> It's not just the size of Operation Gutt that is striking to the modern eye. It's also the oddity of the tool being used. Today, we control inflation with changes in interest rates, not changes in the quantity of money. To soften the effect of the global COVID monetary overhang, for instance, central banks in the U.S., Canada, and Europe began to raise rates in 2022 from around 0% to 4-5% in 2024.
It's a bit more interesting than 'the central bank sets interest rates'.
Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
What happens next is that they buy and sell government bonds in the open market. The interest rate can be seen as the inverse of the price of bonds.
If the central bank wants to see a lower interest rate, they buy bonds with freshly printed money to drive up their prices, ie drive down the interest rate.
If the central banks wants to increase the prevailing interest rate, they sell government bonds from their inventory and essentially destroy they money they receive in return.
So even when the language of modern central banking talks about interest rates, they still change the quantity of money to implement that.
(This is all simplified, especially with the interest on excess reserves that was popular with the Fed for a while. And there's also repos and reverse repos etc.)
> That's just one mechanism, but not the primary way in which the Fed controls interest rates.
Yes.
> The Fed is a large provider of short-term loans ("fed funds") to cover interbank exchanges.
> It also is the lender of last resort and lends to banks directly ("discount rate").
> By changing these rates, the FED can influence the rates the banks charge each other for loans, and down the line to consumers.
And for those rates to take effect, the Fed still has to actually make (or receive) those loans at the announced rates. They don't just magically announce a rate, and then everyone charges that spontaneously.
So it's still about moving money in and out of circulation.
(Or at least the Fed needs to be ready to make and receive those loans, and anticipation does a lot of heavy lifting..)
For an international perspective: buying and selling government bonds is far from an universal mechanism for interest rate control (AFAIK when discussing central banks the US is almost always a special case)
For instance the Canadian, UK and European central banks provide systems for interbank short-term loans. It is almost entirely through these systems that they set their target rate.
For Canada the BoC doesn't do any open market operations to reach target interest rate (so almost only repos and reverse repos). Their target rate is in fact called the "target overnight rate" and only concerns overnight lending between Canadian financial institutions.
As far as I understand, the central banks intervene in this market by offering to loan or borrow above or below otherwise prevailing market rates. This has the effect of adding money to the system (or removing it). So that's pretty much the same mechanism as what I described.
They use an intermediate proxy like the 'target overnight rate' to help them decide how much money to add or remove to the system: exactly as much as needed to bring the market interest rate in line with their intermediate proxy.
"What happens next is that they buy and sell government bonds in the open market."
This describes how central banks operated in the U.S. before 2008 and in Canada before the 1990s. The Federal Reserve and the Bank of Canada both set a target for the overnight interest rate, and then they hit that target by doing open market purchases (or sales) of bonds, effectively adding funds to (or draining funds away from) the overnight lending market. By changing the quantity of funds, they influenced the interest rate.
What changed is that both central banks introduced interest payments on balances that banks hold at the central bank. Previously, these balances earned 0%. With this new tool, they could directly set the overnight interest rate by adjusting the rate paid on these reserves, eliminating the need for regular open market operations.
Ahh…no. The Fed sets the interest rate directly. What you are talking about is yields on treasury bonds, which are manipulated via bond buying to force money into assets by artificially dropping the yield of those bonds, thus creating a more attractive investment in the stocks, assets, etc.
They were entirely wrong about mechanism of setting the interest rate through the discount and fed funds rate, but this description also isn't comprehensive. The feds buying of treasury bonds isn't just to push them down, but is also a mechanism for increasing the monetary supply through the expansion of the fed's balance sheet. This mechanism for increasing the monetary supply is also why the linked article doesn't appear to be accurate either, as they don't seem to understand that the fed does have the ability to manipulate the monetary supply through its balance sheet.
So which interest rate does the Fed set directly, and how does that setting have any effect on the economy?
(I know they have interest on excess reserves. I already accounted for those in my original comment. I know, they are annoying and misguided. I was mostly talking about the system they used before, ie up until about 2008.)
> Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
I get the simplified qualifier and I see what you’re saying but it’s more accurate to say this is not true, it hasn’t really been substantially true since February 1994.
