> 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.)
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.
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.)
The Fed directly sets the Overnight Rate, also known as the Federal Funds Rate. It's the rate at which banks can borrow from one another overnight to satisfy reserve requirements. This rate indirectly affects the interest rate of all other lending instruments because the higher cost of overnight bank to bank lending is passed on to the customers in the form of higher loan rates, credit card rates, mortgage rates, etc.
The Open Market Operations you described (completely different from the Overnight Rate) are a form of stimulus. Because money always seeks higher risk-adjusted returns, the Fed will buy treasuries, which drives down their yield. This makes them an unattractive investment, so the money goes where it can get a better risk-adjusted return. That's usually in the market. So by adjusting treasury note yields, they can stimulate the economy. Furthermore, those treasury bonds are bought with printed money, so this is effectively a way to inject massive amounts (trillions of dollars) of printed money directly into the economy. It's pretty crazy when you think about the power that these policies have.
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.
Please do show this very strong evidence that the effect is any more than the supply chains sorting themselves out. Even some within the CBs are doubting the causality.
Japan had the lowest inflation of any major economy post COVID, and yet persisted with essentially a ZIRP. There's a good argument that in our high reserves world, interest is actually inflationary.
(my original comment: "you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band".
Now show the UK plot for the 2010s. Also, show the one for Japan. It's easy to cherry pick data to show whatever you want. It doesn't constitute strong data for a casual and reliable link between interest rates and inflation.
Plot the days when your air conditioner is on with the temperature of your room. It will have many concrete examples and a long-term correlation showing that actually, the air conditioner is associated with the temperature going up.
It very rapidly hit the bottom end of the prediction range before jumping up again pretty high. All that time interest rates were held constant and low.
Given they claim feedback lags of two years or so, one wonders what the point of all this is... (one cannot run a control loop with control lags substantially longer than the time constant of the system; that's basically the recipe for an unstable control system, assuming of course the control system is doing anything).
It will probably work out just fine as they become a key player in European LNG.
Turkey couldn’t have serviced their debt with rising interest rates and continued government spending on expansion.
Being inflation averse makes sense when you can’t reasonably make use of funds. It’s not clear how much of that is actually related to the business cycle and how much is related to MMT, regardless of what adherents would have you believe.
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.
>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.
This rapidly falls apart when you try to actually calculate it. Whose income do you use? Is inflation lower for doctors than burger flippers? What do you use as the retirement age? Does inflation go down if the retirement age is raised? What counts as "survive"? Does that mean the price of smartphones don't count toward inflation because you can theoretically survive without them?
Unless I miss something, it's very much not a standard measure of inflation. That said, leaning on that "at all": If wages are stickier than expenses, then the gap between wages and expenses will represent recent inflation to some degree.
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.
Renaming didnt drastically reduce inflation. If it were that easy everybody would do it. It just allowed the government to reduce inflationary expectations while they did the legwork of throttling spending, etc.
If they hadnt done the legwork to reduce inflationary pressures this parlor trick would not have worked.
And, arguably, if they hadnt done it at all, inflation would still have gone down simply by reducing the inflationary pressures.
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.
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.
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)
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.
Nobody has sabotaged European energy security more than European governments. The divestment from nuclear and reliance on LNG was an obvious disaster in the making. Taiwan has made a similar blunder and will pay the price at the next whiff of geopolitical instability.
Yes. I was surprised to find out that Russia had been conducted sabotage operations against UA artillery ammunitions dumps for many years prior to full scale invasion, and the Ukrainians had already lost the majority of their artillery ammunition reserves this way by the time invasion began.
And they conquered Crimea in 2014--partially, if I remember right, to get a port that doesn't freeze over in the winter, something they have wanted for literally hundreds of years.
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.
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.
That goes both directions, though. Central banks are prone to understating their responsibility for bad things; the gold bugs and crypto hodl folks are prone to overstating it.
The answer likely lies somewhere in the middle. The US's relatively soft landing post-pandemic seems to demonstrate some use of monetary policy in this fashion works.
Of course they'd say that. Did you expect them to just say "yeah, we fucked you over by devaluing the currency causing your wages to be worthless"?. Don't be naive please and look into how much currency was issued during the pandemic and see for yourself.
