Why Governments Create Inflation
ฝัง
- เผยแพร่เมื่อ 13 ก.พ. 2017
- Inflation can carry with it quite a few costs. But some governments, like Zimbabwe under President Robert Mugabe in the early 2000s, will go out of their to way to create inflation. Why?
Well, in the Zimbabwe example, the government printed the money and used it to buy goods and services. The ensuing hyperinflation acted as a tax that transferred wealth from the citizens to the government.
However, this is a fairly uncommon reason. Inflation doesn’t make for a good tax and it’s a last resort for desperate governments that are otherwise unable to raise funds.
There are other benefits to inflation that would make governments want to create it. In the short run, inflation can actually boost economic output. However, as we’ve previously covered, an increase in the money supply leads to an equal increase in prices in the long run.
If there’s a recession, governments might create inflation to spur productivity and ease the economic downturn. However, this type of inflationary boosting can be abused. Long-term boosting causes people to simply expect and prepare for it.
Reducing inflation is also costly. If the process is reversed and the growth in the money supply decreases, we get disinflation. Unemployment will likely increase in the short run and an economy can go through a recession. But in the long run, prices will adjust as well.
Inflation can be a neat trick for governments to boost productivity in an economy. But it can easily get out of hand and has even been likened to a drug. Once you start, you need more and more. And stopping is awfully painful as the economy shrinks.
This concludes our section on Inflation and the Quantity Theory of Money. Up next in Principles of Macroeconomics, we’ll be digging into Business Fluctuations.
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God what an amazing channel i love your videos please make more!
Money supply and the circular flow of income. Really helpful for A level economics thanks!
what an amazing explanation with very attractive and understandable graphics! Even a child can understand this concept by watching this!
Me a child a yes I am a boy of economics.
What happens when speculative bankers create credit by lending?
Friedman’s statement on the cause of inflation; “It is always and everywhere a result of too much money, of a more rapid increase of money, than of output" reminds me of bank runs. They happened because promises were not able to be fulfilled due to a more rapid increase of demand for speculative assets, than output. Any way you look at it, it is impossible for the Federal Reserve to increase the money supply beyond the private sector's demand for it. A moderate inflation promotes circulation, punishes those who hoard money by taxing its value.
This channel deserves millions of subscribers.
for a macroeconomic video. this channel is the best. so crazily good. i love it😁
Thanks for the video, I always struggle when explaining inflation for people who ask about. Will definitely be showing this video for them!
Thats why its important to sit next to the source
Fantastic and simple elaboration 🙏
Thank you sir..
I initially thought this video would answer a different question: Why do governments seem to be ok with some amount of inflation (even when they are not desperate). For example, the Federal Reserve has an inflation target at 2%. Why not 0%? Anyway, good video.
Inflation stimulate economic activity, because it increases prices, wages, demand, willingness to take up mortgages and willingness to invest in new projects etc. With an inflation rate of 0%, the market wouldnt be "stimulated" enough and economic activity would be low which in turn can have a negative effect on the society as a hole.
MrMarbles,
That's a good suggestion! We should cover that.
-Roman
A low level of inflation is a string that Central Banks can pull on when needed.
Because, otherwise, economic growth would be permanently hindered by deflation. IOW increased M does NOT necessarily cause long-run P increases, as implied here. That's only because of consumption by (presumably) unproductive soldiers in the given example.
I'm afraid most of these videos are subtly misleading.
MrMarbles a few things are forgotten in the video. Having a 2% target implies a range of 1 to 3% that is acceptable. If you had a target of 0% you would then have some moments between -1 and 1 %. A certain level of inflation may have some costs but a small level of inflation also promotes more consumption now since people are more tempted to buy something when they know it will be more expensive next year. If on the other hand you had deflation you could wait a little longer to pay less, which leads to less consumption which then leads to less production... I personally think a 1% target would be ok but 0% would be tricky because of the deflation dangers.
how about doing episodes on small business, startups next time?
You guys are great. Loved this channel.
Nice information and attractive way of presenting them.
Great education
Your videos are so beautifully explained. Thanks a million!! :D
Thank you so much for great learning experience... love u team ❤️
Thank you for the kind words!
-Roman
I really wanted him to say "the baker, the tailor, the candle stick maker."
I graduated from Economics but now I understand all the concept well from this channel. Looks like my Indian teachers who could not speak well English was to blame. :D
P only "catches up" in this example because of consumption by unproductive soldiers. It certainly is not an inevitable long-run consequence of increased M, as implied here.