> What happens next is that they buy and sell government bonds in the open market
Again i feel it’s better to say exactly what happens, not a model or simplification. What happens next is banks move to the new interest rate without any OMO (open market operations) - the announcement effect as it’s called. There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
Yes, expectations and anticipation are very, very important in all markets, and especially financial markets.
But they only work, because the Fed can and will back up its announcements with large transactions at the announced prices and rates.
> There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
You'd hope so, but not all currency issuers are so confident. I remember the Swiss central bank recently giving up on its exchange rate target to the Euro: they let the Swiss Frank appreciate against the Euro in the end, even though they control the printing presses and could always print enough Franks to drive their price down as much as they want to.
We saw similar reluctance to do whatever it takes for Japan since the 1990s and the Fed and the ECB during the 2010s, when they all failed comically to push inflation up to their targets, and came up with various excuses.
(The failure of the Fed is particularly funny, because one of the guys in charge had earlier written a piece telling the Japanese exactly how to get out of their own trap in the 1990s, but then did not practice his own preaching.)
> Today, we control inflation with changes in interest rates, not changes in the quantity of money.
That is also not quite correct, I believe. The FED can invest money created out of thin air any time it wants („fiat money“ — „there shall be money“), usually it buys government bonds to help the federal government run its deficit. Sometimes this scheme is called „quantitative easing“ which is a charming euphemism. This is what drove and still drives inflation directly and indirectly (through the effect of our fractional reserve system private banks amplify this about tenfold by lending out 90% of their customers‘ deposits).
The interest rates everybody is obsessed about are just the target rates for the interest earned or paid for for money in the account of private banks at the FED. It is just a secondary adjustment. At least during major crisis.
>> This is what drove and still drives inflation directly and indirectly
QE is fascinating.
On the one side of QE you have central banks, absolutely baffled by the fact they create all these reserves, we’re talking utterly un-relatable numbers for a human, numbers that belong in the field of astronomy rather than finance. And yet they fail to hit their inflation targets for over a decade.
On the other side you have a bunch of folks shouting loudly this amount of QE will cause ungodly amounts of inflation.
Now they shouted long enough that inflation eventually did show up but it’s not clear that it relates to QE. The onset of inflation correlates more closely with global energy supply shocks than with changes in QE policy or “printing” money in Covid stimulus. However, energy, despite being an input to almost everything we care about, isn’t really considered in the context of inflation by most macroeconomic models. The models are less than helpful in the face of “externalities”.
>> through the effect of our fractional reserve system
We don’t have fractional reserve in the USA, the UK, Aus etc and haven’t had for a number of years at this point.
We don't control inflation with interest rates; we do some economic theatre with interest rates that some people believe controls inflation in a predictable way.
The evidence is very strong that we do actually control it, because in many countries you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band.
It's not a perfect control system because the cost is "NAIRU": non accelerating rate of unemployment. That is, economic growth and wage growth are constrained to avoid a wage-price spiral. And sometimes you get a shock from outside the system.
Correct, it's mostly theater , and people nerding out on the numbers. The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills. The lower this figure, higher is the inflation.
> Simplified: the central bank decide on an interest rate that they want to see.
This is incorrect.
Using the US central bank example, the Fed has a target for inflation. It uses interest rates to try and hit that target. If inflation is higher than 3% the Fed will raise rates to cool the economy.
The Fed sets interest rates directly because lending money to the Fed is viewed as "risk-free" (as the US government has never defaulted on a debt). So if the Fed offers a risk-free 4%, banks will need to offer more because they are not risk-free. So banks no longer really lend savings out for loans. They borrow money and lend it out at a higher rate (eg mortgage-backed securities).
So when you could get a mortgage at 2.5%, it was because the Fed was offering 0%. When the Fed offers 5%, mortgage rates will go up to 7-8%.
There is another mechanism that the government could use to control inflation: fiscal policy, specifically taxation. A criticism of monetary policy to control inflation is that it's indiscriminate. People will go out of business and lose their houses. Taxes only target profits.
So in 2021-2022, we should've just passed a windfall profits tax of 80%. That would've cooled off inflation real quick and given the governments funds to distribute to those most adversely affected. But that will never happen because the corporations and wealthy who own both parties will never stand for wealth redistribution to the poor.