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.
Bruh, 80% of all USD in existence was issued during the pandemic alone. How the hell can you tell me with a straight face that that didn't cause the inflation? I feel like I'm taking crazy pills.
Read the notes in the link you posted. I don’t think it says what you think it says.
In May 2020, the definition of M1 (monetary supply in “cash”) was changed to include savings deposits. They changed this not due to some conspiracy, but because savings accounts were deregulated to remove withdrawal limits, effectively rendering them cash-equivalent, and thus necessary to include in M1 metrics.
I.e. the 80% spike has nothing to do with money being printed.
Bad faith argument again, or at least terrible tunnel vision.
So what? In the EU a lot of that money went into the Recovery fund, which released the funds in multiple steps (only the first one was in 2021), and a lot of it is still remaining in the fund.
How do you explain the massive inflation in the EU then?
And are you seriously that centred on "money printing" that you cannot imagine gas and oil prices raising multiple times, and the disappearance of multiple critical raw material suppliers, had _no impact whatsoever_?
I'm not saying this because they're disagreeing with me. Inflation is probably one of the most talked about topics of the past few years, I find it impossible that people haven't heard about the multi-layered complexity of it, and thus anyone blaming it purely on "money printing" has to be acting in bad faith.
High energy prices cause high transportation and manufacturing costs which causes everything else to rise.
But the main cause of inflation is printing of money, especially when you introduce such a large amount in such a short time.
People used to know that, they either pretend it's not true now or they're ignorant.
And yes the "bad faith" parrot line is really annoying and doesn't contribute to the conversation. It's what people say when they don't have a rebuttal.
> It's what people say when they don't have a rebuttal
Only I have a rebuttal, and came with receipts from Eurostat. So what exactly are you trying to argue?
> But the main cause of inflation is printing of money, especially when you introduce such a large amount in such a short time.
The original premise (which is still in bad faith, however much you dislike that part) was that money printing was the main cause. And this is fundamentally and provably wrong (check my comment upthread, Eurostat inflation per sector with the timeline). Inflation was kickstarted by energy inflation which coincides with the Russian invasion.
Did money printing contribute? Of course. Did Russia's invasion of Ukraine and all the issues it brought in energy prices and food prices? Of course. Did the Houthis contribute with their attacks disturbing supply chains? Probably. Did Covid contribute with all the supply chain issues it caused? Of course.
Trying to pin it solely or mostly on one single reason, especially when it is a global phenomenon that many countries suffered from regardless of their exact specifics (e.g. Sweden's monetary policy was not the same as the EUs nor Canada's, yet they all suffered from serious inflation) is arguing in bad faith. It's so trivially provably wrong, it's not even funny entertaining people who are wrong.
> 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.
>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.
> To our modern sensibilities, this is a wildly invasive policy.
is it? not really
cutting the "value" of money in half always had been a important emergency tool countries had and sometimes used
and "moving" half of the value into a found which even pays out some years later is tbh. quite a fair way to do it (instead of just literally halving the money value permanently)
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.
In this context, all European countries including Finland were subject to rationing during the war; the question is about how to phase out both rationing and price controls without having a huge discontinuity at that moment.
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.
The post is not a study or a solution or a suggestion or anything of the sort. The author clarified in the last portion that it is a prediction. Someone predicting the bad consequences of the current direction is not advocating for that direction.
price control would be if they forbid some goods to be paid beyond certain price where the goal is to regulate the distribution of those goods. Currency supply control is a general policy targeted at the total of goods one can pay for in order to maintain the overall economic activity. This is the difference between heating certain rooms in the house and causing global warming.
you mean WWII? If so, this is just wrong, no-one in Finland "voted" to join the Axis, she was not technically a part of Axis and didn't want to side with Germany at all. GB and Sweden were first asked but they weren't able to help in the defence from Soviet Union. AFAIK they weren't fighting anywhere but their own territory
Without getting political, please, does anyone have a good argument for the expected inflationary pressures of the next year or two? Tariffs will make prices go up, investment in infrastructure will make prices go up… but on the other hand, AI & robotics seems to be a deflationary pressure… where does one go for scenario analysis of the next year or two?
