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Interest rates and Money Supply...Print your way into prosperity??

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henrikk
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Post: #1
Interest rates and Money Supply...Print your way into prosperity??

I have noticed that, logically, increasing my country's money supply and decreasing the interest rates are good for the economy, as well as lowering taxes, of course.

I'd like to know, where do you think the limit is??
I've personally thought that an inflation of 3% is the maximum desirable inflation, and if it's lower than 2%, then more money should be printed.
On the other hand, inflation should ofc be lower than economic growth, or equal.

In the case of interest rates, I know that low ones stimulate spending, as well as lower my debt, but what is the down-side to very low interests??? In real life, it would mean borrowing to "anyone", and thus a crisis as in the United States, a bubble, but what would happen in the game?

Also, there's contrasting points of view;
-One fellow said printing money was good... his country was doing great economically!!
-Other one said that printed money should not greatly exceed GDP!

Oh, also, lets not forget that printing more of your money will depreciate your currency and make an export driven economy... is this good... what do you think??

05.12.2010 08:04
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Helsworth
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Post: #2
RE: Interest rates and Money Supply...Print your way into prosperity??

You can go as fars as you like, depends how much your currency will depreciate, if it will depreciate.
As for real life, the bad thing about having a low interest on overnight credit, is that it creates consumption credit booms, and that never is good, especially if those credits aren't invested in something real/productive and especially if the jobs security during that cycle is unstable.
In real life if I was the head of the treasury and the national bank I would run a two tier reference interest. A tier of 4-5-6% for overnight credit, and a special tier for productive projects in agriculture, infrastructure, industry and energy, at a low fixed 1-1,5-2-2,5%.


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05.12.2010 08:29
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RichardAWilson
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Post: #3
RE: Interest rates and Money Supply...Print your way into prosperity??

I believe consumer price-inflation above around 5% can be dangerous, as it leads to higher inflation-expectations. Inflation in and of itself isn’t a problem until it leads to higher inflation-expectations, with the expectations beginning to drive the actual inflation-rate. That, my friends, is called the nature of cause-and-effect. It should be remembered that the stagflation of the 1970s had more to do with inflation-expectations than it had to do with the underlying credit-conditions. Even the Great-Recession of 1982, which was caused by a tight-cash approach, still didn’t cure the inflation-dragon, whereas consumer price-inflation was minimal between 1997 and 2000 when credit-conditions were generous.

I have an inflation-problem in the American-Dream and I’m fixing to have to go Paul-Volker on inflation, which is probably going to induce a recession. As for “printing my way to prosperity,” I believe historical-evidence illustrates that liberal monetary policies, of a Keynesian-style, can stimulate the economy and create jobs. The Japanese, Chinese, Korean and Taiwanese “miracles” have been financed with cheap and devalued cash that have enabled strong and booming export-driven economies. It should be remembered that Nazi-Germany was the first economy to recover from the Great-Depression, as it was the first industrial-power to abandon the Gold-Standard. China and Imperial Japan avoided the Depression because neither of them maintained the Gold-Standard, as they maintained the much more flexible Silver-Standard. Even the Federal-Reserve has identified the connections and correlations between the Great-Depression and the Gold-Standard.

http://www.federalreserve.gov/boarddocs/...efault.htm

I agree with a two-tier interest-rate policy that favors investments over short-sighted consumption. I believe John Maynard Keynes referenced such an approach in the Treatise on Money where he advocated lower interest rates and pro-growth monetary-policies as a means of stimulating capital-investments. As for the Austrian-theory of booms and crashes, a.k.a. Austrian business-cycle theory, it’s true that monetary-authorities can induce financial-bubbles through monetary-expansion. Southeast Asia’s “miracles,” which were financed with cheap-cash, did lead to an Asian Financial Crisis. However, it didn’t take long for Asia’s financial-system to restructure and consolidate following the crisis, as those governments embraced free-market reforms and structural-adjustments.

05.12.2010 15:45
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henrikk
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Post: #4
RE: Interest rates and Money Supply...Print your way into prosperity??

Helsworth Wrote:
You can go as fars as you like, depends how much your currency will depreciate, if it will depreciate.
As for real life, the bad thing about having a low interest on overnight credit, is that it creates consumption credit booms, and that never is good, especially if those credits aren't invested in something real/productive and especially if the jobs security during that cycle is unstable.
In real life if I was the head of the treasury and the national bank I would run a two tier reference interest. A tier of 4-5-6% for overnight credit, and a special tier for productive projects in agriculture, infrastructure, industry and energy, at a low fixed 1-1,5-2-2,5%.

Sure, I agree, different interest rates for different things.

Yes, I know that people buying what they can't afford is the problem... or maybe better worded, loans to people who shouldn't have them. What do you mean by "job security"... would the unemployment level be a measure of this?

My way of preventing excessive consumption are high Excise taxes... and now, I'm also raising Capital taxes. Thus, a low interest rate (e.g. 2%) wouldn't in my opinion lead to excessive credit, since the investors / consumers wanting it would be taxed high on their consumption / investment. However, acquisition taxes are relatively low, to compensate for this.

