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This explanation certainly fits my experience when discussing Central Bank actions with well-educated and generally well-informed normal people.

Their discomfort begins with the notion that money can simply be printed. The first reaction is to question who gets to decide when money is printed. Then the idea that banks can take that money and expand it through DEBT further alarms them. Finally, the inevitable conclusion that further money printing is required to pay the interest just seals the deal. The notion that people are repaying debt does not penetrate their thinking. The idea that the Central Bank could shrink the money supply is rejected. These views are so firmly held that the inevitable conclusion is that inflation is happening and we are simply being lied to by the government so as not to frighten us.

I have had this conversation so many times that I now firmly believe the Central Bank should always and forever remain at arms length from any sort of political direction.

Thanks Kathleen! Exactly the sort of comment I was looking for. (Especially since it generally supports my hypothesis! ;-) )

The ability for central banks to unprint money by open market sales of bonds certainly exists. But the decision to do so would have to be made not by some known formula based upon, say, improvement in the employment statistics, but by human central bankers. The humans in that position in every important central bank, and probably all of the unimportant ones, have shown themselves to be ardent fans of money printing and keeping interest rates low, but have rarely indicated they can even imagine any benefit to the economy of reducing the money supply or increasing interest rates, unless price inflation were already out of control. They love using the accelerator, and hate to use the brake.

Suppose the Fed were to say that it intended to start selling off the trillions in bonds that it now owns. Or it didn't say anything, but started to do so secretly and that became known, as it would. If you also owned bonds, would you continue to hold them, or sell first to front run the Fed? I think nearly everyone would do the latter. Interest rates wouldn't drift higher, they would explode higher. Leveraged individuals and institutions, of which there are many because of those forced into leverage to extract needed income from near zero rates, would get margin calls and in many cases be wiped out. Would the Fed continue its policy of unprinting money even as the economy were collapsing around it? Of course not.

So it isn't irrational for many people to expect price inflation in the near future, if they think the Fed and other central banks are trapped into continuing to print forever by their ideological bent and the consequences of their ever trying to reverse that policy.

Although I agree that many or most people might sound confused/skeptical when asked about the possibility of reverse printing if asked directly, I don't think it is what expressly underlies people's inflation-fear intuitions. I don't think people freak out about inflation when money is temporarily printed before Christmas or in advance of Y2K. Obviously you do need an implicit no-reversal mental model somewhere to explain someone's inflation-fear today, but I think that is part and parcel to the more core misconception. My take on the summary heuristics goes like this (1) There is no free lunch (2) If someone just decides to print more money or anything else with the express intention of creating a free lunch it will not work and that thing will instead be worth less (3) It is easy to think of many times when things seemed to be going okay for a while but then the chickens came home to roost.

And that is not meant to be some patronizing description of only Joe the Plumber. I am talking about Jane the fund manager, here, too. I think what's missing from people's mental models at its most simplest is (a) The idea that there is a fluid thing called "the demand for money" that itself affects how much the Fed decides to print and (b) A little more respect for actual market prices.

Scott Sumner likes to say "never reason from a price change" to describe the tendency of people to make the easiest mistake: Ignoring joint determination and instead assuming ceteris paribus. The number of Kevin Durant shoes in stores goes from 10 to 1 million, what happens to the price? Some people will even get this wrong and say "they drop." But this mistake is far more common when the source of supply is a federal institution which can benefit the government by increasing the supply of something at no cost, whereas the demand to hold that thing is a rather intangible idea. As long as you have a basic model of a self-interested, imperfect actor unilaterally creating supply of something at no cost with no concept of counterbalancing demand changes "causing" that creation, you will find a way to expect that thing to drop in price when printed.

But why does this belief persist in the face of no actual or expected inflation? I attribute this to (3) and (b) above: i.e. prices, like internet stocks or houses in Nevada, will simply change later and prove expectations wrong and thus don't provide any relevant information. They are something to mock or fear, so it really doesn't matter how long we go with low inflation or low implied breakeven spreads. It is the opposite of the Peso Problem, and at least in my experience it is pretty rampant, allowing people and pundits alike to ignore information from market prices for an unlimited time. The vast majority of, well, everyone thinks that stock prices in 1929 and 1987 were a bubble, even though subsequent returns from those peaks are high enough that economist would describe them as "an equity premium puzzle." Yes, this does imply a no-reversal idea somewhere, but I think that is more commonly a very hidden assumption.