In reality, people use new printed money to buy real estate and listed company shares
Very good material. Subscribed :)
Straight theft, absolutely disgusting. People should be held accountable for this!
wow i really i liked this videos,beautifully Explained :D
Thank you for the knowledge.
Which animation software do you use???
Love the use of DNB at 7:10
a superb video
Your videos are just one of the best ❤
Amazing channel for understanding economics🌹🌹
Thank you!
-Roman
I have to say though, this video is very good and is easy to understand
So, given trillions of dollars of worldwide QE since the great recession... where's the inflation? Great video, many thanks.
good analogies
awesome
I find it really interesting how the going strategy of governments is to stay on a stable inflation rate. I guess it stabilizes the economy, but it could be used as a reactive force to stabilize it further. Like using deflation when the economy is expected to boom, avoiding a potential recession from following it.
1:40 classic textbook definition of correlation doesn't imply causation. The money supply can increase but prices can also either increase, decrease, or stabilize.
Very Well explained.
Nice explained video
What is V? You refer to a previous video, but it’s hard to determine which from your playlist.
Start here: th-cam.com/video/q59tZKP0HME/w-d-xo.html
-Roman
5 years ago but very relevant today !
In the meantime, high inflation wrecks serious havoc on WE the people and the economy because we can't keep up with it (like we're starting to see now.) Then when responsible leadership returns to the whitehouse etc (hopefully 2024) a bit more pain because now the economy has to be fixed and inflation/stagflation brought under control.
What is exactly short and long run. Is it as same as in a production company no right. Can u explain this in details pls
I've seen a 206% increase in business costs over the span of about 1y6m (Apr-2020 - 02-Nov-2021).
You are really great .
This.is.why.every government print their own paper.money.
Well explained
If all people knew this stuff, could the busyness cycle be smoothed out even more? Maybe if all people understood how this works, when they were told by the central bank that the money supply was going to shrink, the prices would start to fall sooner. Wouldn't that be a good thing? Or would self interest (if I lower the price first, and my neighbor doesn't, he'll earn more profit than me), prevent this from happening anyway, making prices to fall only when people start to suffer the real losses?
I think you failed to mention possibly a very important factor as in people are unwilling to spend under deflation as they expect prices to fall reducing incentives to spend like in Japan this is possibly another factor for government created inflation
So...in summary...economies are cursed because of greed.
Welcome to 2020, ladies and gentlemen!
Did you answer the question of why inflation eases unemployment (like you said about the 70s, until it didn't any more?) Is it somewhere in the series that I missed?
2:43 Why?
3:12 Why?
3:18 Why?
Demand increases
But the supply remains constant or increases but at a much lower rate as compared to demand this leads to increase in price.
Ex:- You have 10 apples each day which you sell to 10 individual at 1apple = $1
But one day an 11th person came and wants an apple won't you raise price of apple's so that you get more profit
(Hope this will help)
if you keep selling cheap stuff. you will go bankrupt
this example is of Demand pull inflation.
@@Hereforthekettle How does it differ from wage push inflation? And are there some other types/causes of inflation?
@@cancelled_user yes ,there are 6 types of inflation
1- Creeping inflation- creeping means slow , the annual growth rate in prices of goods and serv. are 2-3%.
2- Galloping inflation- galloping means Fast , the annual growth rate of prices of goods and serv. are of 8-10% p.a
3-Hyper inflation- its uncontrollable, which totally destroys the currency of the respective country, people in such states hold onto the valuable currencies of other countries.
4- Open inflation- The price increase in this inflation is affected by the market force, this means the goods most demanded . The Supply-Demand Force decide the price of the goods which have less supply and more demand, such cases govt.s are helpless.
5- Suppressed inflation- Govt. can use Fiscal and Monetary policy to control the rise of inflation or increase in prices.
6- Stagflation- a) Persistent Increase in Prices - the economic condition where ONLY PRICE RISE and nothing else, no rise in demand , supply, income, so on.
b)- No Jobs- The employment rate is same as before with no increase in goods and serv. and Produce Same rate before the stagflation , No change in manufacture , this leads to decrease in jobs.
c)- No Consumer- If individuals have no jobs they will not have money to buy goods and services , this also leads to decrease in consumer purchases for Produced Goods and services and this leads to harm the businesses and closes down many firms.
