I made this game in order to try to wrap my head around central banks, inflation and macroeconomics, in order to get a better understanding of the aftermath of the global financial crisis and the current period of high inflation.
Thank you so much! I've similarly been trying to wrap my head around monetary things recently, and as with learning anything in physics (my field), I believe you don't really understand a model unless you can code up a simulator.
It's been maddening not being able to find a comprehensive model of how all the bits fit together, and I have many times wondered if the lack of existence of a game like yours meant that no such model actually existed. Happy to be wrong!
And of course a game is a brilliant way to build intuition whether you know the equations of the underlying model or not.
I haven't played it yet but am greatly looking forward to it, really hoping to answer various gaps in my knowledge. Thanks again!
Something I found recently is Steve Keen's Minsky, and his book The New Economics, which uses Minsky to go through a series of simple models of the modern fiat money system.
I was going to suggest this tool too as I’m not aware of others like it.
Worth the caveat that Keen is a heterodox economist. So if you pull his off-the-shelf models you are not getting the current accepted “mainstream” theory. I don’t think Economics is a field as mature as Physics where you should have extremely strong deference to the orthodoxy based on an incredibly strong prediction record, but it’s worth keeping in mind.
Mathematical models are that, models—a simplified version of a particular phenomenon. Economic models are no different, in particular they presuppose, among other things, that economic agents behave rationally [1].
Economic “rationality” sometimes gets a bad rap, but it’s more defensible than it may appear and provides a well-circumscribed, workable general foundation to expand on. In simple versions: rational preferences (which include indifference) are transitive and complete, and people pursue these goals. That’s all. Symmetric violations wash away in the aggregate, and asymmetric can be included, e.g. as loss aversion. Criticism of “rationality” is often stuck in late 19th to mid 20th century debates that were since generally resolved.
To add to this, we’re in a bear market and possibly recession. But not a financial crisis. (We’re also not in a currency crisis. The dollar is gaining against pretty much every currency. It’s also gaining against practically every crypto.)
Either you have this naive understanding that government is secretly printing money and hiding it from the auditors, in which case you are simply wrong.
Or you could have the more sophisticated opinion that, "yeah, I know that the so-called freshly printed money is actually already circulating money that government convinced people to give them in return for a promise in the form of a bond. But that's practically the same as printing money!"
But if you take that perspective, then crypto bros are ALSO printing money at a furious pace.
first of all, awesome job. I'm also a big believer in trying to code such models up to try to understand them.
But, and it pains me to say it, as someone with a bit of a background in economics, I dunno if realistic is quite the word i would use for your current model.
And I don't mean in a "all models are wrong but some are useful" kinda way. I think some of the limitations and simplifications might take away from the value of the model. I'd urge everyone to read the blog post to understand what's going on.
you've touched upon a lot of the apparent findings and paradoxes of macro, which is great.
to try to be constructive, I guess I would ask a rhetorical question to focus on a central (pun intended) issue: how are interest rates set by the central bank implemented? is it an independent variable that you kinda change, or is it implemented through changes in monetary + credit supply? I'm concerned that this is another one of those macroeconomic paradoxes built into the model that lessens its applicability: the idea that interest rates are a variable that the central bank issues by decree, as opposed to a rate that they target by adjusting other monetary/ policy settings?
anyway, good job. I love it when people actually code up and stimulate models :)
You are approaching this from the flawed neo-liberal assumption that, to have good economic model, only inflation has to be controlled.
The rate of inflation is hardly more important than, for example, tax rate. From the Central Bank viewpoint, how much money is annually generated could be anywhere between 15-350%. The key to a good economy lies in proficiency in other sectors, like industry.
The bulk of money is generated through private bank loans, anyway.
Many, many years ago I typed a BASIC program listing for a macro-economics simulation from a computer magazine into a computer. As with your game, the only lever was the bank interest rate. The outcome (for me) was always economic catastrophe.
I'd love to play an economic sim that also has a taxrate input; I realise that's normally not set by the central bank; but then again, it's often not the central bank that really sets central bank interest rates; it's the government.
> Although an instrument of the US Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or by anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms."
I.e. the US central bank doesn't answer to anyone.
It is cool to make those simulations. The mechanics explained deviate significantly from any central bank I know.
In particular, the negative interest rate of SimCB does something very different from, almost the opposite of, what the ECB does (along with many other central banks). What they have is a negative interest rate on the deposit facility rate, which means that overnight deposits on a class of central bank accounts will incur a loss for the commercial bank of, say 0.5% yearly, which incentivizes instead investing those funds.
In SimCB, a negative interest rate makes everyone incentivized to take on a loan, as they will get free money at the expense of everyone else as long as they reimburse the principal, which is even easier when they don’t invest the money in orchards.
I have no idea if this was a bug or a failure model but it seemed I was doing decent until everything started failing all at once. Orchards running out of business etc.
LE: I tried another round. Put the interest rate at -0.5 and just left it there.
> I fought inflation in SimCB and my economy produced 442486 :apples:
If you hit too much disinflation/deflation things can go sour pretty quickly. This is a bit exaggerated in this model as there are only 10 businesses and there can be a domino effect as 10% of the economy fails at a time. You can prevent it if you manage to counter deflationary pressures fast enough.
It helps to slowly creep up interest rates up when the economy is going well so you have more space to lower them aggressively during shocks.
Since this was happening to a lot of people, I added a few paragraphs to the blog post to help explain it:
"One common experience for new players is they start the game, prices creep down, one orchard goes bankrupt, then the other ones quickly fall like dominoes and unemployment goes to 100%.
This dynamic is exaggerated in SimCB. What happens is that when an orchard goes bankrupt, that's ten percent of the economy going offline. Not only that but if that business had loans, those loans get reversed by a negative dividend imposed on people. In a real economy this would happen through banks or other lenders who would be forced to take the hit (since you can't default on the central bank). In any case this results in an instant shrinking of the money supply. The negative dividend acts like a one time tax, people have less money in their bank accounts, spend less on apples, prices drop quickly which makes the other businesses less profitable and go bankrupt.
In a real economy, usually not 10% of businesses would go down in one go and the central bank would have more time to react. Governments might also take on debt, implement bailouts etc. to help smooth out the situation. I could have implemented some kind of automatic government stabilizer.
Or I could have made an economy with a hundred businesses instead of ten, so that these effects were more gradual. Some things to maybe try in future versions. "
Well, indeed, that was a huge problem with Sim City. They believed cities should have low tax rates, so of course low tax rates are the correct strategy. They also discovered exactly how much space building parking takes up so… they made cars take up no space rather than have a game in which public transport and cycling was the go-to approach.
The weird bit about SimCity wasn't so much the low tax rates, as the system encouraging you to set higher tax rates on the poor than the rich as the main way to ensure a city full of shiny villas rather than crumbly shacks. That's... actually not how wealth is created.
In reality of course central plannners 'pulling levers' and setting prices never works. The interest rate is one of the most important prices of them all, which is why having the government meddle with it has proven so destructive.
