One advantage of fiat money is that it's easy to put more money into the economy : You just print some. (Now, I realise modern governments have more sophisticated ways of doing this, involving fractional reserves and whatnot, but that's what it comes down to.) But I don't quite understand how you contract the supply. Once printed, a dollar bill, or dollar amount in a computer account, can't just be destroyed, right? So, is the money supply flexible in only one direction? Is it always going to be a question of how fast the economy is growing, rather than growth versus shrinkage?
Posted by Mr.Funny (Member # 4467) on :
I believe that dollar bills get decomissioned after they get into the posession of a bank or perhaps a government facility with a certain amount of wear. I'm not 100% sure on this, though.
Posted by Coatesie (Member # 9202) on :
Increase the reserve requirements and increase the interest rate. Of course, the byproduct would probably be bank failures and most likely another depression, but that's what happens with a fiat money economy that allows fractional reserve banking without full consent from depositors in the first place.
Fiat money almost necessarily leads to inflation of the money supply, leading to price inflation, leading to all of the negative effects thereof.
Posted by fugu13 (Member # 2859) on :
Actually, modern banking practice generally frowns on the printing of money to increase supply.
You see, money supply is only based on the amount of physical currency in circulation. In reality, much of the money supply is created through investment and loans.
Imagine a series of banks, each of which must keep at least ten percent of their capital on hand. Bank A has $111 in physical currency, of which they lend $100 to some worthy soul. That worthy soul does something with the money that ends up with it in another bank (there are many possibilities), and that bank lends out $90. The next bank lends out $81, and the next bank $72, and the next bank $64, and the next bank $57 . . . this is boring, so our chain will stop here. Even with this foreshortened chain, the money has been significantly multiplied. It is as if there are several times that original $111 in circulation.
The most common way for banks to fiddle with the money supply is to use market implements to manipulate interest rates, though.
Its worth pointing out that the Federal Reserve has regularly contracted the money supply (albeit minutely) without depressions, that there's no way to have a bank do anything but hold money without the possibility of fractional reserves, that the problems Coatesie ascribes to fiat money apply to all forms of money, and that economists widely hold that a little inflation indicates a better economic situation than no inflation.
At various times our monetary policy has been very badly handled, both before and after we had a fiat currency. We have gotten much better at it, quite recently, and continue to improve.
Posted by Kwea (Member # 2199) on :
Money is removed from the suppy all the time, every day, by the millions. They burn bills at the Treasury Depatment, bills that have excessive wear.
Posted by cheiros do ender (Member # 8849) on :
fugu-
Wouldn't that money artificially multiplied by the banks just constitute temporary private debt? In which case, what's the point of the Federal Reserve contracting it?
Posted by fugu13 (Member # 2859) on :
In modern applied monetary economics, the general wisdom is to use changes in the money supply to both soften recessions and temper booms. This is pretty much to prevent the recessions from being really bad (we've discovered that the 'hottest' booms tends to be followed by the most annoying recessions) and keep inflation under control.
While changes in the money supply do not affect inflation in the long run, booms and recessions aren't part of the long run at all, so that's just an argument for ignoring recessions. The government doesn't like to do that, so it takes this approach, which leads to short term changes in the inflation rate that help smooth out the business cycles (booms and recessions).
Posted by calaban (Member # 2516) on :
Consider also that the Federal Reserve is a private group rather than a government entity.
Also in regard to a finite model such as Fiat, there is no way to fully predict an economy as immense as the global economy we have now. Short of a massive infrastructure collapse it can never get smaller and has never had a larger scope. Consider the limitations of a system where all wealth could only be defined by a single physical commodity, or even mutiple comodities. Would there be one thing in this world that could support such a system?
Additionally consider the differences inherent between regional economies. From city to city and state to state you see very diverse cost differences, with the issue becoming even more exacerbated when you start factoring international markets. It's the diversity of a global economy that shifts wealth, creating inflation both monetarily and in a physical sense in relation to both jobs and material.
I am beginning to think its impossible to think nationalistically in an economic sense because of how internationally intertwined supply and demand have become.
Posted by Kasie H (Member # 2120) on :
If the Reserve wants to contact the money supply, they can also just sell off a bunch of T-bill bonds. People put their money into the government for a long period of time and the Fed holds onto it, thereby reducing the amount of liquid cash (so to speak) in the system.
If the Fed wants to increase the money supply, they buy up bonds themselves, dumping their cash into the market.
Posted by Bob_Scopatz (Member # 1227) on :
I have an uncanny ability to make money disappear. It's not like I actually spend it on things. It just "goes away."
Posted by fugu13 (Member # 2859) on :
Kasie: that explanation is incomplete. As noted in my link above, the crucial effect of open-market bond transactions is the difference in bank reserves, effectively changing the multiplier caused by lending operations. The actual amount of cash directly involved is not particularly large.
Posted by Kasie H (Member # 2120) on :
Hmm....okay, right.
It's been too long since macro =)
Posted by starLisa (Member # 8384) on :
quote:Originally posted by calaban: Consider also that the Federal Reserve is a private group rather than a government entity.
But one run under government charter. A very bothersome concept, in my opinion.
Posted by Bokonon (Member # 480) on :
quote:Originally posted by calaban: I am beginning to think its impossible to think nationalistically in an economic sense because of how internationally intertwined supply and demand have become.
Well, except for human resources. Those are only thought of nationalistically, interestingly enough.
-Bok
Posted by calaban (Member # 2516) on :
quote:Originally posted by Bokonon:
quote:Originally posted by calaban: I am beginning to think its impossible to think nationalistically in an economic sense because of how internationally intertwined supply and demand have become.
Well, except for human resources. Those are only thought of nationalistically, interestingly enough.
-Bok
Indeed. How can you tax a productive group of individuals undefined by a national identity?