They will however demand wealth be transferred from the government to the rich.
Fascinating piece of financial history I hadn't heard about. Imagine your government telling you to literally take scissors to your money, it's like a weird mix between arts & crafts hour and monetary policy. Though I suppose we're already halfway there with our modern central banks, just without the satisfying snip-snip sounds.
The Finnish experiment failing because people just deposited their cash in banks first is a classic example of Goodhart's Law in action. Or as I like to call it, "If you tell people you're going to cut their money in half, they'll find a way to keep it whole."
What's really interesting is Belgium's more successful approach, they went full scorched earth on 2/3 of their money supply and somehow managed to pull off an economic miracle. Makes our current inflation-fighting tools look rather tame in comparison. "Sorry, best we can do is nudge interest rates up a quarter point at a time.
How about your puppet government colluding with the soviet union to print a new currency in secret and surprising everyone with a currency reform over night:
Turkey dropped six zeroes off their currency in the 2000s.
Technically, you could describe that as cutting 999,9999/1,000,000 of their money supply. (Especially if they had done a funny dance like the Finnish, where you would use some scissors to only keep the tiny top left corner of your old notes, and can exchange that for new ones.)
In practice, people saw the Turkish currency reform as merely a cosmetic change, not an actually reduction in the money supply.
This is one of those measures that hyperinflation countries have to adopt for sanity, re-numbering the money.
The surprising case that worked is the Brazilian "Real": by renaming the currency as well as switching it to semi-controlled exchange rates, inflation was drastically reduced. https://en.wikipedia.org/wiki/Plano_Real
> Combined with all previous currency changes in the country's history, this reform made the new real equal to 2.75 × 1018 (2.75 quintillion) of Brazil's original réis.
Romania dropped several zeros in 2005, so 1,000,000 became 100. As someone who was around at that time, I still tend to think of prices in the old system, which makes me look ridiculous to younger people and even most of my same-age peers.
Albania dropped a single zero way back in the mid-20th century, and yet even generations born long after that still think of prices in the old system. The first time I went to Albania, I was paranoid and made a scene in shops, thinking every shopkeeper was trying to rip me, a foreigner, off by quoting a price an order of magnitude higher. My face was red when someone finally explained how the country works.
>In practice, people saw the Turkish currency reform as merely a cosmetic change, not an actually reduction in the money supply.
Because it is just cosmetic. Governments chronically think they can directly legislate more value into existence. They fail to understand that currency is just an intermediary for trading labor.
Brazil has cut 3 zeroes from the currency many times.
It's actually no big deal if you change the currency name. Cutting the zeroes isn't supposed to have any impact except on making prices easier to write, so you only need to avoid confusion.
> Especially if they had done a funny dance like the Finnish, where you would use some scissors to only keep the tiny top left corner of your old notes, and can exchange that for new ones.
We didn't: we just printed new money, and exchanged it 1 million:1 with the old one.
So it's not quite the same thing but the US government has historically performed a sovereign devaluation of its currency.
I am of course talking about FDR (Executive Order 6102). This made it illegal to own gold. You had to hand it in and get paid at ~$20/oz. After doing this, the US dollar (nominally on the gold standard at the time) was revised to ~$35/oz.
A recent similar example was the Indian move in 2016 to demonetize the ₹500 and ₹1,000 notes with very little notice, which is in retrospect widely viewed to have been a disaster.
I imagine Finland's would be similarly branded a disaster if the present-day internet/social media megaphones had existed..
History books on 1945 aggressive monetary policy change: "The public didn't like it"
History books on 2025 aggressive monetary policy change: "The public went frigging bananas, doxxed their leaders, coordinated widespread disobediance on the scale of GME, etc"
(Granted I live in the US, and that's putting it mildly how the US would react)
Wasn't that contemperaneously viewed to be a disaster?
I have to wonder if there was a unspoken real reason they did it, because it was obvious anybody with lots of demonitized bills would farm out the redemption if necessary, and wikipedia reports 99.3% of notes were redeemed. Maybe the 0.7% was (some of) the black money that was targetted, or maybe that's a normal amount of lost and damage beyond redemption.
Otoh, maybe there was some highly classified but credible advance notice that the crimimal underground was about to start printing credible 500 INR notes en masse.