This game needs a "gold standard" mode to see what happens to the toy economy with no central bank!
EDIT: It would also be nice if the game paused around major events to give you more time to think & adjust. I found that the economy went off the rails if you don't react right away.
While there were panics and issues before the era of active central banks, most fo the time, things were calm. The idea that the world would burst into flames if central banks weren't there to micro tinker is not historically supported.
It is far from a fringe viewpoint in the finance world that central banks have contributed more to volatility than to stability over the last 20 years.
> While there were panics and issues before the era of active central banks, most fo the time, things were calm.
Wow - this is insanely inaccurate. Before the active central bank era (call it post-WW2), recessions lasted up to twice as long as they do during the modern era. Unemployment also peaked at much higher numbers: 25% during the Great Depression, for example. The pre-central bank localized agrarian and early industrial economic model leant itself to boom and bust cycles eg massive instability.
I mean, we haven't had a depression quite as world-shatteringly gigantic at the Great Depression since. Although I guess it isn't obvious if that's because the system we have now is somehow better, or if it is just the case that we've been more prosperous as a baseline since then, and so our various downturns haven't launched people into such a level of destitution.
Central banks and macroeconomists have learned a lot since the Great Depression, mostly of the “don’t do that again” variety. For example the Fed caused the Great Depression by contracting the money supply by a third in the middle of a recession, killing US economic growth for decades. They are unlikely to repeat that mistake.
Yes. This is why they no longer operate on a gold standard, which de facto contracts the money supply (people want to hold "safe" gold rather than circulate money) in the middle of a recession
They were literally on a gold standard at the time. You absolutely can blame the gold standard for the Fed decision to raise interest rates to protect gold reserves.
The only decision the Fed could (and eventually did) take to allow the money supply to expand was removing the US from the gold standard.
Yeah, these days we only have existential risk to our system via structural contagion twice per decade. Good thing we moved past that era!
Those issues were real and went o longer than they needed to but also weren't as deeply structural as the issues today. Our issues are different but not better.
I don’t know what you would consider “deeply structural,” but not having influence over the money supply seems fairly structural. Going back further, the issues are larger: not having a central bank, not having a single currency, no deposit insurance, etc.
The Great Depression was unprecedented because prior to that no one had had the power to mess up the economy that badly. The Fed was extremely active. They made the Depression Great by contracting the money supply by a third when the economy was in recession.
Given the consequences of the Great Depression (WW2) it seems unlikely active central banks have been a net good.
The world didn't burst into flames because most people were agrarian and largely self sufficient. Part of the reason the Great Depression was so devastating was because the economy was more interdependent than ever before.
That wasn’t true in the 19th century. There weren’t that many self sufficient farmers left back then and the economy was heavily interlinked, especially after the rise of railroads.
The economy was in a permanent boom and bust cycle e.g. the Long Depression (or the first Great Depression) lasted close to a quarter of a century.
That would result in an economy with huge deflation: People consuming the bare minimum of apples needed for survival because their gold savings would appreciate each year in value.
People are still gonna want the new iphone and latest suv. Having a hard money as the reserve currency doesn’t undermine the economy, quite the opposite.
Yes. People will always demand consumer goods. The problem with deflation is that it incentivizes you to hoard money rather than invest in businesses give out loans. During periods of economic growth with a gold-backed currency, we don't actually see much deflation because the money supply expands when banks naturally give out more loans and people invest a greater percentage of their wealth into equity. The problem comes when there is a recession. People and businesses default on their loans, and lenders are less willing to issue new ones, which effectively contracts the money supply. While it sounds good that your money becomes more valuable, most of the reason for this is that people have less of it.
I follow your argument but I would argue that incentives to hoard money aren't necessarily bad. I agree with you that hoarding money leads to a reduced money supply, but I don't think this is necessarily a bad thing.
For example: the GFC. Central banks bail out bad actors which perpetuates the incentives that caused these actors to make bad decisions in the first place ("bad" meaning not optimal globally, e.g. selling bonds you know are worthless). If a gold standard was in use, this would simply be impossible. The government would need to increase taxes to bail out the banks, which would be rejected by citizens who are busy hoarding gold and cursing the banks, which means the banks that replaced the bad actors would be incentivized to avoid the mistakes their predecessors made. Alternatively, the GFC may simply not have occurred, because under a gold-standard the banks cannot assume they would be bailed out and this knowledge would cause them to be more risk-averse. "Every Battle Is Won Before It Is Ever Fought"
The use of fiat currency provides control over the economy, but we shouldn't assume that that control is always used in the best interests of the many. The reason a gold standard is so popular among libertarians is that no institution can have arbitrary monetary control over individuals via printing money.
Hoarding money isn't a bad thing if that's your normal state, but it's a bad thing to go stop lending and investing during a recession when that is what is needed the most.
Mortgage backed securities caused the GFC, but only a small part of the bank dealt with mortgage backed securities. It doesn't make sense to let that drag the rest of the bank and the economy down along with it, which is why the bailouts were necessary. It's not the job of central banks to punish bad actors. Their job is to prevent the next Great Depression. You don't blame the ER doctor who delivers a frightening dose of blood thinners to a heart attack patient. You blame the patient's bad habit of eating barrels of pork, which in this case would be Congress. If Congress did not force the treasury to issue so much debt, the Federal Reserve wouldn't have to buy so much of the debt back in order to lower interest rates.
Just to clarify, I wasn't suggesting that a Central Bank (using fiat currency) should punish bad actors; I was suggesting that if the Central Bank used Gold, the bad actors may not have existed, or if they did exist, would have been decimated to the point they are essentially replaced by better actors.
I'm not saying that the GFC and huge Government debt are the fault of the Central Banks, but they are much more likely to occur because the Central Bank uses a fiat currency. If we had a gold-standard and the Government issued huge amounts of debt, eventually they would run out of creditors who trusted them, and they would be forced to change spending habits.
Sure a gold standard is more punishing, and eventually that may force people into better behavior, but by then it may be too late, and you'd be losing out to any country that does bail out their banks. There are always going to be instances in which individual actors don't care about the institutions they're a part of, and the institution isn't guaranteed to catch this bad behavior. For example, plenty of analysts knew that they were screwing over the banks that employed them by buying unsustainable CDOs, but they didn't care because they were making crazy bonuses. Meanwhile, all the C-suite sees is that their underlings making money by buying AAA rated bonds. There's no reason to believe that would have been prevented with a gold standard, just as the Great Depression wasn't.
The countries that would lose out would be the ones that used fiat because they are more likely to have a GFC, whilst the gold standard countries stay more stable via the mechanism I theorized before.
And if the C suit have such little control that their employees can collapse their company, they are simply incompetent and their losses should not be socialised.
How about instead of enforcing your authoritarian money model which puts all the power in the hands of financial capitalists you instead abandon the idea of caring about the interests of the financial capitalists and just let people trad with each other without requiring permission from authoritarians?