Rick T and dlr: great comments. I have nothing useful to add. Keep 'em coming.


"Normal people may be very unclear on the distinction between open market purchases of bonds (which is what central banks have been doing, and which is easily reversible by open market sales of bonds), and helicopter money (which can only be reversed by raising taxes to take money away from people)."

Helicopter money can also be taken away from people by selling new bonds (and burning the money).

Why would this not be a reversal of the helicopter money?

in the other post you said "today's inflation depends on expected future inflation", so if normal people are worried that all this money printing will cause massive inflation, shouldn't that cause inflation today?

Philippe: "Why would this not be a reversal of the helicopter money?"

Well, yes and no. It reverses the increase in the money supply, but means the stock of bonds is higher than it was before the helicopter flew. Plus, people might not know that central banks can sell bonds.

On your second comment: yes. And how big that effect will be will depend on how many people think like that, and how soon they expect that inflation to arrive. (Years ago, I did a post wondering if we should actually be happy to hear someone yelling "Hyperinflation is coming soon! Buy stuff now!" )

"It reverses the increase in the money supply, but means the stock of bonds is higher than it was before the helicopter flew."

What would be the effect of this higher stock of bonds?


Not 100% on topic, but the US Council on Foreign Relations recently published an article advocating money printing:


I back the basic principles the advocate, but the WAY they propose doing it (and clawing back money printed when necessary) is excessively costly, I think.

"And any normal person, who thinks that printing presses don't have a reverse gear, might very reasonably be very concerned about the very large amounts of money central banks have been printing recently."

The normal people I talk to don't have an "implicit model" of central banks, money and inflation. It's all a black box. They may have picked up some catch phrases about governments printing money and inflation but that doesn't connect to any idea of how it is all supposed to work. A retired high school teacher friend thinks "Nixon took us off the gold standard" and that is the root of all economic ills since then. People pick up their catch phrases and buzz words from what they sort of hear on TV or social conversations about real estate prices. If they are are at all alarmed about "the very large amounts of money central banks have been printing recently" they would be just as alarmed about it even if the central banks were doing the opposite because they don't actually know whether the central bank is printing or withdrawing money. Normal people don't just "not understand much about macro." They've never heard of "macro." They probably think it's another name for KD.


This theory also seems to fit the comments e.g. here:


There are many other places, but this is the most recent example I'm aware of. Several commenters appear unaware that the monetary base can decrease, or that "the government" (central bank or political authority) would ever decrease the base.

This is interesting because many people seem fine with the idea of raising or lowering interest rates (but again, if they equate low interest rates with "printing money", then they're alarmed).

This theory also works for why "the rich" would seem to think printing money is irreversible -- they are more likely to have looked at the past data for the US and noted that e.g. the monetary base has never gone down very much.

(Not sure what happened to my other comment; here's the gist.)

Commenters at e.g. this post:


Seem to think that monetary base increases never go away.

Another reason a reasonable person might expect a sharp upturn in price inflation is the possibility of major political change. You made an important distinction between bond buying and helicopter drops of money. The former, which we have done, is arguably the cause of the asset bubble which has enriched asset owners, i.e., the wealthy. Thus the complaints about how Wall St. has been benefiting more than Main St., and the fad for people buying, if not actually reading, Piketty's book.

If we (the US in my case) were to go into a sharp recession prior to the next national election, and the Fed responded with its usual program to help the banks and brokers, there could plausibly be a strong populist reaction to that at the polls. The Fed may be unelected, but it isn't blind, and I could see it soon replacing QE with helicopter money - $XXX/month added to each person's bank or debit card account. There are many possible consequences from that, but one of them is likely to be a much higher rate of consumer price inflation, enhanced by the "Hyperinflation is coming! Buy stuff now!" effect.

