[Puffer Fish]

In the video I just saw with Mosler, he said that raising interest rates to 90% just increases inflation to 90% so, soon the Gov. must raise rates to 97%. So, it is endless.

. . So, what happens if the Gov. just stops selling bonds and just spends, like Mosler suggests?
.

That would be equal to the Argentine government selling bonds to their own Central Bank. The Central Bank needs to issue new currency to buy those bonds. It's equal to printing money.

Then there will be inflation. That inflation will push up interest rates even higher (though of course not on the government bonds that the Central Bank holds). If the Central Bank attempts to continue to hold down interest rates at that level, in the face of inflationary pressure from the market, it will cause more inflation, even more than it did before. (The difference between what the free market wants to set interest rates at and what the Central Bank is trying to set interest rates at will dictate what the inflation is in that situation) It can turn into a vicious spiral, which quickly spirals out of control. I believe this has already been happening in Argentina. It explains why inflation happened so fast.

When rising interest rates are fueled by inflation, there's really no way for the Central Bank to hold those interest rates down long-term, and definitely not in a quickly accelerating inflationary spiral like Argentina.
If the Central Bank tries, they will just get hyperinflation.

[Puffer Fish]

2] No you are the one how doesn't understand. The rich already have money in the form of bonds. Mosler asserts that bonds are very much like a savings acc. Making them move their money from their savings acc. to a checking acc. is not giving them money.

The problem is, once they move their bonds from that "savings account" to a "checking account", the government needs to give them money. Since Argentina doesn't have that money right now, that is then going to end up resulting in inflation.

It's like trying to print money to pay your creditors off. There are some problems with that.

(Some could argue that issuing too many government bonds also can have an inflationary effect, and that is part true, but it does not immediately cause as much inflation as throwing lots of money out there)

[Puffer Fish]

1] It so happens that last night I happened to hear Warren Mosler explain how raising interest rates in Argentina causes inflation. He explained that when the Gov. pays high interest on the bonds then the rich use the cash to buy dollars so the money keeps its value better. This gives pesos to foreigners this drives down the international value of the peso. This makes imports more expensive, and this drives inflation.

The issue isn't so much that they are "rich". The issue is the creditors are in other countries.
Of course they do not really want Argentine pesos since they are not in Argentina. They will trade those pesos for dollars.

The fact that there is high inflation is another big reason they do not want to hold on to pesos in held in Argentine bank accounts.

The inflation happens no matter what the Gov. does. Unless the Gov. does something radical, see below.

The issue is the Argentine government promised creditors a lot of money it does not have, which would be very difficult to come up with.

There is one way to stop inflation and that would be to stop printing any more money. But of course there are big problems with that option. It would probably result in a credit default, and Argentina would not be able to borrow more money in the future.

Another option could be a partial default, where Argentina could modify the terms of the bonds, and only pay out a certain interest rate, and then also announce a long delay on the payout of the bonds. This would still damage their credit rating, but not as much as a full default. So long as the inflation stopped, a low interest rate paid on the bonds would not be too bad for the creditors.

OTOH, Mosler has said that in his opinion (for nations like the US) the Fed/Gov should set the interest rate at zero or at least less than 1% and never move it. Then the Gov. ends the unnecessary rule that it must sell bonds after it deficit spends to equal the new deficit spending. This means it just spends without selling bonds. It can still sell bonds if anyone wants to buy them at the set very low interest rate.

This is similar to what the U.S. has been doing over the last 16 years.  

At first they could get away with it, due to a few factors, but now I think it is catching up to them.
(Those factors were a strong deflationary effect caused by implosion of the housing bubble, which could cancel out the inflationary effect of expanding the money supply. And then also the U.S. dollar being the world reserve currency, so the inflationary cost was spread out onto the entire world, something that is now beginning to end as other countries "dump the dollar" in response to mounting inflation)

[Steve_American]

@Puffer Fish, all of what you think and wrote in your replies is based on your understanding of the MainStream theories. Those theories are only based on simplified assumptions that are very often obviously false. In the new Chaos Math, it was found that tiny changes in the data would over time result in the mathematically determined outcomes deviating totally from the other computer run with slightly different data. Therefore, starting with data that is wildly different will result in even bigger differences. Therefore, going from a true premise to a false premise is going to invalidate the proof, and make the predictions likely to fail.