It is really quite strange that one would consider the gold standard a source of liberty. Humans aren't made out of gold. They die at some point, creating an obligation that outlasts a human life is honestly sickening and perhaps worse than slavery.
When you say "just let people trade with each other", do you mean a Government policy where payment can be made in any form of value?
Also, I don't understand why a gold standard would produce an obligation that outlasts a human life? A gold standard is seen as a source of liberty because the alternative, fiat money, gives huge amounts of power to the Government / Fed in ways that may not be good for society overall.
It's not actually deflation that's the problem. If productivity grows fast enough, prices can fall, no problem. That's what happened to the computer industry just fine for decades.
The real problem is a fall in nominal GDP. And that's a problem no matter whether prices are rising or falling.
How are they supposed to do that when a rich person A who earns more than he spends accumulates ever greater amounts of gold, leaving everyone else who wants to trade and don't care about trading with A stranded.
Think about it this way. Germany keeps saving more euros. Greece and Spain are trading with each other. At some point all the money is in Germany, making it impossible for Spain and Greece to trade with each other even though they would have maintained balanced trade between each other. Greeks can't buy the latest gadgets produced in Spain even if they wanted to.
The value of currency fluctuated much more during most of the 19th century than it did between 1990 and 2020. It’s just that the periods of inflation were followed by years of deflation. I think for most people and businesses stable and predictable inflation os generally preferable to a permanent boom and bust cycle.
For decades computers and related technology have been dropping in price. Yet people still buy and the industry is one of the most prosperous in the economy.
It is difficult to compare because we don’t have apples that have become smaller with higher nutritional value by approximately a factor of two every 18 months.
> because their gold savings would appreciate each year in value
Relative value usually matters more than absolute value: if money is depreciating at 1% but you can invest in stocks for a 1% return then you would invest in stocks (ignoring risk). Google: alpha vs beta returns.
Risk/volatility and diversification also matter: putting all your wealth into a single asset class is probably a bad idea.
> bare minimum of apples needed for survival
Edit: People are not ideally rational spenders. Also depending on your age, you may value spending now more than saving for an uncertain future. At 70 your death probability hits 2% per annum[1], so saving 1% for next year might not make sense. At any age you may look at history and you might not trust that your money will useful next year (plenty of examples where stable governments have screwed the pooch).
Could you clarify the preference for stocks over gold assuming returns are the same?
I had a look at alpha and beta returns, but aren't those considerations irrelevant if returns are the same?
Thanks in advance, and apologies for naivety on my part.
Historically 90% of families will lose their wealth within 3 generations. How does that jive with "people will save too much" when it seems rather intuitive monetary policy has nothing to do with how a grandkid who has never worked a day in their life, spends money?
>> Maintaining inherited wealth has worked for generations of Frescobaldis over 700 years
The article gives a counter example (wealth passed 700 years is way over 3 generations), and tries to argue that this example is more than just an outlier?
>> heirs and heiresses make up about half of Western Europe’s billionaires.
You can save cash which does not result in additional investment. When banks refuse to lend money, saving does not result in additional investment, in fact that is the cause of QE. The government feeling compelled to invest because people in the private economy refused to invest.
Cash behaves like an interest free loan to the central bank.
Stuffing cash under your mattress takes it out of circulation. An inflation targeting central bank will 'print' more money to make up for the missing cash.
That new cash will be spend. (Or, if people keep stuffing it under mattresses, the central bank can just keep 'printing' money.)
In a few years, when you take the money from under your mattress and buy yourself a nice ice cream, the central bank will notice that total spending has gone up, and decrease the amount of money in the economy to keep inflation on target.
It's exactly as if you had lend out the money from under your mattress to the central bank.
(And by 'print money', I mean that they will buy assets with newly created money. Typically they buy government debt, but they can also buy stocks or gold or foreign exchange or rare Lego sets.)
In any case, it looks like we don't actually disagree on what's happening, only on how to interpret it.
I hold that stuffing money under your mattress isn't the problem here. Central bank monopoly on printing money is.
If you stuff privately issued money under your mattress, it's the private issuer that can increase its balance sheet. No government-run central bank required for this.
Most "investing" isn't investing either. When you buy Facebook shares on the NYSE not a penny is going to Facebook, you're just transferring shares from one person to another at a new price
Yes and no, you don't want too much of either but they are different. You want people to save more when there is high inflation and consume more when there is less
I really dislike this Keynesian line of thinking. It helps Governments print away to glory and have no accountability. You'd only save to an extent, because you have to fulfill your hierarchy of needs. Prices ultimately will reflect supply and demand, and your paycheck will too, not necessarily leaving a huge buffer to invest and save in gold. That's similar to how wages today aren't anywhere close to long term subsistence worthy for the common folk. I admit it may not be as simple as that, but there was a world before fiat printing where gold worked as a harder form of money. It worked for 1000s of years. Everybody thinks that inflation at 2% is healthy etc, but if let to their own devices, tech, food etc. is deflationary and would be substantially cheaper.
The problem is that the deflation thinking has lead to two world wars.
The Austrians are famous for committing extreme austerity before world war two.
First hand experience with tough deflation probably caused Hitler to leave Austria and move to Germany where he promised a quick fix through worker programs. His goal to conquer Europe was basically equivalent to trying to rebuild the Roman empire which was dependent on conquering more land to grow its economy.
The gold standard has no history of success, it lead to the rise of feudalism and countless of wars, revolutions and conflicts.
The only logical answer is to stop the articial price controls on the interest rate and let it fall negative when the economy declines.
I am not a historian, but to tie world wars to gold standard is very very questionable. Weimar Germany failed due to a variety of reasons (reparations etc) but also because they printed away ie QE to "save the economy". Hitler rose on the promise of a radically better future.
The fall of empires in history can quite literally be traced in the % of gold in their coinage Eg. Byzantine, Rome. The problem with history is that one can claim fiat led to the Iphone and that users of gold in the 1500s had bubonic plague, but these links are very tenuous. Humans continue to make progress in science and tech. Revolutions were a result of crumbling economies that lost accountability to their own people. The 2 world wars were fought on debt and broke the gold standard[1]. All wars since have been debt wars [2]. Comparing gold to fiat is in my opinion similar to capitalism vs communism. Do people live on communism - yes. Does the system free up the market to chase efficiency - no. Similarly, making the Govt accountable and free market-y (ie not allowing them to dilute everybody's money via printing which is a hidden tax) will in my opinion bring about a step change in human progress
I am glad you bring up the interest rate price control part. I agree. That's one piece of the free market that is missing. The other is the gold standard making the Govt responsible in its spending instead of passing relief acts that package a ton of $ to unrelated expenditures under the name of helping families with children.
Well you would be right if upu only averaged out yearly inflation over large periods of time. However this stability you’re talking about is just an illusion.
Year to year it was much worse e.g. during the 19th century yearly inflation in excess of 10% was much more common than after WW2 however it was usually followed by similarly high deflation when the current bubble burst.
