Eli5: why can’t we just “deflate” money, and why is it bad?
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Inflation like a lot of things, makes winners and losers.
The winners have convinced the losers that deflating is bad for them. So it could be done but won’t be due to fear mongering.
Why would I spend $100 on bread today when I know that $100 would buy me $110 of bread next week?
Purchasing power goes up every week. Purchases go down. Nobody spending money leads to recession.
Basically to much money; bad, to little money; bad. Only our rich overlords are allowed to horde monies
Well we CAN. We can either:
A) Destroy money. …But whose money are you going to destroy? A lot of people wouln’t like that very much.
B) Stop printing more money. Not as fast and immediate, but it would combat inflation. Also the government would have to balance it’s budget and would immediately go broke, causing all sorts of trouble.
C) Take peoples money and give them an IOU for more money in the future. IE, sell bonds. Which is what the FED is doing right now. They bought a hell of a lot of US bonds during the pandemic and republican power, and now they’re dumping them now that “the plague is over” and we have democrats in power. Coincidentally, every bond they sell is directly competing with the US government trying to sell bonds to get enough cash for their budget.
All of this pushes down inflation, and they could simply stop or ease up once it gets back to the target 3%. No one would actually want to deflate money (A negative inflation rate, where money gets more valuable with time) because it discourages people from spending. That’s the exact opposite of what money exists for.
Is there a reason we can’t just move the decimals over so that cents are relevent again? Otherwise we are going to spend ever increase amounts of bills, right? My main confusion is how to stop bread being $100 in the future
Tldr: We can, the problem is that the methods we use to deflate money hurt just as much as the inflation. On top of that, if we go overboard with deflation, the results could be worse than if we did nothing.
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The way we deflate money is by lowering how much money is in circulation. We have to take money out of the system so each bill is worth more.
The easiest way to do that is to raise interest rates on loans. If you want to borrow money, you’ll have to give more back to the government after.
Businesses, especially small/start up businesses, need loans to function. Businesses can just not be able to function, and some will just have to shut down.
By clamping down and getting rid of money, there’s less money to have, so entities like businesses and people have to lose it.
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The other reason is that hyperdeflation is so much worse than hyperinflation.
With hyperinflation, people are afraid to keep their money because it could become worthless. They take it all out of the bank, spend as fast as possible before it becomes worthless.
But, at least people are using their money for a bit.
Hyperdeflation does the opposite, people are afraid to spend their money because it keeps doing up in value. This means no one buys anything, and the economy just kinda freezes.
If the economy is frozen, money isn’t moving. If money isn’t moving, you can’t really do anything. The way we inflate currency is by lowering interest rates on loans, but people don’t want loans because they don’t wanna buy anything.
We can come back from hyperinflation, but it’s a lot harder to come back from hyperdeflation. Because of that, we’re kinda scared to do anything too drastic.
Inflation is not bad. Uncontrolable inflation is. 0.5%, maybe 1% a year? OK. 10, 15% a year? We fucked
Deflation is the opposite of inflation: money getting more valuable with time (and goods and services getting cheaper). We CAN do that, but we don’t do that.
It sounds great: the longer you hold onto your money, the more it’s worth! Want to buy something, well, just wait and it will become cheaper!
The problem is that if your money is worth more the longer you hold on to it, and things get cheaper the longer you wait to buy them, then there’s really no incentive for you to buy stuff now (maybe food, toilet paper, and medicine).
In fact, you’re best off if you hoard all your money and don’t buy anything you don’t need immediately. This is a problem for people that sell stuff or do stuff for money. If people stop buying stuff or hiring people to do things, they aren’t making money, and they don’t need to buy stuff, they don’t need to make stuff, and they don’t need as many people (to make, sell, or do things). You’d expect many companies to fail and people to lose jobs. Money will stop changing hands as quickly.
I’m going to ELI5 more than most of the previous answers.
We CAN do it, but deflation is bad because it makes people not spend money.
Why? Well with inflation, prices of everything goes up over time right? Well with deflation that means all prices go DOWN over time. Sound good, but not really. When a TV costs $1000 now or $850 next year, people think “better hold off and buy it later when it’s more affordable”.
Everyone waiting more and buying less crashes the economy because everyone has a job providing things people buy. Companies go bankrupt when people buy less.
The first guy pretty much answered the question, so I’ll go on a bit of a tangent. In the big picture, money is not a good in itself. It’s a mechanism to facilitate trade. People tend to get hung up the day to day and how much they can buy, but big picture policy makers want to have enough in circulation that economic transactions are not hindered by lack of money but risky transactions are not encouraged by too much in circulation.
Depending on what’s happening more or less money can be easily created or destroyed as a policy lever to facilitate a healthy economy. It can be a blunt instrument and not the only one, so policymakers have to be careful with a balancing act that is monetary policy so that every move they make is a net benefit to the system as a whole.
This is one of the driving forces behind the crypto or gold people. They want to remove the ability of a central authority to manipulate monetary policy. Generally This comes from a place of self interest. They tend to have a lot of money already and hate the thought of a central bank printing a bunch more to, say, devalue the currency in order to make a nation’s international trade more competitive. In this example the overall economy gets healthier and more manufacturing jobs are created, but their personal wealth in the bank decreases relative to someone in another country. Stuff like this is an ongoing tension that’s always going to be present. Again, there’s always going to be winners and losers when monetary policy is adjusted. The key is keep it where the overall economy is the most successful.
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