Inflation

[SlowUpTake]

I am wondering if inflation could be curbed, in part, by destroying currency. For instance, anytime law enforcement seizes cash could that cash be destroyed. And seizures of goods and properties (provided they are not illegal substances) could they be sold and then the cash destroyed?
Also any fines levied against businesses, or ...etc.
I also wonder about the banking industries ability to increase the money supply by lending out much greater amounts of currency then what they have as collateral.

These are just thoughts, but I am interested in any feedback.

 

[philostam]

Sure they could. Remember when the Silicon Valley Bank was in trouble in 2023, the FED could have said sorry, everyone with deposits over 250k will lose their money. That would destroy money in the economy and bring inflation down. Instead they bailed out the bank with a special facility. There's always a balancing act but in debt based economy inflation is baked into a cake.

For example, US has to refinance 9 trillion of debt this year (debt issued during COVID) and you need buyers for that. In other words, you need balance sheet capacity. If you destroy currency/money, you reduce the size of the balance sheet so who will purchase this debt that HAS to be refinanced?

Fiat/debt based system works like that, inflation is part of the design. They manipulate the numbers to make it seem low. The target is 2% but in reality it's more like 6-7% a year as reflected in the price appreciations of scarce assets (housing, education etc.) over time. Inflation is needed to increase balance sheet capacity to refinance the debt.

 

[TomasM]

To combat inflation through the destruction of actual physical tender (paper bills and coinage) would not make much of a dent in inflation. In one of my economics classes (20+ years ago) we discussed the percentage of money in actual tender being 6 to 7 percent. Given that there has been such large amounts of “printing” (which really isn’t printing but instead just digitally created money) and issuance of debt, I suspect the percentages have dropped significantly.

I’ve also heard that the majority of “cash” is held outside of the United States.

If the seizures and destruction of cash were of digital assets, then that could possibly make a dent in inflation, but it would come at a cost in confidence.

I have pondered ways the government could get rid of such large amounts of debt and none of these seem to work without isolating the country from other countries. The one idea that did seem to pack a punch was creating a new currency that spanned all countries who owned a majority of the land and economic stimulation - of course, this would be a tough sell to the people if their sovereignty was threatened. The people would need to maintain some control over their own money because people have lost trust in responsible centralized management of money.

 

[John K]

Interestingly the current policies of the US government were associated with deflation in the 1930’s, after the great stock market crash. I wonder if that’s a significant risk now, because if it is, it’s a lot worse than anything other than hyperinflation. For one thing folks with any money don’t buy because they are always waiting for prices to keep falling, and the economy tanks and stays tanked. Also anyone with an asset loaded with debt, such as a mortgaged house, is stuck in negative equity too as the value of the asset falls.

I hope and pray that we don’t end up with a significant deflation.

 

[TomasM]

Interestingly the current policies of the US government were associated with deflation in the 1930’s, after the great stock market crash. I wonder if that’s a significant risk now, because if it is, it’s a lot worse than anything other than hyperinflation. For one thing folks with any money don’t buy because they are always waiting for prices to keep falling, and the economy tanks and stays tanked. Also anyone with an asset loaded with debt, such as a mortgaged house, is stuck in negative equity too as the value of the asset falls.

I hope and pray that we don’t end up with a significant deflation.

Feels like a game of musical chairs and the music playing is happy when your sitting and scary when your walking. We are all bears and bulls in this game.

The problem with this game is that one giant butt is always wiggling a couple centimeters above a chair while it claims it is walking.

 

[philostam]

Interestingly the current policies of the US government were associated with deflation in the 1930’s, after the great stock market crash. I wonder if that’s a significant risk now, because if it is, it’s a lot worse than anything other than hyperinflation. For one thing folks with any money don’t buy because they are always waiting for prices to keep falling, and the economy tanks and stays tanked. Also anyone with an asset loaded with debt, such as a mortgaged house, is stuck in negative equity too as the value of the asset falls.