My limited understanding, is (feel free to correct me):
The problem with gold is that it's finite. It might be stable, but it's stable for a very small amount of money. The existing system allows us to create a huge supply of money that is used to drive the creation of these monster companies that end up doing things like inventing new microchip fabrication processes and iPhones. If you suck up all the money supply the economy might be stable in terms of inflation but it can't grow.
Basically, you want to be able to control the quantity of money, because it's a key element of monetary policy. Monetary policy is a tool that governments use to counter boom and bust cycles, so economic cycles are smoother, and to maintain price stability. Under a metallic standard, monetary policy is much more limited. As far as I know, a central bank can still sterilise inflows of money that result from a trade surplus with the rest of the world, and release its reserves, as a way to influence the quantity of money, but it's a lot harder.
Why does the supply of money matter when it isn’t consumed? I understand why the supply of, say, steel is important: because we consume x tonnes of steel to create a building, so a limited supply of steel limits our ability to build new buildings.
However, when we use money we don’t consume it. It simply changes owner. Sort of moving through the economy unchanged in form.
> If you suck up all the money supply the economy might be stable in terms of inflation but it can't grow.
How do you explain the solid economic growth in the 40-year period 1870-1910, which happened during the international gold standard?
The gold standard (and by extension fiat because it is still very similar to a gold standard because of the existence of cash) causes artificial wealth transfers from the poor to the rich.
Let's say you own 1% of the gold of the economy. Notice that you also end up owning 1% of the savings in the economy. If an enterprising individual increases productivity and his company produces more, the value of gold will go up, leading to unearned gains in the value of your savings. Since you own 1% of the economy and the gold standard artificially enforces this against the will of other participants, you will gain a 1% share in the improvements of the company even though you have contributed nothing and taken away potential income from the entrepreneur. If the invention caused the economy to grow by 1% then the entrepreneur would expect to receive a 0.9% in the economy. That share would require everyone to give up 0.9% of their savings. Meaning your savings must go down to 0.91% of the economy. Of course, this doesn't happen in a gold standard which massively hurts the productive economy and that is exactly why there is a constant need to mine out more gold, to let new entrants into the economy as the old ones don't want to give up their gold and let it circulate in the economy. The gold standard is effectively a tool for violence and extortion.
Even under a gold standard, savings don't have to be in gold.
We don't all carry our savings in fiat cash (or central bank reserves) today, either.
You can save in bank deposits (denominated in gold, or fiat money, or whatever your bank offers), you can save by buying stocks, you can save by buying a house, etc.
A finite amount of gold is perfectly fine. Fractional reserve banking is a thing, and allows us to create arbitrary amounts of money, even in a gold standard setting.
This has worked really well in the past in eg Scotland and Canada.
Cool game, but when shit hits the fan and production falls, everything seems to explode instantly, within a few turns. It would be nice to add some time controls so I can actually think about what to do.
Edit: while I'm asking for new features, two buttons with a step of .5 isn't enough to handle these deflationary spirals. Perhaps turn it into a slider with the step buttons.
Also some historical charts to show at the end of the game would be cool
The US Fed has to ensure liquidity for all global USD users, to include USD derivatives, USD denominated loans and USD denominated trade instruments; and it has to do that at the same time trillions can sit nearly idle (not contributing to transactional velocity) on balance sheets worldwide.
I didnt like how some trees were barren so I tried first lowering interest rates to zero and that didnt work so then I raised to 10 causing all business to close. It took them like a decade to even start recovering.
Very cool! I work in a banking adjacent industry, and this is mildly entertaining. Do you have any plans to create an accounting firm simulator for more entertaining games?
> One of the 10 orchards is always in its preparation phase which means it doesn't employ anyone so the natural unemployment rate is one out of ten or 10%
If you can own the bank in the freest/richest society, you can inflate away enough wealth to bribe it into enabling government schools, criminal legal tender "laws", becoming the world reserve fiat global enslavement system, and then inflate away 99.9999% of all the wealth of humanity in perpetuity... that is if you're willing to play as anti-human.
*** GAME END ***
Your economy produced: 439918 apples.
Deflation is easily combated by raising interest above the next expected deflation level so that saving money becomes more lucrative than spending it. Inflation is combated by lowering interest as soon as it rises above the interest level. I never went below 0.50% interest, never above 5.50%. This is easy, maybe I should apply for the job of central banker.
I'm not sure, however, it seems that the game does not have the element of borrowing / lending of money. I think the optimal strategy will be quite different than yours, when the economy has the loan component.
I managed to get close to launching it, but someone with more time might be able to find a good timestamp that's playable (or host it on archive.org on its own)...
That was an insightful game. There was a negative demand shock scenario and to play it properly, it requires first dropping interest rate to 0%, then followed by high interest rate to bring inflation back down over time, which is exactly what's happening in the real world.
It's likely that's the reason why they took the game down.
Any idea how it would expect you to handle negative demand shock first, then inflation driven by a subsequent supply shock (instead of or in addition to increased money supply)?
When there are fewer goods circulating because of a negative supply shock, prices rise and you get inflation. The natural response for a central bank might be to reduce spending levels, so less money circulates and then inflation subsides. But that's usually bad (or at least very unpopular), because it compounds scarcity with scarcity and makes everybody worse off.
Generally, non-monetary inflation/deflation is outside of a central bank's control and other policy levers should get pulled (e.g. Congress releasing stockpiles of material, for example).
The game only has one shock per scenario. But in a negative supply shock scenario, the game expects you to increase interest rate higher than the inflation rate, to maintain a positive real interest rate, to stop inflation from spiraling out of control.
> The Fed has updated its approach to monetary policy, and the changes are not readily accommodated within the existing structure of the game. As of June 1, 2021, the game is no longer available.
Honestly, that's incredibly lame. Just stop promoting it and put up a message explaining why you believe it's inaccurate. That would actually be interesting.
I found it impossible to lower unemployment from 10%?
e: I see
> One of the 10 orchards is always in its preparation phase which means it doesn't employ anyone so the natural unemployment rate is one out of ten or 10%
Yeah, I don't get that. There seems to be an assumption that the size of the workforce exactly matches the labour needs of the (maximum) number of orchards - 1. I can't see what that is modelling.
It seems to mean you can't have a labour crunch.
The fixed (maximum) number of orchards also doesn't seem to be modelling anything realistic; if apple prices go up and labour prices go down, I'd expect new businesses to enter the market.
Of course, labour crunches and new market entrants would make the game less stable, and economic collapse would be harder to avoid.
No idea what a good score is, got 431160 on my first go. My only rule was attempting to keep inflation at 1%, if it went over I raised, if it went under I lowered.
I tried to keep inflation between 1.5-2% for the first 50 months and then decided to find out what happens if I YOLO permanently fix the interest rate to -0.5%.
After the 240 months I somehow ended with GDP 442999 and 1.53% inflation.
