From: Jonathan Bryce 
Subject: Re: Increasing interest rates and controlling inflation
Newsgroups: uk.politics.misc uk.finance
Date: Sat, 14 Jul 2007 20:15:27 +0100
Bytes: 2437

Kosst Amojan wrote:

> On Sat, 14 Jul 2007 07:58:14 -0700, Dave  wrote:
> 
> Abbie is right - it is the money supply that is affected by interest
> rates. The thing you must understand that with our global fiat
> monetary system, each unit of currency is created by offsetting debt.
> In fact, if all debt were paid off, there would be no money. So what
> happens is that interest rates control debt formation which in turn
> controls money creation.

Almost true, but not quite.  If all the debt was paid off, the only thing
left would be the notes and coins in circulation (ie M0).  This is a lot
less than M4, which includes bank account balances.

> The money mongers know how to control inflation but they do not have
> any tools to fight deflation. Witness the 10-year period of deflation
> in Japan a decade ago. There is, however, one way to get out of
> deflation that works every time: Warfare.

Printing more money usually works.  However, in Japan, people chose to save
the extra money rather than spend it, which is why it didn't work there.