There are cases of inflation- 1) DEMAND PULL INFLATION 2) COST PUSH INFLATION
I hope the short description will help you with inflation , now I il answer your question bear with this
1) DEMAND PULL INFLATION - Arises when there is an Excess demand for goods and services but the supply is less and the demand continuous to rise but the supply does not increase in Proportion to demand.
causes of DPI- 1. Growth in black money , 2- Increase in Poplulation , 3- iNCREASE IN MONEY SUPPLY , 4- Increase in Disposable income , 5- Increase in Public expenditure (by the govt.).
2) COST PUSH INFLATION- It occurs when Rise in Price is due to a)Rise in Cost Production , b) Demand and Supply Remains Fixed . (all the prices increase which are related to production come under this)
causes of CPI ( shortforms are by me ) 1- High Wage Rate- If Rent increases of land the cost of production(cop) increase, if wage of labors increases the cop increases , if Increase in interest on capital borrowed from market , the COP increases , If Organization's Manager of productivity or Producer increases personal profit or commission the Cop Increases , All these leads to increase in prices.
2- High Profit Margin , 3- High Taxes , 4- Fall in the availability of goods, 5- High Price Fixed by Govt. .
As you can see , the Demand Pull Inflation is The prices increases due to limited supply of demanded goods or the supply is less in proportion to demand rate of consumers , and
Wage Push Inflation comes under Cost Push Inflation(High wage rate) where the prices of Goods and services are affected or increased by the Rise in wages of labors so the cost of production increases hence increase in Price. ( The firms sort of push their responsibilities on consumers and they have to bear the increase in prices ).
I hope things are little bit clear for you now. (rip my fingers :' ,PS. I didn't copy paste this from any sites. )
Nice
You guys are so good
now id like to see a ML model to control the issue.. would be very intersting! if it does exist, it must cost peoples' data privacy right? and all store need to share their price DB to government.. now it sounds like China 😅..
Any way you look at it, it is impossible for the Federal Reserve to increase the money supply beyond the private sector's demand for it. A moderate inflation promotes circulation, punishes those who hoard money by taxing its value.
What about QE?
Okay, answer me this! Who or what raises the price because as I see it, how does anything goes up for the exception of volume, the price of goods goes up on it's on?
The more money present in the economy, the less purchasing power it has. If a retailer knows that the the wages of his customers have doubled then he will put the prices up of his products. Look at the price of a rent in New York vs Kentucky. This price hike has a knock on effect.
Only described a runaway inflation scenario. Note how production and employment can rise with targeted inflation. As long as printed dollars are being used to create production from unused resources, then you can even print without causing inflation.
Reason #1, the create inflation to inflate away debt.
By causing more debt
Thank you for providing us with knowledge!
Can you please answer my questions
1.Can the government just print money without any gains2
2.How is more money printed in a year?Do they print in according tho the product produce in a year(GDP).
3.Do the federal reserve print more money out of the interest gain and from taxes they gain?
doesn't government push up business costs with more regulations and taxes ? why consumers are charged more
What effects demonetization has on economy ?
are u thinking same as me about modi govt?
Deflation
Reveals black money
Thanks sir you made me full
How can this be solved
Corporation costs go up the pass onto franchise = consumer pays more
LOVE THISS
That can't possibly be sustainable. What happens when the value of a dollar is so low that its not valuable anymore? What does the government do then?
Hyperinflation is caused by government money printing in a large majority of cases. ALSO, people living on fixed income get hit the hardest because they don’t get a “raise” when costs go up like the people working or running businesses do. So when a government has a significant population subsisting on government funded entitlements those people begin the event with hope due to a promise of entitlement increase only to see it lag behind the real increasing costs.
Great video. Terrible tie knot lol
7:10 Is it more correct to say "MONEY SUPPLY to stimulate economy activities (to increase Y) is liken to drug" than to say "Inflation is liken to drug"?
Oil is low and food prices are high, these two should be parallel with each other but we have huge inflation thanks to QE3.
So when did inflation become "a thing"? Was there ever a long period of time when the price of everything wasn't trending upward?
This is all well and good but it doesn't really explain the gradual inflation that always seems to exist in my country (Australia). Is it strictly a low-key tax on savings? I suppose it does incentivise the rich to invest rather than just hold onto their money, which may be a good thing for the economy. I'm unsure that that's their motivation though.
Australia a high tax country , why I push up prices because government increasing regulations & taxes
Why can't currency reset to one is to one ratio like 1$=1£.?
Imagine credit card companies making a fortune just on interest alone!
But how many people default on them and don't repay the money...
Why does bread price go up?