I'm also not taking tackling debt so seriously... if my economy stagnates I'll just print more money lol, or do what I believe you do, and raise government spending Smile


RichardAWilson Wrote:
I believe consumer price-inflation above around 5% can be dangerous, as it leads to higher inflation-expectations. Inflation in and of itself isn’t a problem until it leads to higher inflation-expectations, with the expectations beginning to drive the actual inflation-rate. That, my friends, is called the nature of cause-and-effect. It should be remembered that the stagflation of the 1970s had more to do with inflation-expectations than it had to do with the underlying credit-conditions. Even the Great-Recession of 1982, which was caused by a tight-cash approach, still didn’t cure the inflation-dragon, whereas consumer price-inflation was minimal between 1997 and 2000 when credit-conditions were generous.

I have an inflation-problem in the American-Dream and I’m fixing to have to go Paul-Volker on inflation, which is probably going to induce a recession. As for “printing my way to prosperity,” I believe historical-evidence illustrates that liberal monetary policies, of a Keynesian-style, can stimulate the economy and create jobs. The Japanese, Chinese, Korean and Taiwanese “miracles” have been financed with cheap and devalued cash that have enabled strong and booming export-driven economies. It should be remembered that Nazi-Germany was the first economy to recover from the Great-Depression, as it was the first industrial-power to abandon the Gold-Standard. China and Imperial Japan avoided the Depression because neither of them maintained the Gold-Standard, as they maintained the much more flexible Silver-Standard. Even the Federal-Reserve has identified the connections and correlations between the Great-Depression and the Gold-Standard.

http://www.federalreserve.gov/boarddocs/...efault.htm

I agree with a two-tier interest-rate policy that favors investments over short-sighted consumption. I believe John Maynard Keynes referenced such an approach in the Treatise on Money where he advocated lower interest rates and pro-growth monetary-policies as a means of stimulating capital-investments. As for the Austrian-theory of booms and crashes, a.k.a. Austrian business-cycle theory, it’s true that monetary-authorities can induce financial-bubbles through monetary-expansion. Southeast Asia’s “miracles,” which were financed with cheap-cash, did lead to an Asian Financial Crisis. However, it didn’t take long for Asia’s financial-system to restructure and consolidate following the crisis, as those governments embraced free-market reforms and structural-adjustments.


Thank you Richard for a very elaborate reply! Your explanations were interesting, but made your points seem much more complex than what they are Tongue

Yes, I currently have a very export-driven economy. In order to avoid excessive consumption, I have relatively high excise taxes, but low acquisition taxes to lower that dmn unemployment!! I will keep "printing" to devalue my currency and stimulate the economy, but I have also an "acceptable" level of economic growth... when it gets "too high", more than 3%, then I will also increase taxes and not cut spending so much = tackle my debt, in other words.

I believe that government spending to stimulate the economy is a great tool -it saved mine! But if the economy is doing well the debt has to be paid off...

18.12.2010 08:42
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Usu
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Post: #5
RE: Interest rates and Money Supply...Print your way into prosperity??

The average interest rate has to be lower than the growth rate. Otherwise the financial market would leech the money out of the real economy. But financial "products" create no clear wealth. They just redistribute money.


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18.12.2010 18:31
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Heenriik
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Post: #6
RE: Interest rates and Money Supply...Print your way into prosperity??

My economy is doing great, but my people are unhappy?? Surprised I thought the problem is the high living costs (due to inflation, which is a byproduct of "printing money" for economic growth); my states living costs are higher than average, but the net income is the same.

Any ideas for solutions?? I thought that maybe lower excise taxes would lower living costs, as well as cause a higher domestic demand... on the other hand, I could lower acq. taxes so that they get to keep more of their salaries. Which one?

A clear problem is my low pensions and unemployment benefits... I was ignoring the high living costs when setting them up!!

14.01.2011 01:42
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ccosta
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Post: #7
RE: Interest rates and Money Supply...Print your way into prosperity??

Heenriik Wrote:
My economy is doing great, but my people are unhappy?? Surprised I thought the problem is the high living costs (due to inflation, which is a byproduct of "printing money" for economic growth); my states living costs are higher than average, but the net income is the same.

Any ideas for solutions?? I thought that maybe lower excise taxes would lower living costs, as well as cause a higher domestic demand... on the other hand, I could lower acq. taxes so that they get to keep more of their salaries. Which one?

A clear problem is my low pensions and unemployment benefits... I was ignoring the high living costs when setting them up!!


Your people are unhappy because you occasionally make unpopular decisions on tasks. It happens to everyone, learn from it and reference your previous decisions when you make your next state.

As far as your budget, I would suggest cutting capital tax rates by the max every year, you can afford it with your surplus, cutting your interest by the max, as the current interest (oddly) effects interest on debt retroactively, holding off on money supply increases until you approach 6% growth per year or approach GDP and money supply being nearly equal, freeze justice and increase welfare to cost of living to reduce crime. Freeze everything else unless you feel it is absolutely neccesary.

When you get the naturalization option if you allready havent, give all immigrants citizenship to win popularity and influence and be able to adjust the budget more drastically. Do the admin reform at least, and consider other reforms such as a tax reform. Do this on a quarter where you have shitty tasks, sit them all out and do a reform.