I don't think most people think much about this at all. It is more concrete items, inflation, gas prices, employment, and wages. They hear about this from those with axes to grind and while it might raise concern for the future, or become part of their political group identity ideology, I think most remain profoundly skeptical when prices don't accelerate and high unemployment continues. Inflate? How? When?

Side-stepping the question of whether people really think this way, I'm doubtful that "helicopter money really is hard to reverse, especially if you want to reverse it quickly." You can reverse helicopter money the same way you reverse OMO: just sell bonds. It doesn't matter that the money wasn't created by buying bonds, the Fed is always able to sell an unlimited number of bonds. If it runs out of treasury bonds, then just start selling Fed bonds--because the Fed can print money, there is no limit to the interest payments it can make, and therefore no limit to the amount of helicopter money it can vacuum back up by going into debt.

In practice, doesn't even need to physically sell any bonds to do this. Raising IOR is equivalent to borrowing more money from banks. But my point is that even in a world where IOR and reserve requirements are not allowable policy instruments, the Fed can still borrow unlimited quantities, which reduces the monetary base regardless of how that money was created.

My non-economist reaction to this post is: what about the inflation of the 70's? If it was so easy to do what you say (sell bonds and burn the money), why didn't the Fed do it?

Maurizio: but the Fed did do it! At least if you believe the standard interpretation, the inflation of the 1970s was ended by Volcker's decision in 1979 to reduce the monetary base (in the sense of Rowe's version 3, relative to what it would have been under continued pre-Volcker policy).

[Side note: I feel weird repeating US-centric dogma on a Canadian site. The Volcker moment and other money-supply theories don't totally fit with the facts that inflation was high everywhere in the 70s and fell everywhere in 1979-85, not just in USD and USD-pegged currency areas.]

A rational reason to fear current us fed policy runs as follows:

- the real rate will rise in the future
- the Fed will have difficulty raising rates
- inflation will accelerate
- the value of the Fed holdings, which now have a very long term structure will decline
- the fed will be reluctant to realize losses, and for various strange legal reasons the fed can become technically insolvent because it is organized as a joint stock corporation
- the process will amplify and value of fed assets will approach zero

Before this point the treasury needs to conduct monetary policy by issuing new bonds and holding the proceeds at the fed ( we saw this during 2008 with the supplemental funding account at the fed before the machinery of IOR started)

As a variant of this story, the fed becomes reluctant to pay out IOR exceeding the yield on its assets but the equilibrium rate is higher...

If you are in euro zone, who is going to issue the bonds?

Doesn't the reversibility logic assume that there would be enough demand from private sector to buy the bonds from Fed? If people expect higher inflation, they wouldn't find existing bonds that Fed is trying to sell (offering low yields) a wise investment any more.
I think a more likely scenario (and rationale for Fed not worrying about expansion) is that printing money is causing investment which would increase the production capacity for many year (until this new capital depreciates) and thus future output will be higher. So effect of "irreversible printed money" (a fraction of total printed money) on inflation wouldn't be as much.

The printing press is a very colourful image, which is why I like to counter with the image of a blowfish. Yes, a central bank can rapidly increase the supply of notes and reserves. But blowfish-like, a central bank can just as quickly suck this supply back in.


Um (looking up at you people sitting on a high perch), here's my simple thinking:

1. Inflation is a tax on everyone (if you're going to tell me that wages are _eventually_ going to keep up, thanks, but no, thanks). Raise your hand who loves paying taxes, please.

2. Inflation is a transfer of payments from savers to spenders (including the state). You owe some money, love inflation by all means, if not, too bad for you.

3. Money printing is leading to bubbles and misallocations of capital. It's clear to me that here in CA we have a new real estate bubble in the making. Oh, it's hard for you to identify bubbles, is it?

4. I'm simply disgusted by the idea that more and more printing will solve our problems. Yes, common people belive there is no free lunch, how naive they are.

5. Finally re all this talk of an "exit strategy": realistically unprinting is never going to happen, if only because the central bank then will have to take a loss and that is politically impossible.


I think in point 4 (as an example) you're missing the point. Everyone here understands the principle of no free lunch. Above, dlr is talking about the mistaken heuristics of non-economists. Non-economists seem to think that economists like Nick Rowe want to expand the monetary base to get a free lunch. But Nick knows there is no free lunch. The reason he advocates expanding the monetary base to hit the inflation (or NGDP) target the central bank has assigned itself is to minimise nominal distortions in the real price of lunch.