This video helps why tourism is a big thing for a country.
"Why do some governments create inflation?" What do you mean, *some* governments? I believe most governments create inflation, although most of those don't engage in hyperinflation.
Nearly all governments aim for inflation, but only a bit of inflation.
I've read somewhere that the MAIN reason why governments create inflation is that it erodes the cost of the government's debt over time. Is it true?
@@cancelled_user Well, inflation does erode the cost of debt, government or otherwise, over time. This is why more people go into debt when inflation is occurring. But I'm not sure I can say that that's the main reason governments do it, although it's undoubtedly one of the reasons.
@@macsnafu OK, thanks.
I already asked on Quora :D
www.quora.com/Is-it-true-that-the-main-reason-why-governments-create-and-maintain-inflation-is-to-erode-the-cost-of-their-own-debt-over-time
@@cancelled_user Ah, there was a good response on Quora. It's a way for government to spend more money without increasing taxes. That would seem to be the main reason.
Hey Alex thanks for the class.
Those closest to the new money win.
Someone years ago in this comment section said the Feds goal is to cause inflation every year.
So if the Feds goal is inflation - then inflation ocurrs no matter what and there is no real cause, correct?
Except the big thing that's ignored is that prices are not forced to rise, people who have control over items decide how much or how little something costs, in turn causing inflation. We could literally pay each person $10k a month while also forcing prices to remain stagnant on everything, because there's no law saying prices HAVE to go up. The issue is that people believe it should go up if more people have more money, in turn causing a vicious cycle that's never ending because people are deciding to do this, not the government, not some supernatural being in the sky, people are. Hell, let's go a little less and pay each person $5k a month, enough to pay for rent/mortgage, food, bills, and anything else. That's $60k a year, just reaching the middle class level in this day and age. Then have all countries agree to stop raising prices for the next decade, forcing it to remain the same price, chances are things aren't going to change in terms of property and goods, but it will reduce homelessness and starvation, because at the end of the day, production remains the same and goods and services remain a constant, but if the prices stop rising, that stops pushing people into poverty, and since wages have been stagnant for the last 30 years, it's time to switch it up and force prices to stagnate for a while.
Government pushes up business costs retard that socalism policy. Our business broken even last 4 yrs net profit not increased
Pet peeve. Almost all politicians and talking heads call price increases inflation. Price increases are the result of governments inflating the currency. A subtle, yet significant difference.
This is why an annual inflation rate of ~2% is actually considered good.
So Muabe's problem was that he printed money and gave to workers/public and lacked price control, when he should have given to the banks like they have done in the US, UK and EU, kept taxes low, came up with some Frank Dodd law and had IOERs to ensure liquidity in the system remained low?
The video misses a couple of confounding factors in their parable. Firstly, it assumes that government spending would be a net drain on the economy. This certainly doesn't need to be true. Government has a bit easier of a time profitably spending money, because the society can benefit from positive externalities, it doesn't all have to be first-order profitable. Every printed dollar on the Manhattan project would have been an incredible investment at double the price.
The second component is that it mostly ignores the banking system. In general, we only want investors (not consumers) borrowing money, or money to be borrowed only as a way of increasing production. And then we use Schumpeter and bankruptcy to distill the wheat from the chaff. Slight printing does a couple of things on this front*, but the main effect is that it allows companies that have *slight* negative (real) returns to continue existing. It's essentially a form of workfare, but workfare that is market driven. All of those employees/assets can still migrate to areas that provide superior (real) returns, but it also allows people to continue working while receiving a small subsidy. Not only does this help prevent deflation, but also allows us to get people to pay for most of their needs, and then they're kept off of the actual welfare rolls that so many people hate.
*The other effect is that surprise inflation allows producers to pay off their creditors more easily, and this becomes important ones you have too much rent-seeking behaviour in a society. For the three producers in the parable, what's not mentioned is how much of their labour is being used to merely pay down their debt. Once their debt is cleared, they literally have a greater (real) income with which to buy things in the economy.
Can governments deflate as well? E.g., tax its people and then burn the money instead of spending it?
So we don't really need inflation. If we let the markets go a little up, a little down, instead of only up. The government is now $30,000,000,000,000.00 in debt and the FED has $9,000,000,000,000.00 on their balance sheet, where does it end? This is the definition of insanity.
Then have the goverment set inflation and prices for goods
That’ll cause the same problems rent control causes. As in business owners won’t be able to raise/lower prices whenever they feel necessary, so that will cause a supply shock or a shortage.