Ha, I did the exact same thing. I guess the fed has it all wrong!
Edit: I guess it's not as fair to the player, but maybe there should be more randomness in there, or perhaps some kind of forcing function that makes things a bit less stable.
Under certain Keynesian views, Fed policy is mostly irrelevant, and only fiscal policy matters. Or actual printing... which low rates and QE are very different from.
Another view from the neoclassical school has a similar conclusion dubbed the Policy Ineffectiveness Proposition.
But others say Fed policy does matter because in the real world contracts and prices are sticky.
Low rates causes higher private lending, borrowing creates money (fractional reserve banking). QE also creates money by Federal Reserve buying Treasury's bonds with printed dollars.
Both of these are temporary, but we have had QE and low rates for over a decade now. QE was supposed to be unwound in 2018, but covid pushed it to new peaks.
Creditworthy demand for loans doesn't magically increase when rates change or the Fed buys bonds.
In QE, like with accounting, you debit one side and credit the other. Netting to zero.
The effects it all has probably are real in terms of steering where people park their money. And that matters in the long run.
But that would mainly amplify whatever underlying incentive structures exist for investment.
If you steer people to stocks, and the economy has only ponzi schemes to offer, it might be because they haven't figured out a policy framework that promotes actual production.
But you can't magically add production by rewriting the knobs so that they all go to 11. Printing is differently zero sum, but the analogy works there as well.
Interesting point. I'm sort of steelmanning the anti-monetary perspective to the best of my limited ability. Partly in hopes of hearing good rebuttals.
> Creditworthy demand for loans doesn't magically increase when rates change or the Fed buys bonds
This is fundamentally untrue. Projects that don’t make economic sense at a high discount rate do at a lower one. This is measurable with mortgages [1], alongside side a host of other cases.
Mortgages are one of the most annoying things to analyze in the economy, up there with healthcare, because of how much it is dominated by the government.
In the US a bank first makes a home loan, and then later gets money from the overnight market to cover the loan... likely from the Fed. They immediately sell the loan to Fannie and Freddie, GSEs that have actually been in conservatorship by the government directly since 2008. And every part of the market is protected and micromanaged and tax advantaged to oblivion. And every bank too big to fail, and loaded up with TARP funds and their bonds bought via QE.
Apply the principles of supply and demand to that, I dare you.
Wrong! In reality low rates does not mean more people are qualified for loans. So what happens is more people don't get loans. Or at least many more. Now if you change laws to make it attractive for people with higher risk to get loans. Or give them loans from the government. Etc... That's different.
Whenever people say money printing I don't know what that is supposed to mean. If you mean the government does deficit spending, i.e. spends more than it earns, then yes it indeed does do that, in fact, it even does it to increase inflation but it doesn't change the fact that it is still directly liable for the money it spent via debt, unlike the printing of physical currency.
Money and debt is like matter and anti matter. They both emerge from nothing when separated and disappear into nothing when they come into contact.
Similarly I immediately lowered to -0.25% and left it there, really quite stable and climbed gradually (not monotically, but close) to 442370.
I assume it needs a bit of a tweak for negative inflations, or is limited by the events being fixed - 'people spend 12% less' is more likely to happen at higher interest rates for example. And in particular if we weren't leaving it fixed but had only just lowered it, (i.e. increased motivation to spend) that wouldn't really make sense.
If cash is abolished or has to pay a negative interest rate then no, you will quickly notice that the negative interest rate is closer to a storage fee and you actually have to store that value somehow in the real economy. The purpose of credit is to bridge supply and demand across time and that actually takes some effort if there are no safe havens like cash or real estate.
No, we have a negative interest rate in Switzerland and for the average person it basically means over a certain amount of cash in the bank they will take some. So kind of like a bank account fee.
Interesting I had a very similar number of apples; 442192. However, I had the rate first at 2%, up to 6% when the 12% buff came and down to 2% when the 12% shock.
We don't know what the economic model is actually doing but remember the central bank controls the number of bankreserves, the reserve ratio and the interest rate. A -0.5% interest rate is the same as 0.5% inflation but with the caveat that it doesn't increase the money supply. If you never issue more central bank reserves the money supply won't go up but the circulation of money is encouraged by the negative interest rate. As long as your orchards keep operating and producing enough apples, the price of apples will remain stable with the money supply.
Central banks do QE to increase total bank reserves which is an ugly bandaid for not having to cut interest rates below zero. Inflation then allows real interest rates to be negative. Inflation isn't the same for everyone though, resulting in unfair wealth transfers.
You can be unprofitable at -0.5%. It stabilizes; for a runaway inflation you need to have a positive feedback loop. From the author’s write-up (https://benoitessiambre.com/simcb.html):
>The inverse happens with negative interest rates. If the central bank makes a loss on a loan, people are taxed to make the central bank whole in a kind of reverse seigniorage. Now in the real world this doesn’t tend to happen.
>It's difficult to create hyperinflation in SimCB (unless in the aftermath of high unemployment leading to low market inventory), when you lower interest rates, even to negative rates, the central bank takes a loss and you get reverse seigniorage, people's money is automatically taxed away, which offsets the inflationary effects of low interest rates and the system self stabilizes. This is partially due to there not being government debt to help fuel high inflation. I don't know how well this reflects real world economics.
>The other aspect that is missing from SimCB which could cause hyperinflation is the option for people in an economy to switch to another currency.
>(…) Now I could still have allowed central bank losses in SimCB's model. This might have made sense especially given that SimCB doesn't have a government to amplify central bank moves by borrowing. Central banks taking a loss, instead of taxing reverse seigniorage, might have simulated government stimulus, allowing the negative interests to act as little helicopter drops of money. Real world governments often borrow and spend during conditions that warrant very low rates (or under any other conditions really) to help put money into circulation. Something to try in a future version.
FYI the Fed used to have an educational game called "Chair the Fed". They took it down in 2021. I'll leave the meaning of that action as an exercise for the reader.
322 comments
[ 6.0 ms ] story [ 402 ms ] threadHere is a blog post that goes into further details: https://benoitessiambre.com/simcb.html
It's been maddening not being able to find a comprehensive model of how all the bits fit together, and I have many times wondered if the lack of existence of a game like yours meant that no such model actually existed. Happy to be wrong!
And of course a game is a brilliant way to build intuition whether you know the equations of the underlying model or not.
I haven't played it yet but am greatly looking forward to it, really hoping to answer various gaps in my knowledge. Thanks again!
http://www.profstevekeen.com/minsky/
Worth the caveat that Keen is a heterodox economist. So if you pull his off-the-shelf models you are not getting the current accepted “mainstream” theory. I don’t think Economics is a field as mature as Physics where you should have extremely strong deference to the orthodoxy based on an incredibly strong prediction record, but it’s worth keeping in mind.
1: https://ig.ft.com/climate-game/
2: https://news.ycombinator.com/item?id=31106819
In economies, people, politics, and their dispositions, their sentiments, dominate.