I hope and pray that we don’t end up with a significant deflation.

Correct, deflation is a bigger worry in the current system, but at the same time it's easier to address it as a central banker/politician. You can literally just print money and give people stimulus checks. I don't think we will ever see deflation, you rarely see it anywhere in the world, yet at the same time we have plenty of countries with out of control inflation.

So inflation is more problematic because it's harder to control it and get it down without causing a massive crash.

The same way for most people it's harder go lose weight than to gain it.

 

[philostam]

Also, deflationary economic system could work if our economies weren't so indebted. If prices went 2% down every year, you would still need to eat, go to the gym, hang out with friends, buy phones, computers, cars etc. So there would still be economic demand to buy stuff, just on the margin you'd postpone some non-essential buying because you'd be rewarded to save.

For a producer/manufacturer it would be weird to be in situation where your prices go down every year, but at the same time their costs wold go down too and they would be incentivize to build a treasury instead of de-capitalizing their company the way they're doing now.

 

[TomasM]

I do think there is a point when hyperinflation can trigger deflation that can’t be stopped with printing. If the currency is fiat then the value it has is based on confidence in the management of the currency, because there is no value backing the currency. If people lose so much confidence in the system, [because they have lost so much by using it] they could completely reject the currency. In this case printing more money, doesn’t do any good because people no longer believe the con. This is literally the house of cards falling, because the currency has no value [to people] and any contracts or debt instruments written with the currency as value also have no value.

Is this what you meant @John K ?

 

[John K]

I do think there is a point when hyperinflation can trigger deflation that can’t be stopped with printing. If the currency is fiat then the value it has is based on confidence in the management of the currency, because there is no value backing the currency. If people lose so much confidence in the system, [because they have lost so much by using it] they could completely reject the currency. In this case printing more money, doesn’t do any good because people no longer believe the con. This is literally the house of cards falling, because the currency has no value [to people] and any contracts or debt instruments written with the currency as value also have no value.

Is this what you meant @John K ?

I’ve never looked at the theory and the maths underlying economics so I’m not so clear on the forces and processes at work, except very superficially. I don’t think that hyperinflation would lead to the sort of deflationary doom loop I was thinking of - as far as I can see, true hyperinflation usually ends in political and economic chaos, massive social change, and a new currency, as happened in the 20th century to more than one country.

I think that @philostam is right to point out that printing money can hold off deflation - quantitative easing had this effect after the 2009 financial crisis for example. In the 1930s some governments allowed their money supply to contract as part of their economic dogma, which amplified the deflation. I’m not sure printing money would always work though, because there is a feel of non linearity and mathematical chaos about the laws in effect and that means things don’t behave in an intuitively obvious way. But I know very little about the laws so this is just a gut feeling.

Another fly in the ointment is government debt. We had a taste in the UK a couple of years ago of what happens when a heavily indebted government loses the confidence of the people and institutions who invest in its debt. These guys can crash an economy in hours if they think it’s heading towards an eventual default, or towards large unrewarded loss of value in invested capital through government policies. There might be a high risk of this from printing money to avoid a deflationary crisis if it isn’t handled well.

 

[TomasM]

I do believe that deflation can be managed with printing, to a point, because there is historical precedence to support the argument.

The direct backing of currency by precious metals has been phased out over time. In 1934, the U.S. currency ceased to be redeemable in gold, and by the 1960s, it was no longer redeemable in silver.

So, if confidence is lost in a fiat currency, at a time when the currency is held across the globe, how do you deflate the currency by printing and giving it to citizens [when they don’t trust it], and foreign entities are punished with inflation [and no incentive / checks].

I know we’ve gone from a backed currency to fiat currency. But where do you go when the fiat currency has more debt than can be backed by any commodity as a natural resource? Sure we can create a commodity bubble, but we all know what happens with bubbles.

Is the solution crypto because it’s based on energy and decrements rather than increments?

I don’t know the correct answer to this but I do know there has to be enough confidence and incentive to foster acceptance.