat]

>"The money doesn't become "real" in a money supply sense until the IOU is paid out"

Debt=money

When the lending is done by a bank the iou becomes real money since day 1.

[roblev]

debt does not equal money;

there is money that is not debt (e.g. gold coins, fiat currency)

there is money that is debt (e.g. bank account money, IOUs)

[koolkat]

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.

[roblev]

Hi,

Fiat currency is simply currency that is not backed by something physical - in itself it has nothing to do with debt.

In modern economies, a central bank can and does create fiat currency out of nothing - literally declaring it into existance. This has nothing to do with debt. And yes it is an advantage for the central bank / government to be able to do this - this advantage is called seigniorage.

Usually the central bank creates money to increase financial liquidity in the banking system, and as such it wants the newly created currency to enter the financial system. The most common way to do that is for the CB to buy something - usually a bond, but it could be anything. The person selling just gets the market value for their product - no special advantage in selling to a central bank vs anyone else. But the total amount of fiat money in the system goes up. In this way the creation of money is often seen to be linked with debt but is not a fundamental link.

Then there is a second, entirely seperate kind of money that is not fiat money which is called bank money. Bank money is entirely based on debt - it is the debt of fiat money. And bank money is the most common sort of money we use, much more common than fiat money e.g. I typically buy larger purchases with bank money (a bank card transferring the IOU of my bank to a shop) instead of with fiat money (notes and coins).

I agree this stuff is entirely not too obvious & the misconception that all money is based on debt is incredibly common.

[koolkat]

Thanks. I was talking about the genesis of the first bond. And the debt refers to the debt the goverment of the country gets when "creating money". So that the money created its created trough a loan from the CB. Then the high-powered money serves to cretae more debt money. But its a complex process that i havent studied yet and its allways nice to have a conversation about money.