Mentioning the war on COVID but not the actual war between Russia and Ukraine that caused a huge spike in European energy prices is a big omission, since that caused a lot of global inflation.
Extreme hike in energy prices was about four months before the war began.
It’s when EU decided to abandon long term gas contracts and turned to spot prices (~11.2021).
The war started in 02.2022.
In reality that phase of the war started before. Russia did not improvise this war. They started disrupting the supply in 2021 to ensure that Europe would not fill their strategic reserves / winter storage during the summer, thus insuring maximum leverage when they needed it. This is well documented [1]
Note that this is just talking about this phase of the war. Hostilities started in 2014 when parts of Ukraine "suddenly self-liberated" themselves. Helped by mysterious soldiers in professional but unmarked uniforms.
False. Inflation was mainly caused by the central banks(especially the US FED but also the ECB who followed suit) devalued the currency by over-issuing it during the pandemic, not due to the post pandemic high energy prices which are not that high when you adjust for the crazy Inflation the excessive money printing generated.
In short, they barrowed money in your name with you as a guarantor and now you're paying for it, it's that simple.
The war caused by Russia is just a convenient scapegoat that's easier to sell to the financially illiterate population to deflect the blame. Keep in mind most voters don't understand basic economics and how currency supply affects inflation, but they do understand "Russia dropping bombs = bad".
When 80% of the entire world supply of USD (the world reserve currency that the EU also has to use) was printed during the pandemic, how can anyone say that Russia's war caused the inflation? Do people not know arithmetic anymore?
Money supply increased significantly in 2020 for sure but that's NOT what you're seeing in the M1 graph. M1 was revised to include savings accounts at the same time and this is the major source of the discontinuity:
It would be stupid to discount the effect that artificially limiting energy exports and using it for blackmail before and during the full-blown Russian invasion is naive. IIRC my nat gas prices went up like 10x compared to the previous year.
Combine with the fact that Russia and Ukraine are some of the biggest exporters of many critical raw materials, like importantly, foodstuffs (wheat, sunflower oil, etc), and steel, aluminium, oil, gas. Hell, there was a crisis in availability of mustard and snails in France due to the invasion of Ukraine (and on the mustard, a series of bad harvests in Canada which further complicated things).
We can even clearly see it in the inflation charts, first there was growth in energy inflation towards the end of 2021 (as things were ramping back up from Covid), then a big spike in 2022 due to Russia's invasion, and then over 2022-2023, related spike in other sectors: https://ec.europa.eu/eurostat/statistics-explained/index.php...
To pretend none of this had no impact whatsoever is wilful ignorance.
While I would also lean towards blaming the US Fed, how can you be so confident in precisely what caused inflation?
One of my big issues with economics as a "science" is that they try to boil down massively complex systems into a handful of numbers. When it comes to global economics and geopolitics the system is even more complex. How would we ever be able to say any particular time of inflation was causes by exclusively, or primarily, any one factor?
At best looking at historic data and seeing graphs that move together show correlation, they will never show causation.
> To ensure that interest expense falls toward zero over time, Congress could instruct the U.S. Treasury to stop issuing anything with duration beyond a 3-mo T-bill. Voilà! It wouldn’t just save $2 trillion, it would save tens of trillions of dollars over time.
umm, not sure if her recipe is meant as a joke (I mean the world is rapidly turning into a bad joke anyway so people getting facetious might be a defense mechanism) but eliminating risk-free money for anything beyond 3 months seems like very... short-termist? No idea what kind of volatility that would do to the broader financial / economic system (including e.g. mortgage finance) but somehow it doesn't sound good.
Reducing inflation always results in pain somewhere, pretty much by definition. Wage decreases, job demand reductions, taxes, higher interest rates, etc. Comes down to a decision about where you want to spread the pain and how, and how you weight that against "time to impact".
Unfortunately this compounds misunderstanding of the public because politicians can cause inflation, leave office, then come back to office after saddling the other person with the problem. Fighting inflation rarely results in popularity in the near term.
>Today, we control inflation with changes in interest rates, not changes in the quantity of money.
That's not full truth. In the last 20 yeas central banks do their big and sudden moves using "Open Market Operations". They buy or sell money like assets in market and effectively increase or limit the quantity of money.