You might argue that the target should be different. You might believe in ABCT. But those are different discussions. If we use money, there has to be a nominal price of lunch. And how we communicate the policies that manage the nominal price of lunch is the topic of this post.

But.. but.. you don't know what the price of lunch should be, so why should it be "managed"? What nominal distortions? Free markets need a little oiling eh? Is it something you can measure, so we can validate that it's indeed distorted and will come undistorted once the inflation kicks in?

Nick Rowe is concerned that common men do not understand how much good QE is doing to the world, they are irrationally scared of it. How do you explain this to the masses? -- They are scared to come to grips with the reality that the money they have are numbers in a computer and a couple of people can just sit at the keyboard and divide your number by 1.03 or 1.04 (1.05, no, that's too much) because they can and they have a theory to explain why this is good. This is quite often hard earned money, people trade precious time for it, and being flippant with it is not going to make you many friends, on the outside of the ivory tower, I mean.

Joe: I think it is more that Nick things ordinary folk over-estimate the dangers. QE is not an optimal policy, it is what you do when the central bank has screwed up and cannot bring itself to embrace NGDP (level targeting) as the explicit nominal anchor.

That should be "Nick thinks ..."

JP Koning,

the blowfish analogy doesn't really work. The CB isn't just blowing out money, it is simultaneously sucking in assets.

In fact, if it was a blowfish, it would make more sense to describe the sucking in part as an expansion of its balance sheet, rather than as a shrinking of it.

If a Central Bank tries to sell bonds it holds as a way to pull 'money' into their institution away from those outside, no doubt the market will ask for a concession/discount to purchase them compared to just purchasing them originally without first putting them on the CB ledger.

Here is one way this lay-person sees this: wealthy stop tax bills from being issued (Sandwichman notes some of the communications devices being used to sell this idea) and produce fiscal deficits that are "papered" with Treasury bonds given (voluntarily purchased) to this group of people rather than a tax bill. The FRB can't issue a tax bill but it apparently recognizes that it would be better if they did not ask wealthy individuals to purchase even more bonds than before so it instead ledgers a Treasury bond on to its own accounts and holds the new accounts (identified as Bonds) while simultaneously "transferring" a ledger to the executive branch of the national government who is sending out cash/money immediately into the economy in the same amount (yes, this is printing some money, seen as an exchange). This spending is supporting demand, predominantly in the US economy. The FRB continues to hold these new accounts; they are in essence holding a claim on the future productivity of US residents like any similar legal instrument that can enforce an obligation on a debtor. Of course, the FRB is owned by the public so US residents would be paying themselves back (as long as they are held on the ledgers of the FRB). Maybe that is why they are doing it, the FRB knows that they should hold these rather than just give the asset to the wealthy (remember they can't issue a tax bill to the same people). Perhaps they think that global affairs means they should not be drawing increasing amounts of cash away from the euro-zone or other international partners, so they wan to keep the sales lower. But if the FRB has to sell these bond holdings (perhaps to lower the 'money supply' as defined in these theories of money), they would then purchased by the wealthy, most probably at a discount because of the changed nature of the perceived market such action wold probably produce at that time. So go back to the first point, it is about reducing taxes while getting the government to give you an storehouse of value (a bond) that means you own more of the future productivity of the US economy. INSTEAD - If revenues were sufficient to pay outlays (a fiscal balanced budget, or close enough at least) and no bonds were needed at all, then this whole set of accounting events and scenarios would be avoided.

Please recognize that this scenario is a social and political outcome. Though I am a huge believer in the need for more aggregate demand and do not want the governments to austerely lower their spending quickly at a time the economy has been so dislocated, BUT, as long as we have a deficient revenue system and we are using treasury bonds rather than taxation, it is the wealthy who are being advantaged, coming and going. Don't we need just 3% more in revenues (and so it doesn't work against demand-supporting spending, the new taxes should be very highly progressive). Our institutions were not supposed to be used in this fashion by the wealthy - right?