FYI I don't agree with all these options in real life, they are just what I believe from my experience will help your state in game. Good luck and feel free to PM me with any questions.

15.01.2011 20:53
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VincentNikolai
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Post: #8
Exclamation  RE: Interest rates and Money Supply...Print your way into prosperity??

I've actually been having problems in my Columbia template because welllll frankly in the long-term idgaf about how my economy grows in the short term, but I do know inflation is too damn high in that template with how you start off. So I start by using the recession I got plunged into and instead of fighting the tide I went with it. I used it as an instrument to reduce inflation, my economy is lower than average as you will see, but my inflation has dropped far more compared to how my yearly economy growth has dropped. I see the big trap in the Columbia template with A) getting yourself into major debt and B) inflating your economy to prosperity.

It's a bad move to do that because once the debt gets too high in that template with even higher inflation than you start off with the joblessness is going to soar, your country will be a cess pit of death and corporations dodging that bubble burst. It's hard to be savvy here because damn it it's depressing seeing your economy recede even when you know you could easily pull that thing out of the gutter. Sad Still it does depend on your template's situation.

You can't just "print your way to prosperity" because there are situations in which you don't want to print but also don't want to take away from a population that is already low on cash. You drive your economy with exports in this situation with higher than average interests while keeping your deflation tactics from ravaging the economy. Basically, induce a depression if you have to so that you have room to grow! You never want inflation higher than economy growth, that's a real rule of thumb.

In the USA template (I went through it three times with two times taking slight turns in monetary policy) you want to inflate the economy while keeping your economy growth steady with that inflation and driving up exports through low acquisition (job creation). As for increasing welfare to reduce crime.... Dude try doing that in a country where it will bust your budget. Sometimes there's just no room to stop oncoming waves, you have to flow with them, and keep your eye on the long-term. I personally follow this motto: The population comes first, even when they think they don't. Wink

Oh yeah and debt management? It's a pretty side project once you have your financial house in order. I've learned how to apply a few things in Ars-Regendi. Like.... How would you go about reaganomics without that ugly little side effect of unstable jobs? Better yet, how do you use inflation to your advantage? The one I've really had to get down; at what pace should I increase government spending? (If at all)

The gist of this post? Keep your economy growth higher than inflation, inflating your economy to prosperity AND making big debts will bring a bust you can't handle, and make sure to know how you will contain deflation so it doesn't ravage your economy.

Helsworth let's wait until 2011 before we start counting points in our competition. Wink


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The Prince- A dedication and political maneuver by Niccolo Machiavelli to prove his advice's value to the maintenance of the ruling Florentine Medici Political force.

This post was last modified: 16.01.2011 03:38 by VincentNikolai.

16.01.2011 03:31
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Helsworth
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Post: #9
RE: Interest rates and Money Supply...Print your way into prosperity??

Well Vince I'm not happy at all about the template's mechanics. The real big cycle maker and breaker is consumption. Frankly I think that the effects are too dramatic. I mean how the hell do I get a 14%+ economic growth in one quarter witha 7,35% savings rate and then the next quarter witha 7% savings rate I get -14% economic growth. Also economic growth is not even correlated with reducing unemployment. Last quarter when I had +14% growth my unemployment went up. I also went through a depression and got out pretty good. Must be the damn Cali drug lords who scheme against me and the country Hehe don't really know.
I mean if I were to balance out the MS with the GDP it would shrink like hell, causing a gigantic wave of inflation and more people would starve to death. I mean it's pretty unhappy for me to see almost 1000 people die in one quarter, my country would have to be a target for drastic humanitarian aid...
So Vince with your approval I'd like to renounce the Columbia challenge "contest"... I mean it kills all your motivation to run it.


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16.01.2011 08:43
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VincentNikolai
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Post: #10
RE: Interest rates and Money Supply...Print your way into prosperity??

Hehe Truth is since we were in a contest I didn't want to say anything but.... Your economy was bound to drop like a rock. You took the golden apple my man. The trick to this template (and frankly all of South America) is long-term growth with deflation in prices. You can't have currencies touching the floor without it even serving as an export fuel. It's pointless. The temptation is to drive up inflation (it'll cause wild mood swings for the economy as you're describing) and drive up the economy in consequences (which is what many economic policies would advocate).

I'm going to make this statement. Watch Viciana. I will get the infrastructure indexes to 100% and drop unemployment to 8% or less. It will be grueling but watch. This isn't an overnight project but it will be done.

Also notice my welfare and pensions aren't high but not so many people starve to death as in your state where you tried to solve that problem through government aid... Not the path to go. Stabilization of inflation is number 1 in this template bro.

I'd actually like to see someone fully play out that inflating the Columbia economy path... Just so I can have a long-term proof of concept. Not suggesting you do it, that would be basically purposely sabotaging a state and your record as a regent.


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The Prince- A dedication and political maneuver by Niccolo Machiavelli to prove his advice's value to the maintenance of the ruling Florentine Medici Political force.
16.01.2011 09:16
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