Open market operations are the mechanism by which the interest rate is controlled.
Basically, the central bank sets an interest rate target and then performs open market operations until the interest rate matches the target.
That obviously affects the quantity, but the point is that the target is the interest rate. The quantity just ends up being whatever happens to be necessary to hit the interest rate.
The article talks about history of alternatives to the interest rates, mainly controlling the currency supply and how it might be implemented in the future. How you discovered price control as the solution in there is still a mystery to me.
I think they are considering the last part of the article to be "price controls". If the government prevents people from buying certain goods by selectivity freezing certain purchases I'm not sure I'd call that a price controls -- more like a prohibition.
But I could see how this could be done similarly more like a price control. If the control was this granular, then maybe car purchases could be limited to $30,000 instead of blocked fully. This is effectively a price control.
Also - the author notes in the comments the post is a prognostication, not endorsement.
That said, much like the original Finnish plan, I have no idea how you'd implement this without massive loopholes. I'd imagine even if there were merits to the policy it would fail on account of the difficulty in implementation.
I wonder if it is more reasonable if there was equally a carrot to go with the stick - something analogous to the bond portion of the Finish approach.
Yes, the solution he advocates is "we freeze your assets, allot you a certain basket of consumer goods, and take what we consider the appropriate price out of your frozen assets".
If you'd rather describe that as "communism" than "price controls", feel free.
The theme of the whole piece is that, if you don't allow people to pay more for things, then the price of those things won't rise, and that this is some sort of policy victory. It's a very stupid viewpoint; seeing prices fail to rise because you redenominated the currency means nothing. Seeing prices fail to rise because you prohibit that, on the other hand, doesn't mean nothing - instead, it means your economy is collapsing.
Readit News
It's a bit more interesting than 'the central bank sets interest rates'.
Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
What happens next is that they buy and sell government bonds in the open market. The interest rate can be seen as the inverse of the price of bonds.
If the central bank wants to see a lower interest rate, they buy bonds with freshly printed money to drive up their prices, ie drive down the interest rate.
If the central banks wants to increase the prevailing interest rate, they sell government bonds from their inventory and essentially destroy they money they receive in return.
So even when the language of modern central banking talks about interest rates, they still change the quantity of money to implement that.
(This is all simplified, especially with the interest on excess reserves that was popular with the Fed for a while. And there's also repos and reverse repos etc.)
The Fed is a large provider of short-term loans ("fed funds") to cover interbank exchanges.
It also is the lender of last resort and lends to banks directly ("discount rate").
By changing these rates, the FED can influence the rates the banks charge each other for loans, and down the line to consumers.
Yes.
> The Fed is a large provider of short-term loans ("fed funds") to cover interbank exchanges. > It also is the lender of last resort and lends to banks directly ("discount rate"). > By changing these rates, the FED can influence the rates the banks charge each other for loans, and down the line to consumers.
And for those rates to take effect, the Fed still has to actually make (or receive) those loans at the announced rates. They don't just magically announce a rate, and then everyone charges that spontaneously.
So it's still about moving money in and out of circulation.
(Or at least the Fed needs to be ready to make and receive those loans, and anticipation does a lot of heavy lifting..)
For instance the Canadian, UK and European central banks provide systems for interbank short-term loans. It is almost entirely through these systems that they set their target rate.
For Canada the BoC doesn't do any open market operations to reach target interest rate (so almost only repos and reverse repos). Their target rate is in fact called the "target overnight rate" and only concerns overnight lending between Canadian financial institutions.
As far as I understand, the central banks intervene in this market by offering to loan or borrow above or below otherwise prevailing market rates. This has the effect of adding money to the system (or removing it). So that's pretty much the same mechanism as what I described.
They use an intermediate proxy like the 'target overnight rate' to help them decide how much money to add or remove to the system: exactly as much as needed to bring the market interest rate in line with their intermediate proxy.
This describes how central banks operated in the U.S. before 2008 and in Canada before the 1990s. The Federal Reserve and the Bank of Canada both set a target for the overnight interest rate, and then they hit that target by doing open market purchases (or sales) of bonds, effectively adding funds to (or draining funds away from) the overnight lending market. By changing the quantity of funds, they influenced the interest rate.
