I believe that EY’s main point with printing money is that central banks tend to not print enough money, even if some banks—such as Russia’s in the 90′s—print too much.
Just because you can do too much of something, it doesn’t mean that you shouldn’t do that thing more.
Yes, it looks like Western central banks try a Goldilock approach—to print enough money to start inflation but not enough to cause catastrophic consequences. However, nobody knows when the consequences will be become catastrophic as it is non-lineary event, when people lose the faith in the money stability and start to change all of them into a harder currency.
Basically, the idea is to print not too much and not too litle money, and pass between Scilla and Haribda of inflation and deflation. Also, the idea is to adjsut monetary policy of a central bank to act opposite to the business cycle, that is, to print more money during deflational recession and less during boom phase of economy. I have read about the idea in Dr.Roubini Econoblog during 2008 recession, and, in fact, it was presented as ideal policy, a dream, which ability to work is not known, but the dream is attractive to central banks.
If we look closer, we will find that we live in the period of unprecidented money printing, started after 2008. US government increased M1 (cash) money supply several times after 2008 - from around 1 trillion to 3.5 trillion in circulating bills. But it didn’t produce “good” inflation, as these money pured into speculative assets. (This is where economists start to disagree, and my point become more speculative.)
It also good to note that while official inflation is very low, the price of a lot of important things increased several times, including gold, education, housing (for a longer period given previous bubble), stock prices, medicine, phones and even TV sets (but it is not presented in official infltion data because of “hedonistic indexing”).
“Q. What if I say I’ll print ten dollars and the market still thinks that’s not enough?
A. Create even more money. Look, imagine creating a quadrillion dollars. Prices would go up then, right? I mean, a 12-year-old raised by goldbugs could understand that part… uh, it’s possible you might need to add a 12-year-old raised by goldbugs to your advisory staff.” https://www.facebook.com/groups/674486385982694/permalink/896559330442064/
It look like he thinks that after printing a quadilion dollars, it will increase prices, but in fact only nominal prices will grow, but the prices in a harder currency will fail, and the market will be able to find the harder currency. For decades it was gold, but after 1970s central banks did exacltly what EY advises—they incresed fiat money supply, while playing against gold. There was elaborated scheme for lowering gold price by using gold lending and virtual gold, but it failed around 2008, and the price of gold jumped from 300 to 2000.
But raising nominal prices is economically useless if it is not the healthy inflation.
One could add 000 behind each prices number (thus 10 will be 10 000), something similar to denomination, but in the other diretion—thus nominal prices will grow 1000 times, but it will not affect economy.
“But raising nominal prices is economically useless” No, that’s not true. Raising nominal prices helps with sticky wages & debts. Failing to raise nominal prices causes recession, unemployment, and bankruptcies.
“the healthy inflation” That phrase doesn’t refer to anything. “Healthy” isn’t a modifier that applies to “inflation”. There is only one single thing: the change in the overall price level. There aren’t “healthy” and “non-healthy” versions of that one thing.
“One could add 000 behind each prices number” No, you’re likely thinking of a different hypothetical, something like an overnight currency devaluation. In those cases, wage and debt contracts are simultaneously converted from the “old peso” into the “new peso”. That’s a very, very different macroeconomic event. “Printing money”, on the other hand, changes the prices of goods … but sticky wage and debt contracts are unaffected (and thus devalued). It is exactly the fact that only some but not all prices are changed by central bank money printing, that causes “raising nominal prices” to have an effect on the real economy. (Exactly as you suggest, if all prices changed simultaneously, the real economy would be unaffected. It’s important to understand that central bank money printing is very different.)
I mean by the “health level of inflation” the level of inflation which is benefitial to the economy without destoying belief in your currency, or creating an assets bubbles. As I explained in another comment below, printing money destoys contracts as people start to rewrite these contracts in a harder currency, as it happened in Russia during money printing experiments. The contracts were rewritten in dollars, exactly because russian central bank could not print dollars. As a result, the central bank lost the ability to affect inflation in dollars contracts. It had to pay a lot later to return the people beilef in russian ruble, by constntly manipulating currency rate.
Nominal GDP also increases by 1000 times, and everyone’s currency savings increases by 1k-fold, but the things which are explictly in nominal currency rather than in notes will keep the same number. The effect would be to destroy people who plan on using payments from debtors to cover future expenses, in the same way they would as if their debtors defaulted and paid only one part in a thousand of the debt, but without any default occuring.
I believe that EY’s main point with printing money is that central banks tend to not print enough money, even if some banks—such as Russia’s in the 90′s—print too much.
