What a claim!

All that we can do is create too much money. That happens when money creation results in inflation. But, as is now very apparent from experience right around the world, it is very hard to create inflation when interest rates (which are now, because of quantitative easing, almost entirely under government control) at or very close to zero and if there is less than full employment at a real living wage.

Neither Venezuela or Zimbabwe have inflation then, do they? They both have negative real interest rates – as we do – and less than full employment at a real living wage.

7 thoughts on “What a claim!”

  1. Those similarities you point out Tim are interesting though – why does is prove inflationary in places like that and not so much in places like this?

  2. ” why does is prove inflationary in places like that and not so much in places like this?”

    My theory is that the places where money printing ends up hyper inflationary pretty quickly are the ones where money is more physical. That is to say if you physically print lots of banknotes that is immediately inflationary. Everyone literally has more money in their pocket trying to buy the same goods, prices go up.

    Whereas in an economy where money is almost entirely electronic and backed by debt, printing more money electronically may just replace debt backed money with base money, and the overall money level in the economy stays at a similar level. Money printing like QE etc is usually undertaken by advanced economies when debt money is static or declining, ie debts are going bad and the economy is tanking. So swapping one sort of money for another in those circumstances is not in the short to medium term going to affect prices too much. Certainly not in a runaway inflationary spiral anyway.

    Of course all that base money could eventually be turned into a much larger amount of debt money via the banking system, and that would be inflationary, but it seems that the electronic money world is less susceptible to hyper inflationary episodes than the physical note money world. Of course it could be that an eventual hyper inflationary crash would be far worse in the electronic money world, but so far we haven’t seen such an example.

    The other thing is that in more advanced economies the property market tends to act as a sponge for excess money printing, and we see property price inflation, and the market for goods and services remains less affected. So that may be a factor as well.

  3. Well, yes, MV = PQ and all that. When V falls more M is the solution, not a problem. But when V recovers…..

  4. “But when V recovers…..”

    But it doesn’t seem to, does it, in the circumstances we find in advanced Western type economies today? The Japanese have been printing money hand over fist for decades and not managed any inflation yet. The Americans are full-on debt monetising and we shall see how that goes. One wonders if the nature of electronic money coupled with modern financialisation of everything, and the mass use of debt somehow creates far more space for non inflationary money printing than if you just churn out £20 notes (or indeed gold sovereigns) and hand them out. Thats not to say that it won’t end in tears, but one wonders if the end might come very quickly, literally within days or weeks perhaps, there won’t be any warning as to when the limit is approaching, in the way there is with more ‘traditional’ money printing inflation.

  5. @ Rob
    Higher *real* interest rates are a tool to fight inflation.
    Higher *nominal* interest rates are a consequence of inflation – hence Denis Healey borrowing money by a gilt with a 15% coupon and when Grand Metropolitan issued a convertible loan stock with a double-digit coupon that was certainly not an attempt to fight inflation

  6. @ Jim
    Well, that could be due to those with savings on which they rely for their old age *cutting back on spending* when interest rates decline from fear of running out of money if they spend some/more than they were already spending of their capital. Japan’s high and increased life expectancy means that those who have retired need to make their savings last longer. The lucky minority in the UK with inflation-proofed pensions don’t have to worry about that and we (I spent a large minority of my working life in a DB scheme and fortunately can live on that – the DC scheme from the majority of my working life is worth much less) increased our spending when real interest rates went negative years ago: making them even more negative will not have much additional impact.

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