Ok, let’s start simple and work our way to inflation. Let’s imagine a world where the government prints a certain amount of money, to make things easier let’s say 1 trillion dollars, and no more will ever be printed, this makes it so that in absolute terms you can think as 1$ as a 1/1 trillion so you can buy stuff relatively to how common they are, if we produced 1 trillion kg of rice, then 1kg of rice should cost 1$, but if we produced 2 trillions then the price drops to 50 cents.
Cool, things make sense, however there are some problems with this approach, money gets destroyed, or otherwise lost forever, so in the long run $1 becomes rarer than 1/1 trillion, let’s exaggerate that and imagine there are now only $1000, it doesn’t make sense that a 1$ buys only 1kg of rice anymore. This is called a deflationary currency, and this is bad, because if you know this is the way money works you wouldn’t spend your money because it will be more in the future.
Ok, let’s try to combat that, let’s then say that the government prints a certain fixed amount of money every year. Some years less money would be lost, those years the value of money would decrease, other years more money would be destroyed, and those years the money would be worth more.
What happens now? Well, people would speculate, and not spend in some years, overspend in others, and the economy would be a wild mess because some years people would hoard money because it would be worth more next year.
Ok, what if the government tried to estimate exactly how much money got lost and printed the same amount, so you (in theory) always have the same amount of money going around.
Turns out this also is a bad idea in the long run. Because while money won’t increase in value because there’s a limited amount it becomes a 0-sum game. Why is that a bad thing? Well, if there are only 1 trillion dollars in circulation, each dollar I hold and refuse to use increases the value of every other dollar I have, so people with lots of money would hoard their money as much as possible to make the rest worth more, allowing him to earn more and store more and turn the currency into a deflationary currency again.
This leaves us with only one option, the government has to print more money than what’s lost, this makes money be worth less with time, but also forces people to invest their money instead of hoarding it, because otherwise it’s worth less, and if they invest it it’s circulating in the economy so in theory everyone wins.
Holy crap, that was great. I never really even thought about it until OP asked the question. I just accepted it as a fact if life. But bottom line is, like most things, it’s because people suck.
Ok, let’s start simple and work our way to inflation. Let’s imagine a world where the government prints a certain amount of money, to make things easier let’s say 1 trillion dollars, and no more will ever be printed, this makes it so that in absolute terms you can think as 1$ as a 1/1 trillion so you can buy stuff relatively to how common they are, if we produced 1 trillion kg of rice, then 1kg of rice should cost 1$, but if we produced 2 trillions then the price drops to 50 cents.
Cool, things make sense, however there are some problems with this approach, money gets destroyed, or otherwise lost forever, so in the long run $1 becomes rarer than 1/1 trillion, let’s exaggerate that and imagine there are now only $1000, it doesn’t make sense that a 1$ buys only 1kg of rice anymore. This is called a deflationary currency, and this is bad, because if you know this is the way money works you wouldn’t spend your money because it will be more in the future.
Ok, let’s try to combat that, let’s then say that the government prints a certain fixed amount of money every year. Some years less money would be lost, those years the value of money would decrease, other years more money would be destroyed, and those years the money would be worth more.
What happens now? Well, people would speculate, and not spend in some years, overspend in others, and the economy would be a wild mess because some years people would hoard money because it would be worth more next year.
Ok, what if the government tried to estimate exactly how much money got lost and printed the same amount, so you (in theory) always have the same amount of money going around.
Turns out this also is a bad idea in the long run. Because while money won’t increase in value because there’s a limited amount it becomes a 0-sum game. Why is that a bad thing? Well, if there are only 1 trillion dollars in circulation, each dollar I hold and refuse to use increases the value of every other dollar I have, so people with lots of money would hoard their money as much as possible to make the rest worth more, allowing him to earn more and store more and turn the currency into a deflationary currency again.
This leaves us with only one option, the government has to print more money than what’s lost, this makes money be worth less with time, but also forces people to invest their money instead of hoarding it, because otherwise it’s worth less, and if they invest it it’s circulating in the economy so in theory everyone wins.
Great answer. I thought I had a grasp, but you helped flesh out my understanding, thanks
Holy crap, that was great. I never really even thought about it until OP asked the question. I just accepted it as a fact if life. But bottom line is, like most things, it’s because people suck.