This article scared me a bit with the notion of banks implementing “quantitative freezing.”
You can't really separate these two. If central bank targeting is left alone and the policies implemented aren't too disruptive (i.e. not the wild claims of the campaign), then it won't move much. If some of the wilder claims are implemented, all bets are off.
I live in Norway, most people I know in private life that are of working age do not actually work, and for the most part they have better lives than I do, and I do work. The amount of people on sick leave have absolutely skyrocketed. 60% of welfare benefits in Norway go to immigrants and the population in cities grows faster than new homes are built.
The causes and solutions of inflation are not complex. People just don't want it fixed.
The convenience of cutting paper money in half is a really anachronistic element of this tale - I’ve got a fair amount of money saved up, and approximately none of it exists as paper, so much as it exists ‘on paper’ - that is, as figures marked in a bank’s digital ledger, somewhere in a server farm.
The tricky part isn't money on a digital ledger. That's easy enough to handle with e.g. a one-off deposit tax (IIRC used as recently as the Euro crisis). There's no operational problem here, it just needs to be legislated to happen. Executing the operation properly might take a while (it's not something they'd have a process for), but banks must already have in place systems for e.g. freezing assets which could be used to buy time.
Bonds can just have a haircut on their nominal value, which is pretty much standard operation procedure during a financial bailout.
The real problem is deposits in foreign banks in foreign currencies. In the modern world by the time a country would be looking into this kind of a measure, a lot of the capital will have already fled. In this case the blocker is jurisdiction / sovereignty, not any kind of technical limitation.
I took the question to be on the logistics of executing this kind of operation with digital ledgers, not on when/whether those operations make sense.
Confiscating foreign assets would do little[0] to reduce inflation. But it's the same for local assets. Obviously just chopping off a zero from every note and bank balance doesn't actually reduce inflation, unless accompanied by some other structural changes.
[0] I say "little" rather than nothing, since it could have the effect of repatriating the money -> increasing the exchange rate -> making imports cheaper. But I can't imagine the effect being strong.
It can do; everyone you export to and import from still has the same money with which to buy and sell, and the same goods have different prices than you'd expect from just exchange rates in different markets.
That is basically one of the conspiracy theories I have heard related to central bank digital currencies.
As the tale goes, eventually major banks will run into another financial crisis (possibly intentionally if you really like conspiracy theories). The government will say they have no choice but to step in, and their solution will be to open the federal reserve to the public as a government-run bank. All funds lost in the crisis would be covered under an extended FDIC program and the money would be waiting for you in your new Fed bank account, denominated in the newly created CBDC.
---
In no way am I vouching for the theory, just sharing it as it is very relates to you question of how it could be handled.
If this second thing last paragraph doesn't make your skin crawl then I don't know what will:
"Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two, leaving the public entirely dependent on bank deposits and fintech balances which, thanks to digitization and automation, can be easily controlled by the authorities. To rein in a jump in inflation, central bankers will require commercial banks and companies like PayPal to impose temporary quantitative freezing on their clients' accounts, but unlike Finland's 1945 blockade, the authorities will be able to rapidly and precisely define the criteria, say by allowing for spending on necessities — food, electricity, and gas— while embargoing purchases of luxury cars and real estate"
I'm quite confident that governments aren't that powerful.
They can issue money, and manage their currency. But I've never heard about any government actually controlling what currency people use. Not even extremely authoritarian ones.
> 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.
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.
You are correct. Striking how many HN commentors are so often confident and yet wrong...
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.
For the interested https://en.wikipedia.org/wiki/Interbank_lending_market#Monet... has more on it.
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.
Interest on reserves is very much still in place[0]. Open Market Operations haven't been a thing since shortly after the 2008 Financial Crisis.
https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
Alas, you are right. Compare also https://www.cato.org/working-paper/floored
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.
I described Open Market Operations, see https://en.wikipedia.org/wiki/Open_market_operation
> 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.)
The Fed directly sets the Overnight Rate, also known as the Federal Funds Rate. It's the rate at which banks can borrow from one another overnight to satisfy reserve requirements. This rate indirectly affects the interest rate of all other lending instruments because the higher cost of overnight bank to bank lending is passed on to the customers in the form of higher loan rates, credit card rates, mortgage rates, etc.