Just because you can do too much of something, it doesn’t mean that you shouldn’t do that thing more.
Yes, it looks like Western central banks try a Goldilock approach—to print enough money to start inflation but not enough to cause catastrophic consequences. However, nobody knows when the consequences will be become catastrophic as it is non-lineary event, when people lose the faith in the money stability and start to change all of them into a harder currency.
That is not how it works.
How does it work instead? I don’t know much about this and your response doesn’t seem to explain why you think that or what you think happens instead.
Basically, the idea is to print not too much and not too litle money, and pass between Scilla and Haribda of inflation and deflation. Also, the idea is to adjsut monetary policy of a central bank to act opposite to the business cycle, that is, to print more money during deflational recession and less during boom phase of economy. I have read about the idea in Dr.Roubini Econoblog during 2008 recession, and, in fact, it was presented as ideal policy, a dream, which ability to work is not known, but the dream is attractive to central banks.
If we look closer, we will find that we live in the period of unprecidented money printing, started after 2008. US government increased M1 (cash) money supply several times after 2008 - from around 1 trillion to 3.5 trillion in circulating bills. But it didn’t produce “good” inflation, as these money pured into speculative assets. (This is where economists start to disagree, and my point become more speculative.)
It also good to note that while official inflation is very low, the price of a lot of important things increased several times, including gold, education, housing (for a longer period given previous bubble), stock prices, medicine, phones and even TV sets (but it is not presented in official infltion data because of “hedonistic indexing”).
https://en.wikipedia.org/wiki/Goldilocks_economy
He wrote:
“Q. What if I say I’ll print ten dollars and the market still thinks that’s not enough?
A. Create even more money. Look, imagine creating a quadrillion dollars. Prices would go up then, right? I mean, a 12-year-old raised by goldbugs could understand that part… uh, it’s possible you might need to add a 12-year-old raised by goldbugs to your advisory staff.” https://www.facebook.com/groups/674486385982694/permalink/896559330442064/
It look like he thinks that after printing a quadilion dollars, it will increase prices, but in fact only nominal prices will grow, but the prices in a harder currency will fail, and the market will be able to find the harder currency. For decades it was gold, but after 1970s central banks did exacltly what EY advises—they incresed fiat money supply, while playing against gold. There was elaborated scheme for lowering gold price by using gold lending and virtual gold, but it failed around 2008, and the price of gold jumped from 300 to 2000.
The point was to raise nominal prices in the first place
But raising nominal prices is economically useless if it is not the healthy inflation.
One could add 000 behind each prices number (thus 10 will be 10 000), something similar to denomination, but in the other diretion—thus nominal prices will grow 1000 times, but it will not affect economy.
“But raising nominal prices is economically useless” No, that’s not true. Raising nominal prices helps with sticky wages & debts. Failing to raise nominal prices causes recession, unemployment, and bankruptcies.
“the healthy inflation” That phrase doesn’t refer to anything. “Healthy” isn’t a modifier that applies to “inflation”. There is only one single thing: the change in the overall price level. There aren’t “healthy” and “non-healthy” versions of that one thing.
“One could add 000 behind each prices number” No, you’re likely thinking of a different hypothetical, something like an overnight currency devaluation. In those cases, wage and debt contracts are simultaneously converted from the “old peso” into the “new peso”. That’s a very, very different macroeconomic event. “Printing money”, on the other hand, changes the prices of goods … but sticky wage and debt contracts are unaffected (and thus devalued). It is exactly the fact that only some but not all prices are changed by central bank money printing, that causes “raising nominal prices” to have an effect on the real economy. (Exactly as you suggest, if all prices changed simultaneously, the real economy would be unaffected. It’s important to understand that central bank money printing is very different.)
I mean by the “health level of inflation” the level of inflation which is benefitial to the economy without destoying belief in your currency, or creating an assets bubbles. As I explained in another comment below, printing money destoys contracts as people start to rewrite these contracts in a harder currency, as it happened in Russia during money printing experiments. The contracts were rewritten in dollars, exactly because russian central bank could not print dollars. As a result, the central bank lost the ability to affect inflation in dollars contracts. It had to pay a lot later to return the people beilef in russian ruble, by constntly manipulating currency rate.
Nominal GDP also increases by 1000 times, and everyone’s currency savings increases by 1k-fold, but the things which are explictly in nominal currency rather than in notes will keep the same number. The effect would be to destroy people who plan on using payments from debtors to cover future expenses, in the same way they would as if their debtors defaulted and paid only one part in a thousand of the debt, but without any default occuring.
And is it good?