Wouldn't it be a sort of a centrally planned economy? From what I know, it's never a good idea.
The price of the clothes innitially increases not because it costs more to make it, but ONLY because more people want it...so basically it's greed...that is a flawed model. Everything should stay constant....inflation is a way to keep the poor POOR...because you tell them you increase their wages so they can afford the basics...but you go behind their backs and increase the prices of the basics...then they right where they started. This is the model that keeps the rich richer and the poor poorer nomatter how they increase their income
It cost more to make idiot
I would be fine with a short recession, I just want pocket change to be worth something again
Why don’t the world switch from paper currency to metal or commodity?
There's a reason why those types of currency are a thing of the past. In the case of commodity money, it's wildly inefficient; in the case of metal money, the amount of currency in circulation is too restricted by the ability to mine those metals, not to mention that a hundred dollars worth of metal would weight much more than a hundred dollar bill.
Can you explain what V and Y are?
M stands for the amount of money supply in circulation, V is the velocity of money circulating in the economy, P is the price level of goods and services and Y is the real value of total goods and services transacted
Thank you!
Is there anyone else watching this in 2021? In the era of "transitory inflation"? 😂
I get the idea but hypothetically if baking overheads hasn’t increased and he’s only raising prices because of the new staff why not just do the extra hours and pocket the extra cash... although less job opportunities will arise if that were the case I dunno 🤷🏻♂️ just my thought.
Naw I understand why the coffee taste bad at the Truck stop, the truck stop has to buy the cheapest coffee too meet the demand of the product , in order not too boost the price UP due to inflation 😉
Money supply goes up - Y goes up. Why does an increase in real output cause prices to rise? Why did the baker raise his prices? Why did the tailor raise her prices?
What if the money supply was fixed never increasing or decreasing?
Smashinbedrock
Hey, Ben Bernanke said the gold standard was responsible for the Great Depression. And since he was the chairman of the Federal Reserve he has to be right.
the economy would grow slower but there would also be no recessions. if you really think about it, money supply is just a tool for the powerful that probably does more harm than it does do good in the long run. also if the rest of us would increase the money supply he would go to jail. in a perfect world, should state and money be separated?
Umar Virk
People mine gold at around the same rate they make babies. So even under a gold standard the supply of money isn’t a fixed pie.
Umar Virk
What? The biggest boom in American history is the Industrial Revolution. And that was on a gold standard. Also I 100% disagree when you say the economy is better off since Nixon illegally removed us from the gold standard. Since 1971 we’ve lost well over half of our purchasing power, real wages have either been stagnant or have been going down, and there’s a recession every 10 years or so and each one is worse than the last. I’m not gonna lie and say the gold standard doesn’t have some problems like you mentioned, deflation, but I’d rather have mild deflation and mild inflation every once in a while than banks conjuring billions into existence every year with bank credit or the fed printing billions every year.
Umar Virk
Well of course the monetary system itself wasn’t responsible for the industrial revolution. But I’m saying under a gold standard it’s entirely possible to have a massive boom. Plus you have the added bonus of not relying on a central doing too much or too little to prevent a recession from getting worse. The Great Depression was caused by the Federal Reserve letting the money supply shrink by almost 30%. So it didn’t really have anything to do with the monetary system but instead central bank mismanagement. Plus I’m not saying that under a gold standard there isn’t a need for something like the FDIC. The economy looks like it’s doing well on the surface but if you dig deeper you see the problems. Like how interest rates are far too low, we’re 22 trillion dollars in debt which was financed by 2 year treasury bills that are now majority owned by the Chinese, the Saudis, and a few others. So no matter what happens now at this point, the dollar as it stands can never make a comeback, it will either stay where it is or continue to be debased.
That’s exactly the reason why gold was money.
So, inflation is unparalleled purchasing power. So, if the people in a country purchasing power is decreased. Isn't it become worrying ? Now happening in Indonesia, 30% lower purchasing power. Crap...
Why is inflation bad for people? Is it because the printed money not getting equally distributed?
What will happen if along with printing more money, the government also imposes price control so that no one can increase the prices of the goods as well as the wages? In that case, the backer can back more goods, the tailor can hire more people and create more cloths, and their earning will grow not from the increase in price but the increase in sales. Under this new scenario, the only thing the backers, carpenters, and tailors will need to do to increase their wealth is putting in extra efforts to produce more so as to satisfy the increased demand for their goods/services. Can the vicious cycle of inflation be broken by doing this?