Keep spending up at this time, but stop printing Treasury bonds (I guess Chris Sims and others see these as 'money' - so yes stop printing this type of money) instead raise taxation. T-bills and Treasury bonds transact in the same way and are inter-changeble from a cash standpoint just in different directions without the owned claim on future productivity that is transferred with a Treasury bond.

The banks aren't the only, or even the chief, burners of money.

Ordinary people lose bills and coins all the time. But that percentage of the whole is negligible. I am thinking instead of bubbles, bad investments, evaporated pension plans and so on. And then there are the sequestered funds, likes tanks of compressed gas, hidden offshore or kept in untaxed accounts of various sorts.

We call money "liquid," but that term is a bit off. Liquids are not compressible. But gasses now, they can be compressed until they become liquids -- a thousand "gallons" of money in a one gallon jug.

What would cause inflation? Nothing the banks are likely to do. Rather, inflation right now would be caused by the petcock popping off the $4T US money supply bottled up where ordinary people cannot get at it. Not sure what would do that ... but whatever it was, that would have to be done slowly to avoid scary awful bad evil inflation.


Printing has been done before- post WWI Germany and Zimbabwe, among others.

I'm not aware of any "unprinting" ever occurring before. I know that technically it can be done, but I also know that politicians might find the rising rates that follow from making bond sales into an improving economy with rising normal loan demand to be inconvenient. In a fiat currency world the opinion of politicians matter as much as those of economists.

I'm quite concerned about the negative interest rates on reserves that the EU recently changed to negative 20 bps. Money is a store of value as well as a medium of exchange. That function is being perverted by policy.
It is psychologically a very short step for currency holders to begin mistrusting what they hold when the currency fails to perform one of its primary functions.

Gold has a negative carry, but can't be printed. Cash now has a negative carry, and the monetary base is being intentionally expanded. I'm by no means a gold bug, but there is a historical affinity to gold among Europeans. I think that the ECB policy is playing with fire.

The term "printing money" seems to be a bit misleading. I wonder if it wouldn't be easier for people to understand and more accurate if it was said that central banks have an infinite supply of money (they don't need to "print") and that they only lend out a certain amount to match what is needed by the economy, a bit like a rental store for money. On top of that, (except for helicopter money) they only lend it out at market prices, under rather strict conditions asking in return, as collateral, the safest kinds of assets available.

The idea that central banks need to "sell bonds" to absorb the supply of money is also a bit misleading. Really what they are doing is taking back the money after the lending period is over and returning the collateral.

Like a rental store, they usually lend out the money for a limited period of time ( as determined in the repurchase agreement) and all they have to do to reduce the amount of money out there is to let the lending periods defined in the agreements expire and refuse to lend the money out again when the money is returned (or impose harsher conditions like high interest rates to agree to lend it out again).

The QE is meant to influence investors to move money into investments that can deliver high enough returns to outperform inflation, investments such as buying corporate bonds which are basically loans to businesses.Such investment usually results in hiring more workers. What the average person is meant to see is the increase in employment.

Fiscal policy is used to influence average people by means of a payroll tax holiday, sales tax holiday, dated coupon, etc. This policy did work in 1933, but was called raising the price level and giving aid to people in the Chicago Plan of 1933. You can also track how the economy improved in 2009 when the 10 yr bond yield was rising. How much of each method you will need will depend upon where you find yourself economically speaking. The govt borrowing will also reinforce the inflation expectations of the QE.And, yes, the inflation will help debtors and the govt debt going forward, but that's a good thing, because the level of debt needs to go down, but not by making debtors indigent. That won't work.

RichL "Money is a store of value as well as a medium of exchange."

Money is NOT meant to be a store of value except in the short term and between members of an economy. When money starts to be used as a store of value economy wide, in the "aggregate" case, all hell breaks loose.

Money is just paper or electrons, if it accumulates economy wide but the amount of intrinsically valuable stuff or production capacity for this stuff doesn't increase accordingly, the value of this excess idle money becomes an illusion. The stuff that this money is supposed to allow you to buy just doesn't exist.

