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CHANGE THE INFLATION MODEL!!!

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unmerged(372)

Colonel
Oct 25, 2000
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For a while, I have been looking at the EU inflation model and some stuff is not very accurate or rational.

The governers thing is kind of cool (for each one you build, inflation goes down 1% one time only). But if all your provinces have governors, you can no longer curb inflation. And once you run out of techs, you can no longer curb inflation without constantly going to war or deliberately bankrupting yourself. If your inflation is very high and you go bankrupt, it goes down by 50% or so, but never seems to go below that. This is either a bug or a 'feature', but can be used to cheat the system a little bit.

To do anything to run a country, you end up creating inflation in the game. No country can live on the meager direct taxes. Trade, and later production makes up most income of nations, but it is recieved in monthly money. Also, to get it, you need merchants, which usually come out of monthly income causing inflation. Same thing for mayors, governors, etc.

How does running your country normally make inflation in real life? Why does inflation not recede on its own? This is very unrealistic. Inflation comes from excess money demand (usually; stagflation is one exception), not from any miniscule amount of money not being spend on research and stability. What is so different about spending money on research and spending money on infrastructure/merchants? Both contribute to the economy. Neither should cause inflation.

As for solutions (ones which do not require a total overwork of the model). I suggest adding the option of building governors repeatedly in a province (at an increased cost for each succesive one built). This would be a little better and allow countries to not spiral out of inflation for ever after a certain time.

Another suggestion is to make inflation DECREASE if you set your treasury-to-cash slider between, say, zero and 5%, to STAY THE SAME if you set it between 5 and 33%, and INCREASE if you set it above 33%. That is more realistic, since it allows a country to maintain a moderate level of spending without inflationary effects (support a small army, make merchants, build a few bailiffs). Also, you would get a chance to reduce inflation by fiscal discipline (not spending much at all by the government). To counterbalance this, you could increase the inflation from overspending (say, making the maximum level of spending cause a 5% or 10% increase in inflation).

Finally there is something wrong with calling what is in the game 'inflation', since ,in EU, if inflation is 50%, everything costs 50% more, but you still make the same amount of money. That is just not a real world phenomenon. When prices rise, people change their conception of money and adjust their prices of wages and stuff. Your real income does not decrease forever because your nominal costs increase constantly. Just because a country's price level rises by 10% each year does not mean that the country is able to buy 10% fewer soldiers, fortresses, merchants from then on. The debilitating effects of inflation should be modelled in a less abstract way in the game, and they should definately not be as permanent as they are now.

Please Paradox and guys on the forum, tell me what you think about this matter.
 
I agree somewhat to what you said on the inflation subject not being treated very realisticly in the game.
However, I don't agree that it is that hard keeping it low. So far, inflation hasn't been my most serious problem when playing the game, I'm in 1700 now, with inflation zero and about 100.000 ducats in the treasury.
Also, as it is, my impression is that already now it's rather (too) easy to create a large empire in the game. The suggestions you make would make it even easier to expand quickly.

Just to illustrate this, in my game (agressive/difficult) as Russia I discovered all there was to discover in Asia using my very first explorer (never needed any of the later ones), have annexed all of the Khanates, Crimea, the Baltic lands, Prussia,Poland, Sweden, Denmark, Hansa, Brandenburg, China and Japan, colonized all of Siberia, most of SE Asia and a big chunk of North America.
I've got 10 cots in my empire, income 800 ducats a month. This all happened before 1680!
After the first 50 years of the game I never bothered about alliances, no need to. I was never once attacked, although everybody else hated my guts.

I think the game would benefit more from some tweaking of other features, such as explorers (too succesful), gaining of maps (far too easy), offensive alliance building against emerging superpowers (non-existent), researchlevel cost development (seems odd that one can have fully researched all available levels in just 175 years) etc.

greetings, Oranje
 
Indeed, the research needs to be tweaked. Perhaps by making it exceedingly expensive to research certain tech before they were historically available. Remember, the real obstruction for technological progress is not available ideas or funding, but available engineering techniques.

Inflation is fine as it is, imho. What needs to be changed is the AI's inclination to combat it.
 
My comments (for what they are worth - I guess I'm more of the constructive type of player, not as aggressive as to conquer everything by 1650):

I think the inflation could be changed a bit. One thing that bothers me about inflation in the game is that the monthly cost of soldiers is not counted in the amount of income that will hold you at zero inflation. What this causes for me is that I have a high income but since I want zero inflation, I only get money once a year. Thus I run out of money every year about midway through from sending settlers, traders, etc. Since I get no monthly income, everything goes into research and I'm starting to pull away from the AI in technology because it takes out monthly income and has inflation.

