Exactly. And deflation incentivizes hoarding money. Inflation is bad but deflation can be worse. If no one spends money because you’re literally making money by sitting in it the economy would crumble.
In a bad case the government would have to slash interest rates, maybe even slightly negative.
You don’t see high inflation and deflation much in the real world but you can easily observe it in online game economies when money is created out of nothing through grinding and the hoarding behaviour can depend a lot on what is available that is worth buying with that money.
Better yet, look at crypto, where people believe inflation is all about monetary supply and restrict it on purpose. The result? Wild volitity, huge crashes, and low velocity of money because everyone hoards it instead of spending.
I don’t feel crypto is a good example because it is used by so many people as more of an investment and most spending was never really feasible due to high transaction costs and slow transactions.
Exactly. And deflation incentivizes hoarding money. Inflation is bad but deflation can be worse. If no one spends money because you’re literally making money by sitting in it the economy would crumble.
In a bad case the government would have to slash interest rates, maybe even slightly negative.
You don’t see high inflation and deflation much in the real world but you can easily observe it in online game economies when money is created out of nothing through grinding and the hoarding behaviour can depend a lot on what is available that is worth buying with that money.
The developer of the MMORPG Eternal Lands wrote two articles about how to manage a game’s economy.
https://eternal-lands.blogspot.com/2008/03/mmorpgs-economy.html
https://eternal-lands.blogspot.com/2008/03/mmorpgs-economy-part-2.html
Richard Bartle mentioned the topic in some detail in his book Designing Virtual Worlds as well.
We have seen high inflation recently, and it is exactly because we live in a system where they can make money out of nothing.
I was thinking more about hyper-inflation levels, 100%+ within weeks, not the 10-15%+ annually we have seen recently.
Better yet, look at crypto, where people believe inflation is all about monetary supply and restrict it on purpose. The result? Wild volitity, huge crashes, and low velocity of money because everyone hoards it instead of spending.
I don’t feel crypto is a good example because it is used by so many people as more of an investment and most spending was never really feasible due to high transaction costs and slow transactions.
It’s what happens when people treat money as an investment and don’t spend it. Money that’s useful as money would be a bad investment.
What I’m trying to say is that (in theory) moderate inflation isn’t bad; it is meant to discourage hoarding.