The Open Market Operations you described (completely different from the Overnight Rate) are a form of stimulus. Because money always seeks higher risk-adjusted returns, the Fed will buy treasuries, which drives down their yield. This makes them an unattractive investment, so the money goes where it can get a better risk-adjusted return. That's usually in the market. So by adjusting treasury note yields, they can stimulate the economy. Furthermore, those treasury bonds are bought with printed money, so this is effectively a way to inject massive amounts (trillions of dollars) of printed money directly into the economy. It's pretty crazy when you think about the power that these policies have.
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.
Please do show this very strong evidence that the effect is any more than the supply chains sorting themselves out. Even some within the CBs are doubting the causality.
Japan had the lowest inflation of any major economy post COVID, and yet persisted with essentially a ZIRP. There's a good argument that in our high reserves world, interest is actually inflationary.
UK historical investigation: https://www.elibrary.imf.org/display/book/9781557758897/ch07... - written in 2000, but you can see on this graph https://www.macrotrends.net/global-metrics/countries/gbr/uni... how flat it is from 1992 to 2020. That's a very good record for any piece of policy. Inflation control works for controlling business cycle inflation. However, it's not perfect and the COVID+war shock resulted in unavoidable inflation.
It's a ""plant"" in the https://en.wikipedia.org/wiki/Control_theory sense.
(my original comment: "you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band".
The US graph is similar https://www.macrotrends.net/global-metrics/countries/usa/uni... - although the adoption of inflation targeting wasn't fully formalized, it was definitely used in setting interest rates from the 90s.
Now show the UK plot for the 2010s. Also, show the one for Japan. It's easy to cherry pick data to show whatever you want. It doesn't constitute strong data for a casual and reliable link between interest rates and inflation.
Plot the days when your air conditioner is on with the temperature of your room. It will have many concrete examples and a long-term correlation showing that actually, the air conditioner is associated with the temperature going up.
All feedback/control systems are like that.
Your argument would have more weight if the inflation predictions were accurate. Here's the prediction report for the BoE in Aug 2014: https://www.bankofengland.co.uk/-/media/boe/files/inflation-...
(It's worth noting that even with the assumption of the models used being useful, the spread on those inflation rates is wild).
Here's what actually happened: https://www.ons.gov.uk/economy/inflationandpriceindices/time...
It very rapidly hit the bottom end of the prediction range before jumping up again pretty high. All that time interest rates were held constant and low.
Given they claim feedback lags of two years or so, one wonders what the point of all this is... (one cannot run a control loop with control lags substantially longer than the time constant of the system; that's basically the recipe for an unstable control system, assuming of course the control system is doing anything).
There's an argument that it's inflation expectations that matter, but there are dissenters within the temple that disagree: https://www.federalreserve.gov/econres/feds/files/2021062pap...
The second link https://www.macrotrends.net/global-metrics/countries/gbr/uni... is from 1960 to 2023.
>There's a good argument that in our high reserves world, interest is actually inflationary.
How's that working out with Turkey?
It will probably work out just fine as they become a key player in European LNG.
Turkey couldn’t have serviced their debt with rising interest rates and continued government spending on expansion.
Being inflation averse makes sense when you can’t reasonably make use of funds. It’s not clear how much of that is actually related to the business cycle and how much is related to MMT, regardless of what adherents would have you believe.
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.
>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.
This rapidly falls apart when you try to actually calculate it. Whose income do you use? Is inflation lower for doctors than burger flippers? What do you use as the retirement age? Does inflation go down if the retirement age is raised? What counts as "survive"? Does that mean the price of smartphones don't count toward inflation because you can theoretically survive without them?
Huh? What does this have to do with inflation at all?
Unless I miss something, it's very much not a standard measure of inflation. That said, leaning on that "at all": If wages are stickier than expenses, then the gap between wages and expenses will represent recent inflation to some degree.
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.
Well, as fascinating as your government telling you to surrender all gold you might hold [1].
https://en.wikipedia.org/wiki/Gold_Reserve_Act
“By 1975, Americans could again freely own and trade gold.”
Woah.