OTOH, Mosler is not using a theory with a lot of false assumptions. He is an expert, and he has worked in the banking field for decades. He has real world experience so he understands the real world and doesn't think in terms of the fantasy world you think exists.

It is likely that his predictions about Argentina are more accurate than yours. In this case the policy he suggests has never been tried. Therefore, no one can say for sure that it will or will not work.
.

[Rancid]

You will, if you don't get kidnapped.

So, you may want to spend on security.

As long as you stay away from the Favelas, you're good.

[Puffer Fish]

In the new Chaos Math, it was found that tiny changes in the data would over time result in the mathematically determined outcomes deviating totally from the other computer run with slightly different data. Therefore, starting with data that is wildly different will result in even bigger differences.

That's true, I can agree with that, but I just do not see how that would be applicable to this situation. We're talking about general economics. Not trying to predict something specific.

OTOH, Mosler is not using a theory with a lot of false assumptions. He is an expert, and he has worked in the banking field for decades. He has real world experience so he understands the real world and doesn't think in terms of the fantasy world you think exists.

It is likely that his predictions about Argentina are more accurate than yours. In this case the policy he suggests has never been tried. Therefore, no one can say for sure that it will or will not work.
.

I take issue with Mosler's theory and disagree with it. Obviously his theory is a little controversial.

Of course he's not here in this discussion to have an actual debate about it.

What I mean is, he is correct about many things, but I just disagree with the conclusion that he takes away from his understanding of the situation.

[Steve_American]

That's true, I can agree with that, but I just do not see how that would be applicable to this situation. We're talking about general economics. Not trying to predict something specific.

I take issue with Mosler's theory and disagree with it. 2] Obviously his theory is a little controversial.

Of course he's not here in this discussion to have an actual debate about it.

What I mean is, he is correct about many things, but I just disagree with the conclusion that he takes away from his understanding of the situation.

1] I had written, and he deleted: "Therefore, going from a true premise to a false premise is going to invalidate the proof, and make the predictions likely to fail."
1] All of MS Econ. Theories are "proven" using some false premises. Yet you believe them over an expert who uses true premises and also bases his theories on the real world, on real economic history and data.

2] MMT is controversial only with MS economists who live in a fantasy world. I reject their proofs because they are invalid, because they use false premises to prove things.

MMTers predicted the GFC/2008, less than 5 MS economists predicted it. All the rest said it could not happen. Thousands said it was not going to happen and 2 to 4 said it would happen. The thousands were obviously totally wrong.

I said that, because Mosler's solution to Argentina's inflation has never been tried anywhere, that we could not know for sure that it would work.
What we have seen is that your solution doesn't stop the inflation. So, we know for sure that it doesn't work.
.

[Puffer Fish]

Argentina was forced to borrow in other currency because its currency was not strong enough to borrow in Argentine pesos. Just to let you know, a country doesn't necessarily have to have an (or the) international reserve currency to be able to borrow money in its own currency.
And probably the whole main reason it had to borrow in alternate currency rather than its own was because the rest of the outside world had limited trust in Argentine currency due to a troubled history of high inflation. (Argentina had a devastating period of hyperinflation from 1975 to 1991)

Even in 2003 their inflation was quite high at 13.44 % and stayed around 8 to 9% between 2005 to 2013.
At those continued rates, and with their history, it would have been very difficult and impractical to borrow on the international market in their own currency.

[Skinny Bob]

Maybe you are confused. Raising interest rates does not actually literally "fight" inflation. What it does do is help prevent more inflation. Because when a Central Bank lends out money to lower interest rates (or continue to keep interest rates down in the face of high inflation) it usually creates an inflationary effect.



