Eli5: why can’t we just “deflate” money, and why is it bad?
In: 620
Inflation is not bad. Uncontrolable inflation is. 0.5%, maybe 1% a year? OK. 10, 15% a year? We fucked
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.
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
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.
Basically to much money; bad, to little money; bad. Only our rich overlords are allowed to horde monies
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.
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.
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