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:
https://english.radio.cz/when-savings-were-lost-and-dreams-s...
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.
See https://en.wikipedia.org/wiki/Revaluation_of_the_Turkish_lir...
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.
(!)
Renaming didnt drastically reduce inflation. If it were that easy everybody would do it. It just allowed the government to reduce inflationary expectations while they did the legwork of throttling spending, etc.
If they hadnt done the legwork to reduce inflationary pressures this parlor trick would not have worked.
And, arguably, if they hadnt done it at all, inflation would still have gone down simply by reducing the inflationary pressures.
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.
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.
Would've been funny if you had been expected to literally cut out six zeroes from the notes.
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).
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.
https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetis...
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)
IIRC the reasoning was that only criminals have large amounts of valuable notes and by demonetising them they'd hit the criminals where it hurts.
But it turns out that tons of people in rural India had their life savings under mattresses in large denomination bills...
There were multiple motives for that move, notably however not among those an attempt to curb inflation.
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.
From your perspective the war started in 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.
[1] https://www.banque-france.fr/en/publications-and-statistics/...
Nobody has sabotaged European energy security more than European governments. The divestment from nuclear and reliance on LNG was an obvious disaster in the making. Taiwan has made a similar blunder and will pay the price at the next whiff of geopolitical instability.
Well, the full scale portion of the war started in February 2022.
But you are right otherwise.
Yes. I was surprised to find out that Russia had been conducted sabotage operations against UA artillery ammunitions dumps for many years prior to full scale invasion, and the Ukrainians had already lost the majority of their artillery ammunition reserves this way by the time invasion began.
And they conquered Crimea in 2014--partially, if I remember right, to get a port that doesn't freeze over in the winter, something they have wanted for literally hundreds of years.
They already had https://en.wikipedia.org/wiki/Port_of_Novorossiysk for that.
Especially since the Finnish experience is the only direct comparison to Ukraine today, where both their army and government are fighting Russia.
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?
https://fred.stlouisfed.org/series/M1SL
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:
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
Do you think that since M1 is down 13% since peak we should be seeing deflation right now, or does M1 growth only impact inflation one way?
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.
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.
>Do people not know arithmetic anymore?
They never knew it.
The European Central Bank said it’s due to energy.
The people who caused the problem say they weren't responsible for the problem.
Do you see the issue here?
That goes both directions, though. Central banks are prone to understating their responsibility for bad things; the gold bugs and crypto hodl folks are prone to overstating it.
The answer likely lies somewhere in the middle. The US's relatively soft landing post-pandemic seems to demonstrate some use of monetary policy in this fashion works.
Of course they'd say that. Did you expect them to just say "yeah, we fucked you over by devaluing the currency causing your wages to be worthless"?. Don't be naive please and look into how much currency was issued during the pandemic and see for yourself.
Utter nonsense, and I say this as nicely as I can.
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.
Bruh, 80% of all USD in existence was issued during the pandemic alone. How the hell can you tell me with a straight face that that didn't cause the inflation? I feel like I'm taking crazy pills.
https://fred.stlouisfed.org/series/M1SL
Read the notes in the link you posted. I don’t think it says what you think it says.
In May 2020, the definition of M1 (monetary supply in “cash”) was changed to include savings deposits. They changed this not due to some conspiracy, but because savings accounts were deregulated to remove withdrawal limits, effectively rendering them cash-equivalent, and thus necessary to include in M1 metrics.
I.e. the 80% spike has nothing to do with money being printed.
Bad faith argument again, or at least terrible tunnel vision.
So what? In the EU a lot of that money went into the Recovery fund, which released the funds in multiple steps (only the first one was in 2021), and a lot of it is still remaining in the fund.
How do you explain the massive inflation in the EU then?
And are you seriously that centred on "money printing" that you cannot imagine gas and oil prices raising multiple times, and the disappearance of multiple critical raw material suppliers, had _no impact whatsoever_?
>Bad faith argument again
Stop saying this whenever somebody disagrees with you. That's not what that term means at all.
I'm not saying this because they're disagreeing with me. Inflation is probably one of the most talked about topics of the past few years, I find it impossible that people haven't heard about the multi-layered complexity of it, and thus anyone blaming it purely on "money printing" has to be acting in bad faith.