How do you model human responses to local, national, regional, and global events. How do you model human cascades?
[1] https://en.wikipedia.org/wiki/Homo_economicus
Australian East Coast Saturday night wooo!
[0] https://en.wikipedia.org/wiki/MONIAC
[1] https://www.youtube.com/watch?v=rAZavOcEnLg
I guess you can make up your own definition.
Either you have this naive understanding that government is secretly printing money and hiding it from the auditors, in which case you are simply wrong.
Or you could have the more sophisticated opinion that, "yeah, I know that the so-called freshly printed money is actually already circulating money that government convinced people to give them in return for a promise in the form of a bond. But that's practically the same as printing money!"
But if you take that perspective, then crypto bros are ALSO printing money at a furious pace.
The money printing part is not the Treasury issuing bonds (and getting money).
The money printing part is the Federal Reserve buying bonds (and giving money).
But, and it pains me to say it, as someone with a bit of a background in economics, I dunno if realistic is quite the word i would use for your current model.
And I don't mean in a "all models are wrong but some are useful" kinda way. I think some of the limitations and simplifications might take away from the value of the model. I'd urge everyone to read the blog post to understand what's going on.
you've touched upon a lot of the apparent findings and paradoxes of macro, which is great.
to try to be constructive, I guess I would ask a rhetorical question to focus on a central (pun intended) issue: how are interest rates set by the central bank implemented? is it an independent variable that you kinda change, or is it implemented through changes in monetary + credit supply? I'm concerned that this is another one of those macroeconomic paradoxes built into the model that lessens its applicability: the idea that interest rates are a variable that the central bank issues by decree, as opposed to a rate that they target by adjusting other monetary/ policy settings?
anyway, good job. I love it when people actually code up and stimulate models :)
To study central banks you need those history before the model :-)
https://www.amazon.com/Good-Money-Birmingham-Beginnings-Coin... is also really interesting.
The rate of inflation is hardly more important than, for example, tax rate. From the Central Bank viewpoint, how much money is annually generated could be anywhere between 15-350%. The key to a good economy lies in proficiency in other sectors, like industry.
The bulk of money is generated through private bank loans, anyway.
Many, many years ago I typed a BASIC program listing for a macro-economics simulation from a computer magazine into a computer. As with your game, the only lever was the bank interest rate. The outcome (for me) was always economic catastrophe.
I'd love to play an economic sim that also has a taxrate input; I realise that's normally not set by the central bank; but then again, it's often not the central bank that really sets central bank interest rates; it's the government.
I.e. the US central bank doesn't answer to anyone.
Source: https://en.wikipedia.org/wiki/Federal_Reserve
In particular, the negative interest rate of SimCB does something very different from, almost the opposite of, what the ECB does (along with many other central banks). What they have is a negative interest rate on the deposit facility rate, which means that overnight deposits on a class of central bank accounts will incur a loss for the commercial bank of, say 0.5% yearly, which incentivizes instead investing those funds.
cf. https://www.ecb.europa.eu/ecb/educational/explainers/tell-me...
In SimCB, a negative interest rate makes everyone incentivized to take on a loan, as they will get free money at the expense of everyone else as long as they reimburse the principal, which is even easier when they don’t invest the money in orchards.
LE: I tried another round. Put the interest rate at -0.5 and just left it there.
> I fought inflation in SimCB and my economy produced 442486 :apples:
It helps to slowly creep up interest rates up when the economy is going well so you have more space to lower them aggressively during shocks.
> You can prevent it if you manage to counter deflationary pressures fast enough.
Iirc, it was a matter of < 10 months from good to gutter.
I haven't looked at the code, but I guess it's fairly consistent then.
"One common experience for new players is they start the game, prices creep down, one orchard goes bankrupt, then the other ones quickly fall like dominoes and unemployment goes to 100%. This dynamic is exaggerated in SimCB. What happens is that when an orchard goes bankrupt, that's ten percent of the economy going offline. Not only that but if that business had loans, those loans get reversed by a negative dividend imposed on people. In a real economy this would happen through banks or other lenders who would be forced to take the hit (since you can't default on the central bank). In any case this results in an instant shrinking of the money supply. The negative dividend acts like a one time tax, people have less money in their bank accounts, spend less on apples, prices drop quickly which makes the other businesses less profitable and go bankrupt.
In a real economy, usually not 10% of businesses would go down in one go and the central bank would have more time to react. Governments might also take on debt, implement bailouts etc. to help smooth out the situation. I could have implemented some kind of automatic government stabilizer. Or I could have made an economy with a hundred businesses instead of ten, so that these effects were more gradual. Some things to maybe try in future versions. "
But in the end, the problems with most such models is that the outcome ends up being determined by the assumptions built into the model.
EDIT: It would also be nice if the game paused around major events to give you more time to think & adjust. I found that the economy went off the rails if you don't react right away.
Sounds pretty realistic to me!
It is far from a fringe viewpoint in the finance world that central banks have contributed more to volatility than to stability over the last 20 years.
Wow - this is insanely inaccurate. Before the active central bank era (call it post-WW2), recessions lasted up to twice as long as they do during the modern era. Unemployment also peaked at much higher numbers: 25% during the Great Depression, for example. The pre-central bank localized agrarian and early industrial economic model leant itself to boom and bust cycles eg massive instability.
Glad to see we put those patterns behind us /s
The only decision the Fed could (and eventually did) take to allow the money supply to expand was removing the US from the gold standard.
Those issues were real and went o longer than they needed to but also weren't as deeply structural as the issues today. Our issues are different but not better.
Given the consequences of the Great Depression (WW2) it seems unlikely active central banks have been a net good.
The economy was in a permanent boom and bust cycle e.g. the Long Depression (or the first Great Depression) lasted close to a quarter of a century.
For example: the GFC. Central banks bail out bad actors which perpetuates the incentives that caused these actors to make bad decisions in the first place ("bad" meaning not optimal globally, e.g. selling bonds you know are worthless). If a gold standard was in use, this would simply be impossible. The government would need to increase taxes to bail out the banks, which would be rejected by citizens who are busy hoarding gold and cursing the banks, which means the banks that replaced the bad actors would be incentivized to avoid the mistakes their predecessors made. Alternatively, the GFC may simply not have occurred, because under a gold-standard the banks cannot assume they would be bailed out and this knowledge would cause them to be more risk-averse. "Every Battle Is Won Before It Is Ever Fought"
The use of fiat currency provides control over the economy, but we shouldn't assume that that control is always used in the best interests of the many. The reason a gold standard is so popular among libertarians is that no institution can have arbitrary monetary control over individuals via printing money.