This is a little bit complicated to explain. Yes, raising interest rates in this situation was causing more inflation, but that does not mean that not raising interest rates would not have caused that same inflation. (That may sound paradoxical, but you will have to think about it)

Raising the interest rate (or rather allowing interest rates to go up) from 30% slowly to 100% increased the income going to creditors in other countries, which was being used to buy dollars and this drove down the value of Argentina's currency.

Some of this was just making sure that creditors would actually be paid back what they should be owed, without using inflation to pay the debt off and cheating the creditors. But part of it could also be the cycle of hyper-inflation caused by uncertainty. If lenders are not sure if inflation will continue to increase and lenders believe there is a risk to lending, then interest rates will go up.

There's not really any easy escape from this sort of situation, when a country gets in this situation. That is something many do not realise or understand. Economic policies come with trade-offs, and sometimes those policies can't solve an underlying problem.

If Argentina made it a policy to stop issuing more currency, and could somehow provide everyone with a guarantee that it would stick to that policy over the next few years, then inflation would come to a complete halt.
The problem though is Argentina does not have enough money, and is burdened with a big debt obligation.

What we are seeing in Argentina is what happens when a government (typically run by the Left) thinks they can pay off their debt through printing more money.

And anyone who makes an emergency loan to such a country (such as the IMF) is going to impose conditions, to make sure that loan will be repaid in full.

I don't know how the banking system works in Argentina. But, 97% sounds drastic to me, that they have let it get out of hand. When inflation starts to gallop, it's pretty tough at that juncture to get a handle on inflation. In my view, it can only get to that point by very poor fiscal policy, that the government is spending far more money than it has or collects in taxes, then forces the government to print money, or create it digitally, at a rate faster than it's GDP can absorb it.

Inflation is the result of the growth of the money supply exceeding the economy's capacity to produce goods and services (GDP). In the United States, M1 (comprising cash and checking deposits) is a key indicator of the money supply. Inflation can occur when the money supply grows faster than GDP, leading to a situation where more money is available but there are not enough goods, causing prices to rise. However, the relationship between low interest rates and inflation is complex. Low rates can potentially fuel inflation by encouraging borrowing and spending, but this is not a guaranteed outcome. Conversely, high interest rates can help curb inflation by making borrowing more expensive, but their effectiveness can vary, especially in severe inflationary scenarios.

When Congress passes bills requiring funding, the government may finance this spending through different means if there isn't sufficient revenue in the Treasury. One option is to issue and sell Treasury bonds. While it's true that bonds need to be repaid, thus potentially offsetting some inflationary impacts, the sale of bonds can still have inflationary effects, particularly in the short term or if the debt levels become unsustainable. Another option is the use of Quantitative Easing (QE), where the Federal Reserve creates money to purchase government bonds or other securities. QE can be inflationary, particularly if it leads to a significant increase in M1 without a corresponding increase in economic output.

The fractional reserve banking system also contributes to money supply growth. In this system, banks lend out a portion of their deposits while keeping a fraction in reserve. This process can effectively multiply the money supply, but it doesn’t directly cause the Federal Reserve to print money. Instead, it expands credit and can impact the money supply and potentially inflation, depending on various economic factors and the central bank's policies.

[Puffer Fish]

I don't know how the banking system works in Argentina. But, 97% sounds drastic to me, that they have let it get out of hand.

It's obvious that things are out of hand.

The reason why the interest rate is so high is because the inflation problem is so bad.

If I want you to lend me 10 million pesos, but by the time I pay you back that money is going to be worth half of what it was when you loaned it to me, why would you ever decide to make such a loan?
Unless I promised to pay you back at least double.
And that's why we see interest rates in Argentina that are approaching 100%.

In normal times, if a country's Central Bank wants to lower interest rates, they might print some more money and lend it out at the low interest rate they want to set. But Argentina's government Central Bank can't do this because they know it would just make the inflation problem very much worse, since inflation is already out of hand, dangerously close to the level of hyperinflation.