It's not really complex, GP is correct.
High energy prices cause high transportation and manufacturing costs which causes everything else to rise.
But the main cause of inflation is printing of money, especially when you introduce such a large amount in such a short time.
People used to know that, they either pretend it's not true now or they're ignorant.
And yes the "bad faith" parrot line is really annoying and doesn't contribute to the conversation. It's what people say when they don't have a rebuttal.
> It's what people say when they don't have a rebuttal
Only I have a rebuttal, and came with receipts from Eurostat. So what exactly are you trying to argue?
> But the main cause of inflation is printing of money, especially when you introduce such a large amount in such a short time.
The original premise (which is still in bad faith, however much you dislike that part) was that money printing was the main cause. And this is fundamentally and provably wrong (check my comment upthread, Eurostat inflation per sector with the timeline). Inflation was kickstarted by energy inflation which coincides with the Russian invasion.
Did money printing contribute? Of course. Did Russia's invasion of Ukraine and all the issues it brought in energy prices and food prices? Of course. Did the Houthis contribute with their attacks disturbing supply chains? Probably. Did Covid contribute with all the supply chain issues it caused? Of course.
Trying to pin it solely or mostly on one single reason, especially when it is a global phenomenon that many countries suffered from regardless of their exact specifics (e.g. Sweden's monetary policy was not the same as the EUs nor Canada's, yet they all suffered from serious inflation) is arguing in bad faith. It's so trivially provably wrong, it's not even funny entertaining people who are wrong.
It all comes down to math:
https://stephaniekelton.substack.com/p/how-to-cut-2-trillion...
> 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.
>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 target is inflation in both.
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.
This is all very interesting historically.
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.
Torille! https://www.urbandictionary.com/define.php?term=Torille%21
> To our modern sensibilities, this is a wildly invasive policy.
is it? not really
cutting the "value" of money in half always had been a important emergency tool countries had and sometimes used
and "moving" half of the value into a found which even pays out some years later is tbh. quite a fair way to do it (instead of just literally halving the money value permanently)
Fixing inflation is simple, people keep voting for it to not be fixed, so the inflation remains and gets worse.
Yes it is. It's the biggest wage theft in history.
Somehow this author has come to the conclusion that price controls are the "solution" to inflation.
This is a fundamental misunderstanding of why inflation is viewed as bad.
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.
In this context, all European countries including Finland were subject to rationing during the war; the question is about how to phase out both rationing and price controls without having a huge discontinuity at that moment.
Or you can just accept the discontinuity, because sometimes the cures are worse than the disease.
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.
The post is not a study or a solution or a suggestion or anything of the sort. The author clarified in the last portion that it is a prediction. Someone predicting the bad consequences of the current direction is not advocating for that direction.
price control would be if they forbid some goods to be paid beyond certain price where the goal is to regulate the distribution of those goods. Currency supply control is a general policy targeted at the total of goods one can pay for in order to maintain the overall economic activity. This is the difference between heating certain rooms in the house and causing global warming.
I wonder what the cleansing element of it in Finland was, given that they voted to join the Axis.
you mean WWII? If so, this is just wrong, no-one in Finland "voted" to join the Axis, she was not technically a part of Axis and didn't want to side with Germany at all. GB and Sweden were first asked but they weren't able to help in the defence from Soviet Union. AFAIK they weren't fighting anywhere but their own territory
Without getting political, please, does anyone have a good argument for the expected inflationary pressures of the next year or two? Tariffs will make prices go up, investment in infrastructure will make prices go up… but on the other hand, AI & robotics seems to be a deflationary pressure… where does one go for scenario analysis of the next year or two?
This article scared me a bit with the notion of banks implementing “quantitative freezing.”
In addition to tariffs, expelling millions of people out of the country will have inflationary effects as well, in many different ways [0].
0 - https://www.nytimes.com/2024/11/13/business/economy/trump-im...
> Without getting political
> inflationary pressures of the next year
You can't really separate these two. If central bank targeting is left alone and the policies implemented aren't too disruptive (i.e. not the wild claims of the campaign), then it won't move much. If some of the wilder claims are implemented, all bets are off.