If money is seen as a store of value better than free market alternatives for a long period of time, then when the average member of society will decide they have saved enough and it is time to retire and spend this money, there won't be enough stuff out there to exchange for the money. Bam: either sudden inflation or very high corrective interest rates.

It's a bit of paradox but keeping inflation low in periods of low interest rates will actually augment the risk of high inflation later.

"Central banks have been printing money and using it to buy bonds."

But here is the catch: The bonds they are buying are issued by the Federal Government.

A monetary circuit is in place. Government spends -> Government sells bonds -> Private economy needs money -> Central Bank buys bonds -> Government sells bonds -> Government spends -> cycle repeats.

Notice that government does not sell all it's bonds at one point in the cycle. Government sells at two points in the cycle. Government would not need to sell bonds at all if the economy was stable.

Now we can ask if this cycle is a cause of inflation? The evidence of the past 6 years in the U.S. (and the evidence from Japan for much longer) is that this process (by itself) does NOT cause inflation. This cycle (by itself) also does not seem to cause additional employment. The cycle is a feature of a steady-state economy with a constantly increasing government debt load.

How about the ratio of base money to bonds? Does this ratio have an impact on inflation? Central Banks can reduce the amount of outstanding bonds by increasing the base money supply. I think the evidence of the past 6 years is that this action (by itself) neither increases inflation nor increases employment. This ratio may influence the ability of banks to lend but that is a different aspect of macro-economic policy.

It's a bit of paradox but keeping inflation low in periods of low interest rates will actually augment the risk of high inflation later.

I believe you will be very interested in learning about this


Beyond those selling their book, and those selling to those with their book, some of this may be magical thinking. The economy was good with mortgages at 6% so we must raise them to 6% to return to a good economy in a case of reverse causality. If what is being done isn't working, well enough anyway, we must try the opposite, an experimental approach to the mysteries, what we believe will make it so.

Nick, please compare what Joe wrote (hist list from 1..5) with my comment about Krugman et al a couple of blog posts ago. In Joe's model, inflation is immoral. The question is whether his assumptions and model are correct.

Joe - this is not to slag you. You have clearly articulated a pov I hear from many smart people who are interested in public affairs.


> Ordinary people lose bills and coins all the time. But that percentage of the whole is negligible. I am thinking instead of bubbles, bad investments, evaporated pension plans and so on. And then there are the sequestered funds, likes tanks of compressed gas, hidden offshore or kept in untaxed accounts of various sorts.

That's misleading, but the common language is misleading here as well. Value is "destroyed" in the popping of a bubble, but money isn't because the thing being bubbled is not itself money. It's especially not the monetary *base*, which is what the central bank controls.

If I purchase, say, a condo on margin and its on-paper value doubles, then I have wealth but not money. I can leverage that wealth into money by selling the condo (exchanging it for someone else's base money) or by taking out a loan with the condo as collateral (creating new M2/M3 money, but not monetary base).

If the condo market crashes, then the value of the unit has fallen but the amount of base money remains the same. In the latter case I may have to default on the loan, but here this is a reduction of the M2/M3 monetary supply as the bank needs to write-off the loan.

But look at the US M2 money stock, and you'll see that the amount of M2 money has increased more or less along a stable trend for 20+ years. The idea that bubble bursts, even ones that spark a major financial crisis, substantially destroy money beyond the extent of the CB to compensate is false.

Suppose one day all the money was hoarded by one American corporate job creator in an offshore bank (not invested in the U.S.)-- what would happen to the M-1 supply? If fiat currency isn't being circulated throughout the U.S. creating economic activity (because the hoarders control the promise of goods and services with their cash holdings), how could the economy exist? Imagine it wasn't paper money (or digital dollars in a computer database)that they hold, but piles of gold. The Fed can't mine gold whenever their paper dollars disappear under someone's mattress, but they can print money.

National and Household Debt - Apples and Oranges

So start by setting aside the bookkeeping at a central bank level, you can recognize that a sovereign can print its currency and give it to someone even without accounting for it in these CB fashions. Once the cash enters into the real economy in fact it enters on to someone's books, at which time, however, I can't see how it can be removed without adjusting the books that keep it in the economy (as an asset, an exchange moment in time, or a accounting-liability).

