[v3rt]

Since when is HN new-world-order-conspiracy-central?

We live in an economy with a certain amount of economic activity and overall wealth, which tend to go up over time (barring recession). To facilitate trade, the central banks of nations issue currency, which acts as a "dual" of the economy (or more precisely, a piece of it - there aren't enough dollars circulating to buy every good and service in the US simultaneously), a pure trade good with fiat value. If the economy kept growing and the supply of currency stayed constant, deflation would result, as previously noted. However, by Keynesian theory (which is not absolutely proven be right, but has worked pretty well over the past 75 years), inflation (at reasonable levels) is more conductive to investment and consumption and overall economic vitality than deflation, due to people being more inclined to spend and invest money that would lose value just sitting there.

Thus, the government prints more money every year than would be necessary to match the growth in the economy. This is not some ridiculous plot by the Swiss and the Jews to enslave us all; it's simply a tax on everyone who holds dollars (or, in other countries, other currencies), since the government dilutes the overall pool of currency to grant itself spending money. This "inflation tax" is always a very small percentage of overall government revenues in the US, and even if Keynesian theory were totally wrong, the policy would not be particularly harmful. It would just be another tax, although somewhat regressive, since the poor tend to have more of their net-worth in cash than the rich.

And, it makes absolutely no difference who gets the money straight from the printing press, aside from the value of enjoying crisp, shiny new bills. The government spends money it got from printing in exactly the same places as it spends money procured from taxes.

I understand what psychological processes drive people to conspiracy theory, but it still frustrates me to no end that so many people believe in the laws of cigar-munching cabals instead of those of economics.

[forensic]

For fuck's sake. Where did I say it's a conspiracy? Where did I mention the Jews? Where did I say that I failed macroeconomics?

I don't need you to regurgitate the textbooks. I was making a specific point which you did not understand. That is fine. Maybe I gave a bad explanation.

But if you don't understand what I'm saying, you can ask questions or at least address something I actually said. Don't just google "Federal Reserve" and copy-paste their website.

>However, by Keynesian theory (which is not absolutely proven be right, but has worked pretty well over the past 75 years), inflation (at reasonable levels) is more conductive to investment and consumption and overall economic vitality than deflation, due to people being more inclined to spend and invest money that would lose value just sitting there.

This has been disproven. Note how all computer technology experiences deflation - it is a benefit not a detriment. Deflation was a major issue in the days before electronic currency because it meant the mint would have to re-issue new money constantly to retain liquidity. But this is no longer the case.

The danger with deflation is that the money supply will become illiquid. Central banks in the past have accidentally induced illiquidity and deflation at the same time by restricting the money supply without issuing smaller currency denominations. This leads to illiquidity which is the worst possible thing.

With modern technology it is trivial to keep the money supply liquid in a deflationary environment and so the policy of continual inflation is no longer needed.

On top of that, the inflation rates are too high anyway. In an environment of continual inflation, it absolutely matters what order you eat in. Each new supply of money devalues all the money that came before it. It works its way through the economy in a specific order trickling down from the banks. Whoever receives this money first receives it BEFORE the entire money supply has been devalued which gives them an instant wealth increase relative to those they pay the money to.

When a bank loans 100k to an entrepreneur, the entrepreneur will make concessions to get that money. The money is worth more to the entrepreneur than to the bank, because until the money reaches the money supply as a whole it has not yet devalued the currency. As soon as it changes hands, the currency slightly inflates. When the entrepreneur pays his staff, it devalues again, and so on until it reaches some theoretical "room temperature" asymptotic point and the inflationary effect is complete.

The inflation does not occur when the money is released to the banks from the Fed. It occurs when the money trickles down into the hands of the average person. The people who get to spend this money before it reaches the average person's hands are spending non-inflated money. But the instant it reaches the hands of those people it is inflated money. This is why there is an effect where money is worth more the closer it is to the mint, and people who have jobs that allow them to receive payments closer to the mint* will naturally be more wealthy.

This effect happens in every inflationary economy, and the higher the rate of inflation, the bigger the effect.

*It should be obvious that when I said mint I actually mean the Federal Reserve issuing electronic currency.

[codexon]

I think the problem is that we are overestimating the intelligence of an average HN reader.

The concept you are trying to explain is somewhat abstract and difficult. My stab at explaining it:

Let's say that there are $100 in the economy right now. A piece of bacon costs $0.01 dollars.

The government, now fearing deflation, wants to issue another $100 into the system. The banks get access to this additional $100 at a rock bottom interest rate of 1%. They then proceed to use that money to buy out the bacon on the market for $0.01 dollars.

The people selling bacon now realize there is $200 in the market instead of $100, and start selling bacon for the true price of $0.02 dollars a piece. Unfortunately, the bank and their friends were already able to purchase the bacon for $0.01 dollars out of $200, when the market corrected price was $0.01 out of $100.

This correction error happens every time the fed prints more bills, and serves to enrich the people who get central bank money first.

[Psyonic]

This was a very informative post. I have thought about this before, but was never able to get my facts lined up in this way. Thanks

[codexon]

And, it makes absolutely no difference who gets the money straight from the printing press, aside from the value of enjoying crisp, shiny new bills. The government spends money it got from printing in exactly the same places as it spends money procured from taxes.

That is incorrect. Banks that have access to central bank money are able to borrow from the US a rock bottom interest rates, and then use it to loan to the public or invest in a business before the rest of the economy knows that there's more fiat money in the system.