Ok, you mean on the US...
Keep in mind that the US government (like almost the entire world) has control of inflation, and through more means than you will think of.
Anyway, all of those are real factors, but inflation is a monetary phenomenon. Those two don't need to have any kind of correlation.
Personally, I have not follow US news closely enough to understand what Trump wants to do with monetary policy.
I live in Norway, most people I know in private life that are of working age do not actually work, and for the most part they have better lives than I do, and I do work. The amount of people on sick leave have absolutely skyrocketed. 60% of welfare benefits in Norway go to immigrants and the population in cities grows faster than new homes are built.
The causes and solutions of inflation are not complex. People just don't want it fixed.
I wonder if anyone left his uncut so he could show it off later? It would certainly be more attractive to numismatics later on.
The convenience of cutting paper money in half is a really anachronistic element of this tale - I’ve got a fair amount of money saved up, and approximately none of it exists as paper, so much as it exists ‘on paper’ - that is, as figures marked in a bank’s digital ledger, somewhere in a server farm.
How would an effort like this be handled today?
… a new crypto currency?
The tricky part isn't money on a digital ledger. That's easy enough to handle with e.g. a one-off deposit tax (IIRC used as recently as the Euro crisis). There's no operational problem here, it just needs to be legislated to happen. Executing the operation properly might take a while (it's not something they'd have a process for), but banks must already have in place systems for e.g. freezing assets which could be used to buy time.
Bonds can just have a haircut on their nominal value, which is pretty much standard operation procedure during a financial bailout.
The real problem is deposits in foreign banks in foreign currencies. In the modern world by the time a country would be looking into this kind of a measure, a lot of the capital will have already fled. In this case the blocker is jurisdiction / sovereignty, not any kind of technical limitation.
> The real problem is deposits in foreign banks in foreign currencies.
Well, money abroad doesn't contribute to local inflation, does it?
I took the question to be on the logistics of executing this kind of operation with digital ledgers, not on when/whether those operations make sense.
Confiscating foreign assets would do little[0] to reduce inflation. But it's the same for local assets. Obviously just chopping off a zero from every note and bank balance doesn't actually reduce inflation, unless accompanied by some other structural changes.
[0] I say "little" rather than nothing, since it could have the effect of repatriating the money -> increasing the exchange rate -> making imports cheaper. But I can't imagine the effect being strong.
It can do; everyone you export to and import from still has the same money with which to buy and sell, and the same goods have different prices than you'd expect from just exchange rates in different markets.
as the article states, it didn't really work back then either as the bank accounts were not touched.
> This stock of notes only comprised 8% of the total Finnish money supply
That is basically one of the conspiracy theories I have heard related to central bank digital currencies.
As the tale goes, eventually major banks will run into another financial crisis (possibly intentionally if you really like conspiracy theories). The government will say they have no choice but to step in, and their solution will be to open the federal reserve to the public as a government-run bank. All funds lost in the crisis would be covered under an extended FDIC program and the money would be waiting for you in your new Fed bank account, denominated in the newly created CBDC.
---
In no way am I vouching for the theory, just sharing it as it is very relates to you question of how it could be handled.
If this second thing last paragraph doesn't make your skin crawl then I don't know what will:
"Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two, leaving the public entirely dependent on bank deposits and fintech balances which, thanks to digitization and automation, can be easily controlled by the authorities. To rein in a jump in inflation, central bankers will require commercial banks and companies like PayPal to impose temporary quantitative freezing on their clients' accounts, but unlike Finland's 1945 blockade, the authorities will be able to rapidly and precisely define the criteria, say by allowing for spending on necessities — food, electricity, and gas— while embargoing purchases of luxury cars and real estate"
The quiet part is that you will not be able to spend on those necessities when your politics no longer align with the regime.
Total control over money is a guaranteed path to totalitarianism.
I'm quite confident that governments aren't that powerful.
They can issue money, and manage their currency. But I've never heard about any government actually controlling what currency people use. Not even extremely authoritarian ones.
Indeed makes my skin crawl. How can one reasonably protect himself from such draconian freezing? Asking for reasonably, not bunker full of gold bars.
Bunker full of gold bars. Or foreign currency. Or silver.