But I've heard that trillions of cash (US dollar denominated) are held in the underground economy - so it is true that the cash is being removed from economies now at least when seen from the standpoint of being used then as an exchange medium. This removed cash is still seen as wealth by its owner (they may not lawfully reveal this asset/net worth position, but it is definitely real to them).

Economists and political scientists should shift attention to following Net Worth, especially when talking about the US fiat currency that is the hardest 'money' in history (and probably explains why people are moving and will continue to move more of their net worth into dollar denominated things). I think money supply theory is distracting, and not sure it is so important in today's economy where the concept of money velocity is supported by computers and telecom, V is so high it is not measurable. So that is my lay-person's discomfort with these monetarist theories, they seem anachronistic and are too often intentionally used to mislead.

But the thread's start seems correct, currency once in the economy goes on to the books somewhere even when the sovereign does not want it to be on the books, at least if the cash is in the lawful economy. It is lawfully accounted-for then and it can't be removed.

A reading of history can influence people's fears, and we shouldn't set history aside really, but I am hoping that influential economists like Mr. Rowe try to stay balanced and avoid a piling on related to these fears, at least as it relates to the US and perhaps in Canada too (who has the right stuff too, I'd say). Of course, I'd be more scared in other countries. So maybe the blogging about unnatural-inflation should separate one thread for the US, another one for weaker sovereignties (Zimbabwe stories comes to mind), and a third one for the Eurozone. Just make it clear when pushing the blog.

Ok Nick you want the views of noneconomists, I'll give it a try-as much as Sumner has accused me of knowing nothing of economics.

"Would you be really scared of very high future inflation? I would be. Would you be saying that central banks should stop printing so much money, even if it did mean that aggregate demand is too low right now? I think I would be."

Why do you have this preference for low inflation over high growth? It sounds like your preference is the opposite of the Keynesians in the 60s with the crude Phillips Curve where they were willing to trade relatively higher inflation for relatively lower unemployment.

Are you saying that if we had chronic 10% unemployment you'd say stay there rather than have say 6% inflation? What I'm mostly trying to get at is why do you think permanently high unemployment is preferable to permanently higher inflation? You had the other piece you wrote that called out the inflation fallacy so what is it about things like shoe leather costs, etc. that is so dire that makes higher umeployment always preferable to high inflation?

Joe said: "1. Inflation is a tax on everyone (if you're going to tell me that wages are _eventually_ going to keep up, thanks, but no, thanks). Raise your hand who loves paying taxes, please.

2. Inflation is a transfer of payments from savers to spenders (including the state). You owe some money, love inflation by all means, if not, too bad for you."

1) By inflation, I assume you mean price inflation (of goods and services). I am reading that prices are up in Japan, but wages are flat or down. There is a big flaw with NGDP targeting.

2) A worker owes some currency denominated debt. Prices go up. Wages do not. Will that make it harder to service the interest payments and principal payments?

Put it another way Nick, would you agree with Evan Sotlas that it's ok if the US economy overheats a little bit?


Mike: your answer should depend on the slope of the trade-off. If it cost 1% extra inflation to reduce the unemployment rate by 1%, you might say it's worth it. But if it costs 100% extra inflation to reduce the unemployment rate by 1%, you might say it's not worth it.

I don't think it really matters whether most people understand the mechanics of CB action, because CB actions in fractional reserve systems will still have the same effects. Too many people are too worried about inflation, so why doesn't the inflation they expect materialize? After all, a fiat currency has whatever value people assign it, and people expect it to become less valuable. And I'd say it's because the macro worries they express don't show up in the micro world they actually interact with.

In fact I'd argue even if the non-CB bankers themselves (who implement the policy) don't understand it, even that doesn't matter. All they need to know is they have more reserves, so they can lend more. They just have to respond to the bits of information they can see.

Virtually no one knows how to make a pencil from raw materials, but we can still price pencils as long as everyone in the pencil supply chain responds to the bits of information they can see.

So by analogy what we have today is a situation where people keep saying they're really concerned about the quantities of graphite, rubber, and wood being produced, but pricing behavior in the supply chain re pencils doesn't reflect those concerns, and therefore pencil prices are stable.

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