What changed is that both central banks introduced interest payments on balances that banks hold at the central bank. Previously, these balances earned 0%. With this new tool, they could directly set the overnight interest rate by adjusting the rate paid on these reserves, eliminating the need for regular open market operations.
https://www.newyorkfed.org/markets/domestic-market-operation...
https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
> The Fed sets the interest rate directly.
So which interest rate does the Fed set directly, and how does that setting have any effect on the economy?
(I know they have interest on excess reserves. I already accounted for those in my original comment. I know, they are annoying and misguided. I was mostly talking about the system they used before, ie up until about 2008.)
I get the simplified qualifier and I see what you’re saying but it’s more accurate to say this is not true, it hasn’t really been substantially true since February 1994.
> What happens next is that they buy and sell government bonds in the open market
Again i feel it’s better to say exactly what happens, not a model or simplification. What happens next is banks move to the new interest rate without any OMO (open market operations) - the announcement effect as it’s called. There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
Citation needed to support my statements above: https://www.newyorkfed.org/medialibrary/media/research/epr/0...
But they only work, because the Fed can and will back up its announcements with large transactions at the announced prices and rates.
> There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
You'd hope so, but not all currency issuers are so confident. I remember the Swiss central bank recently giving up on its exchange rate target to the Euro: they let the Swiss Frank appreciate against the Euro in the end, even though they control the printing presses and could always print enough Franks to drive their price down as much as they want to.
We saw similar reluctance to do whatever it takes for Japan since the 1990s and the Fed and the ECB during the 2010s, when they all failed comically to push inflation up to their targets, and came up with various excuses.
(The failure of the Fed is particularly funny, because one of the guys in charge had earlier written a piece telling the Japanese exactly how to get out of their own trap in the 1990s, but then did not practice his own preaching.)
That is also not quite correct, I believe. The FED can invest money created out of thin air any time it wants („fiat money“ — „there shall be money“), usually it buys government bonds to help the federal government run its deficit. Sometimes this scheme is called „quantitative easing“ which is a charming euphemism. This is what drove and still drives inflation directly and indirectly (through the effect of our fractional reserve system private banks amplify this about tenfold by lending out 90% of their customers‘ deposits).
The interest rates everybody is obsessed about are just the target rates for the interest earned or paid for for money in the account of private banks at the FED. It is just a secondary adjustment. At least during major crisis.
QE is fascinating.
On the one side of QE you have central banks, absolutely baffled by the fact they create all these reserves, we’re talking utterly un-relatable numbers for a human, numbers that belong in the field of astronomy rather than finance. And yet they fail to hit their inflation targets for over a decade.
On the other side you have a bunch of folks shouting loudly this amount of QE will cause ungodly amounts of inflation.
Now they shouted long enough that inflation eventually did show up but it’s not clear that it relates to QE. The onset of inflation correlates more closely with global energy supply shocks than with changes in QE policy or “printing” money in Covid stimulus. However, energy, despite being an input to almost everything we care about, isn’t really considered in the context of inflation by most macroeconomic models. The models are less than helpful in the face of “externalities”.
>> through the effect of our fractional reserve system
We don’t have fractional reserve in the USA, the UK, Aus etc and haven’t had for a number of years at this point.
It's not a perfect control system because the cost is "NAIRU": non accelerating rate of unemployment. That is, economic growth and wage growth are constrained to avoid a wage-price spiral. And sometimes you get a shock from outside the system.
This is incorrect.
Using the US central bank example, the Fed has a target for inflation. It uses interest rates to try and hit that target. If inflation is higher than 3% the Fed will raise rates to cool the economy.
The Fed sets interest rates directly because lending money to the Fed is viewed as "risk-free" (as the US government has never defaulted on a debt). So if the Fed offers a risk-free 4%, banks will need to offer more because they are not risk-free. So banks no longer really lend savings out for loans. They borrow money and lend it out at a higher rate (eg mortgage-backed securities).
So when you could get a mortgage at 2.5%, it was because the Fed was offering 0%. When the Fed offers 5%, mortgage rates will go up to 7-8%.
There is another mechanism that the government could use to control inflation: fiscal policy, specifically taxation. A criticism of monetary policy to control inflation is that it's indiscriminate. People will go out of business and lose their houses. Taxes only target profits.