Mortgage backed securities caused the GFC, but only a small part of the bank dealt with mortgage backed securities. It doesn't make sense to let that drag the rest of the bank and the economy down along with it, which is why the bailouts were necessary. It's not the job of central banks to punish bad actors. Their job is to prevent the next Great Depression. You don't blame the ER doctor who delivers a frightening dose of blood thinners to a heart attack patient. You blame the patient's bad habit of eating barrels of pork, which in this case would be Congress. If Congress did not force the treasury to issue so much debt, the Federal Reserve wouldn't have to buy so much of the debt back in order to lower interest rates.
I'm not saying that the GFC and huge Government debt are the fault of the Central Banks, but they are much more likely to occur because the Central Bank uses a fiat currency. If we had a gold-standard and the Government issued huge amounts of debt, eventually they would run out of creditors who trusted them, and they would be forced to change spending habits.
And if the C suit have such little control that their employees can collapse their company, they are simply incompetent and their losses should not be socialised.
It is really quite strange that one would consider the gold standard a source of liberty. Humans aren't made out of gold. They die at some point, creating an obligation that outlasts a human life is honestly sickening and perhaps worse than slavery.
Also, I don't understand why a gold standard would produce an obligation that outlasts a human life? A gold standard is seen as a source of liberty because the alternative, fiat money, gives huge amounts of power to the Government / Fed in ways that may not be good for society overall.
The real problem is a fall in nominal GDP. And that's a problem no matter whether prices are rising or falling.
Think about it this way. Germany keeps saving more euros. Greece and Spain are trading with each other. At some point all the money is in Germany, making it impossible for Spain and Greece to trade with each other even though they would have maintained balanced trade between each other. Greeks can't buy the latest gadgets produced in Spain even if they wanted to.
The value of currency fluctuated much more during most of the 19th century than it did between 1990 and 2020. It’s just that the periods of inflation were followed by years of deflation. I think for most people and businesses stable and predictable inflation os generally preferable to a permanent boom and bust cycle.
Relative value usually matters more than absolute value: if money is depreciating at 1% but you can invest in stocks for a 1% return then you would invest in stocks (ignoring risk). Google: alpha vs beta returns.
Risk/volatility and diversification also matter: putting all your wealth into a single asset class is probably a bad idea.
> bare minimum of apples needed for survival
Edit: People are not ideally rational spenders. Also depending on your age, you may value spending now more than saving for an uncertain future. At 70 your death probability hits 2% per annum[1], so saving 1% for next year might not make sense. At any age you may look at history and you might not trust that your money will useful next year (plenty of examples where stable governments have screwed the pooch).
[1] https://www.ssa.gov/oact/STATS/table4c6.html
Wait, that's really interesting! Where did you read that?
Apparently this has been the case for long enough that there's even an old Chinese proverb
> Wealth does not pass three generations
———
[0]: https://www.fa-mag.com/news/how-to-stay-rich-in-europe--inhe...
>> Maintaining inherited wealth has worked for generations of Frescobaldis over 700 years
The article gives a counter example (wealth passed 700 years is way over 3 generations), and tries to argue that this example is more than just an outlier?
>> heirs and heiresses make up about half of Western Europe’s billionaires.
You can save cash which does not result in additional investment. When banks refuse to lend money, saving does not result in additional investment, in fact that is the cause of QE. The government feeling compelled to invest because people in the private economy refused to invest.
Stuffing cash under your mattress takes it out of circulation. An inflation targeting central bank will 'print' more money to make up for the missing cash.
That new cash will be spend. (Or, if people keep stuffing it under mattresses, the central bank can just keep 'printing' money.)
In a few years, when you take the money from under your mattress and buy yourself a nice ice cream, the central bank will notice that total spending has gone up, and decrease the amount of money in the economy to keep inflation on target.
It's exactly as if you had lend out the money from under your mattress to the central bank.
(And by 'print money', I mean that they will buy assets with newly created money. Typically they buy government debt, but they can also buy stocks or gold or foreign exchange or rare Lego sets.)
In any case, it looks like we don't actually disagree on what's happening, only on how to interpret it.
I hold that stuffing money under your mattress isn't the problem here. Central bank monopoly on printing money is.
If you stuff privately issued money under your mattress, it's the private issuer that can increase its balance sheet. No government-run central bank required for this.
The Austrians are famous for committing extreme austerity before world war two.
First hand experience with tough deflation probably caused Hitler to leave Austria and move to Germany where he promised a quick fix through worker programs. His goal to conquer Europe was basically equivalent to trying to rebuild the Roman empire which was dependent on conquering more land to grow its economy.
The gold standard has no history of success, it lead to the rise of feudalism and countless of wars, revolutions and conflicts.
The only logical answer is to stop the articial price controls on the interest rate and let it fall negative when the economy declines.
The fall of empires in history can quite literally be traced in the % of gold in their coinage Eg. Byzantine, Rome. The problem with history is that one can claim fiat led to the Iphone and that users of gold in the 1500s had bubonic plague, but these links are very tenuous. Humans continue to make progress in science and tech. Revolutions were a result of crumbling economies that lost accountability to their own people. The 2 world wars were fought on debt and broke the gold standard[1]. All wars since have been debt wars [2]. Comparing gold to fiat is in my opinion similar to capitalism vs communism. Do people live on communism - yes. Does the system free up the market to chase efficiency - no. Similarly, making the Govt accountable and free market-y (ie not allowing them to dilute everybody's money via printing which is a hidden tax) will in my opinion bring about a step change in human progress
I am glad you bring up the interest rate price control part. I agree. That's one piece of the free market that is missing. The other is the gold standard making the Govt responsible in its spending instead of passing relief acts that package a ton of $ to unrelated expenditures under the name of helping families with children.
1: https://www.britannica.com/topic/money/The-decline-of-gold 2: https://bitcoinmagazine.com/culture/how-the-fed-hides-costs-...
Well you would be right if upu only averaged out yearly inflation over large periods of time. However this stability you’re talking about is just an illusion.
Year to year it was much worse e.g. during the 19th century yearly inflation in excess of 10% was much more common than after WW2 however it was usually followed by similarly high deflation when the current bubble burst.
https://www.in2013dollars.com/uk/inflation/1800?endYear=1914...
Which times and which economies are you talking about? There were different regimes that are often lumped together as the gold standard.
(Eg the 19th century Canadian monetary arrangement was very different to mid-20th century US arrangements.)
The problem with gold is that it's finite. It might be stable, but it's stable for a very small amount of money. The existing system allows us to create a huge supply of money that is used to drive the creation of these monster companies that end up doing things like inventing new microchip fabrication processes and iPhones. If you suck up all the money supply the economy might be stable in terms of inflation but it can't grow.
However, when we use money we don’t consume it. It simply changes owner. Sort of moving through the economy unchanged in form.
> If you suck up all the money supply the economy might be stable in terms of inflation but it can't grow.
How do you explain the solid economic growth in the 40-year period 1870-1910, which happened during the international gold standard?