So in 2021-2022, we should've just passed a windfall profits tax of 80%. That would've cooled off inflation real quick and given the governments funds to distribute to those most adversely affected. But that will never happen because the corporations and wealthy who own both parties will never stand for wealth redistribution to the poor.
They will however demand wealth be transferred from the government to the rich.
Deleted Comment
The Finnish experiment failing because people just deposited their cash in banks first is a classic example of Goodhart's Law in action. Or as I like to call it, "If you tell people you're going to cut their money in half, they'll find a way to keep it whole."
What's really interesting is Belgium's more successful approach, they went full scorched earth on 2/3 of their money supply and somehow managed to pull off an economic miracle. Makes our current inflation-fighting tools look rather tame in comparison. "Sorry, best we can do is nudge interest rates up a quarter point at a time.
https://en.wikipedia.org/wiki/Gold_Reserve_Act
https://english.radio.cz/when-savings-were-lost-and-dreams-s...
Woah.
Technically, you could describe that as cutting 999,9999/1,000,000 of their money supply. (Especially if they had done a funny dance like the Finnish, where you would use some scissors to only keep the tiny top left corner of your old notes, and can exchange that for new ones.)
In practice, people saw the Turkish currency reform as merely a cosmetic change, not an actually reduction in the money supply.
See https://en.wikipedia.org/wiki/Revaluation_of_the_Turkish_lir...
The surprising case that worked is the Brazilian "Real": by renaming the currency as well as switching it to semi-controlled exchange rates, inflation was drastically reduced. https://en.wikipedia.org/wiki/Plano_Real
> Combined with all previous currency changes in the country's history, this reform made the new real equal to 2.75 × 1018 (2.75 quintillion) of Brazil's original réis.
(!)
Albania dropped a single zero way back in the mid-20th century, and yet even generations born long after that still think of prices in the old system. The first time I went to Albania, I was paranoid and made a scene in shops, thinking every shopkeeper was trying to rip me, a foreigner, off by quoting a price an order of magnitude higher. My face was red when someone finally explained how the country works.
Because it is just cosmetic. Governments chronically think they can directly legislate more value into existence. They fail to understand that currency is just an intermediary for trading labor.
It's actually no big deal if you change the currency name. Cutting the zeroes isn't supposed to have any impact except on making prices easier to write, so you only need to avoid confusion.
In 1963 Finland also ended up shifting markka to the right by two, so that the old markka became the new penni (1/100 markka).
We didn't: we just printed new money, and exchanged it 1 million:1 with the old one.
I am of course talking about FDR (Executive Order 6102). This made it illegal to own gold. You had to hand it in and get paid at ~$20/oz. After doing this, the US dollar (nominally on the gold standard at the time) was revised to ~$35/oz.
https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetis...
But it turns out that tons of people in rural India had their life savings under mattresses in large denomination bills...
History books on 1945 aggressive monetary policy change: "The public didn't like it"
History books on 2025 aggressive monetary policy change: "The public went frigging bananas, doxxed their leaders, coordinated widespread disobediance on the scale of GME, etc"
(Granted I live in the US, and that's putting it mildly how the US would react)
I have to wonder if there was a unspoken real reason they did it, because it was obvious anybody with lots of demonitized bills would farm out the redemption if necessary, and wikipedia reports 99.3% of notes were redeemed. Maybe the 0.7% was (some of) the black money that was targetted, or maybe that's a normal amount of lost and damage beyond redemption.
Otoh, maybe there was some highly classified but credible advance notice that the crimimal underground was about to start printing credible 500 INR notes en masse.
In reality that phase of the war started before. Russia did not improvise this war. They started disrupting the supply in 2021 to ensure that Europe would not fill their strategic reserves / winter storage during the summer, thus insuring maximum leverage when they needed it. This is well documented [1]
Note that this is just talking about this phase of the war. Hostilities started in 2014 when parts of Ukraine "suddenly self-liberated" themselves. Helped by mysterious soldiers in professional but unmarked uniforms.
[1] https://www.banque-france.fr/en/publications-and-statistics/...
But you are right otherwise.
Dead Comment
In short, they barrowed money in your name with you as a guarantor and now you're paying for it, it's that simple.
The war caused by Russia is just a convenient scapegoat that's easier to sell to the financially illiterate population to deflect the blame. Keep in mind most voters don't understand basic economics and how currency supply affects inflation, but they do understand "Russia dropping bombs = bad".
When 80% of the entire world supply of USD (the world reserve currency that the EU also has to use) was printed during the pandemic, how can anyone say that Russia's war caused the inflation? Do people not know arithmetic anymore?
https://fred.stlouisfed.org/series/M1SL
https://fredblog.stlouisfed.org/2021/05/savings-are-now-more...
M2 captures the pandemic influx better and is significantly less dramatic: https://fred.stlouisfed.org/series/WM2NS
Check the price of Russian gas before and after the invasion, and the resulting price of electricity: https://ec.europa.eu/eurostat/statistics-explained/index.php...
Combine with the fact that Russia and Ukraine are some of the biggest exporters of many critical raw materials, like importantly, foodstuffs (wheat, sunflower oil, etc), and steel, aluminium, oil, gas. Hell, there was a crisis in availability of mustard and snails in France due to the invasion of Ukraine (and on the mustard, a series of bad harvests in Canada which further complicated things).
We can even clearly see it in the inflation charts, first there was growth in energy inflation towards the end of 2021 (as things were ramping back up from Covid), then a big spike in 2022 due to Russia's invasion, and then over 2022-2023, related spike in other sectors: https://ec.europa.eu/eurostat/statistics-explained/index.php...
To pretend none of this had no impact whatsoever is wilful ignorance.
One of my big issues with economics as a "science" is that they try to boil down massively complex systems into a handful of numbers. When it comes to global economics and geopolitics the system is even more complex. How would we ever be able to say any particular time of inflation was causes by exclusively, or primarily, any one factor?
At best looking at historic data and seeing graphs that move together show correlation, they will never show causation.
They never knew it.
https://stephaniekelton.substack.com/p/how-to-cut-2-trillion...
umm, not sure if her recipe is meant as a joke (I mean the world is rapidly turning into a bad joke anyway so people getting facetious might be a defense mechanism) but eliminating risk-free money for anything beyond 3 months seems like very... short-termist? No idea what kind of volatility that would do to the broader financial / economic system (including e.g. mortgage finance) but somehow it doesn't sound good.
Unfortunately this compounds misunderstanding of the public because politicians can cause inflation, leave office, then come back to office after saddling the other person with the problem. Fighting inflation rarely results in popularity in the near term.
That's not full truth. In the last 20 yeas central banks do their big and sudden moves using "Open Market Operations". They buy or sell money like assets in market and effectively increase or limit the quantity of money.
Basically, the central bank sets an interest rate target and then performs open market operations until the interest rate matches the target.
That obviously affects the quantity, but the point is that the target is the interest rate. The quantity just ends up being whatever happens to be necessary to hit the interest rate.
When you reduce the volume of assets available, or the price renting the asset, you increase it's value. In this case the asset is money.
Market interest rate is a signal how effective the action is long before inflation statistics is available.
However the rise of repo markets has rendered the money=medium of exchange, bond=store of value belief pretty much redundant. Rehypothecation more so.
Banks are liquidity providers. If they think they can make a turn they'll discount any asset into money for you.
This is a fundamental misunderstanding of why inflation is viewed as bad.
But I could see how this could be done similarly more like a price control. If the control was this granular, then maybe car purchases could be limited to $30,000 instead of blocked fully. This is effectively a price control.
Also - the author notes in the comments the post is a prognostication, not endorsement.
That said, much like the original Finnish plan, I have no idea how you'd implement this without massive loopholes. I'd imagine even if there were merits to the policy it would fail on account of the difficulty in implementation.
I wonder if it is more reasonable if there was equally a carrot to go with the stick - something analogous to the bond portion of the Finish approach.
If you'd rather describe that as "communism" than "price controls", feel free.
The theme of the whole piece is that, if you don't allow people to pay more for things, then the price of those things won't rise, and that this is some sort of policy victory. It's a very stupid viewpoint; seeing prices fail to rise because you redenominated the currency means nothing. Seeing prices fail to rise because you prohibit that, on the other hand, doesn't mean nothing - instead, it means your economy is collapsing.