Let's say you own 1% of the gold of the economy. Notice that you also end up owning 1% of the savings in the economy. If an enterprising individual increases productivity and his company produces more, the value of gold will go up, leading to unearned gains in the value of your savings. Since you own 1% of the economy and the gold standard artificially enforces this against the will of other participants, you will gain a 1% share in the improvements of the company even though you have contributed nothing and taken away potential income from the entrepreneur. If the invention caused the economy to grow by 1% then the entrepreneur would expect to receive a 0.9% in the economy. That share would require everyone to give up 0.9% of their savings. Meaning your savings must go down to 0.91% of the economy. Of course, this doesn't happen in a gold standard which massively hurts the productive economy and that is exactly why there is a constant need to mine out more gold, to let new entrants into the economy as the old ones don't want to give up their gold and let it circulate in the economy. The gold standard is effectively a tool for violence and extortion.
We don't all carry our savings in fiat cash (or central bank reserves) today, either.
You can save in bank deposits (denominated in gold, or fiat money, or whatever your bank offers), you can save by buying stocks, you can save by buying a house, etc.
This has worked really well in the past in eg Scotland and Canada.
Also, the price level can adjust.
You can have both, neither or either one.
Edit: while I'm asking for new features, two buttons with a step of .5 isn't enough to handle these deflationary spirals. Perhaps turn it into a slider with the step buttons.
Also some historical charts to show at the end of the game would be cool
The US Fed has to ensure liquidity for all global USD users, to include USD derivatives, USD denominated loans and USD denominated trade instruments; and it has to do that at the same time trillions can sit nearly idle (not contributing to transactional velocity) on balance sheets worldwide.
Impressive, no doubt and good on you though!
https://www.frbsf.org/education/teacher-resources/chair-fede...
Unfortunately, they took it down about a year ago.
https://web.archive.org/web/20180710122012/http://sffed-educ...
It's likely that's the reason why they took the game down.
Generally, non-monetary inflation/deflation is outside of a central bank's control and other policy levers should get pulled (e.g. Congress releasing stockpiles of material, for example).
Honestly, that's incredibly lame. Just stop promoting it and put up a message explaining why you believe it's inaccurate. That would actually be interesting.
e: I see
> One of the 10 orchards is always in its preparation phase which means it doesn't employ anyone so the natural unemployment rate is one out of ten or 10%
It seems to mean you can't have a labour crunch.
The fixed (maximum) number of orchards also doesn't seem to be modelling anything realistic; if apple prices go up and labour prices go down, I'd expect new businesses to enter the market.
Of course, labour crunches and new market entrants would make the game less stable, and economic collapse would be harder to avoid.
Where's the dam leader board ;)
There was a lot of excitement about it being real and not just a model and real and not being statistical.
After the 240 months I somehow ended with GDP 442999 and 1.53% inflation.
How come? Shouldn't I have a runaway inflation?
Edit: I guess it's not as fair to the player, but maybe there should be more randomness in there, or perhaps some kind of forcing function that makes things a bit less stable.
Another view from the neoclassical school has a similar conclusion dubbed the Policy Ineffectiveness Proposition.
But others say Fed policy does matter because in the real world contracts and prices are sticky.
https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposi...
Low rates causes higher private lending, borrowing creates money (fractional reserve banking). QE also creates money by Federal Reserve buying Treasury's bonds with printed dollars.
Both of these are temporary, but we have had QE and low rates for over a decade now. QE was supposed to be unwound in 2018, but covid pushed it to new peaks.
Creditworthy demand for loans doesn't magically increase when rates change or the Fed buys bonds.
In QE, like with accounting, you debit one side and credit the other. Netting to zero.
The effects it all has probably are real in terms of steering where people park their money. And that matters in the long run.
But that would mainly amplify whatever underlying incentive structures exist for investment.
If you steer people to stocks, and the economy has only ponzi schemes to offer, it might be because they haven't figured out a policy framework that promotes actual production.
But you can't magically add production by rewriting the knobs so that they all go to 11. Printing is differently zero sum, but the analogy works there as well.
Somebody doing a cash out refi for 100k to add an extension to their house can certainly be inflationary
I will have to think about this.
This is fundamentally untrue. Projects that don’t make economic sense at a high discount rate do at a lower one. This is measurable with mortgages [1], alongside side a host of other cases.
[1] https://app.oarklibrary.com/file/2/f047273e-32ba-40f7-9b83-5...
Mortgages are one of the most annoying things to analyze in the economy, up there with healthcare, because of how much it is dominated by the government.
In the US a bank first makes a home loan, and then later gets money from the overnight market to cover the loan... likely from the Fed. They immediately sell the loan to Fannie and Freddie, GSEs that have actually been in conservatorship by the government directly since 2008. And every part of the market is protected and micromanaged and tax advantaged to oblivion. And every bank too big to fail, and loaded up with TARP funds and their bonds bought via QE.
Apply the principles of supply and demand to that, I dare you.
Businesses carry a lot of debt too, and can refinance lower and borrow more. Compare private sector debt levels today vs the 80s
Just because businesses can afford more debt, doesn't mean banks are going to give it to them. This is flawed logic.
Money and debt is like matter and anti matter. They both emerge from nothing when separated and disappear into nothing when they come into contact.
In any case, it is not the case here as private banks and bonds do not exist.
I assume it needs a bit of a tweak for negative inflations, or is limited by the events being fixed - 'people spend 12% less' is more likely to happen at higher interest rates for example. And in particular if we weren't leaving it fixed but had only just lowered it, (i.e. increased motivation to spend) that wouldn't really make sense.
If prices are falling fast enough, a negative nominal interest rate is still a positive real interest rate.
Started with 0.25% and when the random events happened, adjusted rate really fast to get inflation to no more than 1% for ~6ticks
Central banks do QE to increase total bank reserves which is an ugly bandaid for not having to cut interest rates below zero. Inflation then allows real interest rates to be negative. Inflation isn't the same for everyone though, resulting in unfair wealth transfers.
>The inverse happens with negative interest rates. If the central bank makes a loss on a loan, people are taxed to make the central bank whole in a kind of reverse seigniorage. Now in the real world this doesn’t tend to happen.
>It's difficult to create hyperinflation in SimCB (unless in the aftermath of high unemployment leading to low market inventory), when you lower interest rates, even to negative rates, the central bank takes a loss and you get reverse seigniorage, people's money is automatically taxed away, which offsets the inflationary effects of low interest rates and the system self stabilizes. This is partially due to there not being government debt to help fuel high inflation. I don't know how well this reflects real world economics.
>The other aspect that is missing from SimCB which could cause hyperinflation is the option for people in an economy to switch to another currency.
>(…) Now I could still have allowed central bank losses in SimCB's model. This might have made sense especially given that SimCB doesn't have a government to amplify central bank moves by borrowing. Central banks taking a loss, instead of taxing reverse seigniorage, might have simulated government stimulus, allowing the negative interests to act as little helicopter drops of money. Real world governments often borrow and spend during conditions that warrant very low rates (or under any other conditions really) to help put money into circulation. Something to try in a future version.
https://www.frbsf.org/education/teacher-resources/chair-fede...