The second annoyance about inflation is that all other countries are paying me the same 250 gold that I would have to pay them in peace. However, theirs is from debased money, in effect their price of peace is quite reduced because they don't handle inflation well. Does it cost them more to send settlers? If not, inflation is actually rewarded.

Inflation is difficult to model effectively in a game. If we can address issues where it affects gameplay, at least, I think we would be better off.

Oranje, how did you get to 100.000 in the treasury? I am setting to 0 inflation, yet it takes all of my annual money by around June just to pay for a colonist, a trading post, and even use half of the traders I get. Maybe later all of these will pay off for me and my incomes will be huge. But much of it is trade income, and of course that all goes into research because it is monthly income and to touch it would cause me inflation. Your 800 per month is nice, but again you have to put it all into research; it can't even be used to pay for your standing army, since at 0 inflation, that means your monthly income goes all into the research.

Perhaps it could be that if you build a mayor (?) or governor, you are able to now take a certain % of your income for your treasury every month without an inflation penalty. Make it 2% for the mayor, 4% for the governor or something. Being able to take a minimal amount into the Treasury without inflation would help restrict the research of technologies so quickly....

Trading for maps is very difficult, even if I have 150 provinces to offer in exchange for 3. You must be getting those by conquest, so if changes are made to make it more difficult to conquer half of Europe, I think the maps would be harder to come by.

I agree on the issues of making other nations more likely to feel threatened by a nation that expands quickly, forcing them to form alliances with previous enemies who are no longer such a threat.

And finally, regarding research, some of it is due to what I mentioned above about all monthly income being forced into research. Also, it would be a good idea to make it more difficult to research technologies as you get further ahead of the historic technology development.
 
I don’t have the game yet, but I have some thoughts to add to the comment above regarding the economic model of the game relating to deficit spending, loans, bankruptcy and inflation. I am familiar with many of these issues through my training in monetary economics, but I realize the complexities of economics need to be simplified to create effective game mechanics that encourage historical behavior.

The economics of price inflation and price levels are complicated in nuances but the cause of inflation as an economic disease is simple. Deficit spending in this era had to be financed by borrowing or debasement of the currency through reducing the precious metal content of currency (by clipping, adding base metal, etc.), often joined with legal tender laws requiring creditors to take the debased money in payment of debts. This price inflation was limited to the particular country within which the debased currency circulated, and is the one critical to simulate for this historical period.

There was also general inflation in Europe due not to debasement but the natural expansion of the money supply beyond corresponding economic growth, due to the flow of gold and silver from the Americas. These precious metals were wealth for Spain, as they readily accepted elsewhere for goods and services. The resulting inflation was a much slower and steadier phenomenon than inflation through debasement. Because it was general, and adjusted to more easily, I think it should not be factored into the inflation equation.

It is important to remember that even modern economies have difficulty adjusting to inflation, and the economic relations of this historical period often involved fixed incomes, fees and revenues, often originally established by conversion of feudal obligations to cash at a time of lower prices. This put a budget squeeze on some monarchs–financial pressure simulated by the model I suggest.

The mechanism that I think makes the most sense is a simple one. If a country spends more than it has in cash, it may take a loan or face a deficit. I suggest we assume the deficit is financed by proportional debasement of its local currency. E.g., France has 100 ducats and spends 200 ducats, meaning the local currency has be debased by half with prices doubling the next year (similarly, spending 125 ducats would mean the currency would need to be debased by 20% (as 100/125 = 0.8)). A one-year time lag is simplistic but workable. What happens thereafter? In this model, the inflation price premium would decline year by year (or perhaps monthly would be better) by some number of percentage points. I would suggest, for example, a base reduction of 5-8 points per year depending on the sophistication of the economy, with an additional 0 to 4 points if average inflation for the preceding 20 or 30 years was sufficiently low and an additional 0 to 4 points based on the extent to which all the provinces have governors.

Example using France above, assuming low prior inflation and half the provinces having governors would be 7+3+2=12 per year: Prices would be normal in the year of the deficit, 100% more in Year 2, 88% in Year 3, 76% in Year 4, etc. until inflation dropped to 4% in Year 10 and 0% in Year 11. France pays a price for the deficit, but offsetting this will probably spend heavily at good prices in Year 1 and might defer other expenses in later years until prices fall.

Small deficits are easily absorbed. If France had a 25d deficit, prices would be up 20% in Year 2, 8% in Year 3, and normal in Year 4. Small deficits are actually a fairly good deal economically, but, of course, deficits should also have other consequences: a country undergoing inflation should have stability capped at 2, not 3, and high inflation should have even worse effects.

I think loans, in contrast to deficit spending, should not feed directly into the inflation equation. There are several reasons. The first is that a domestic loan would not increase the domestic money supply, though a foreign loan would. The second is that the additional funds from a foreign loan might well not be spent inside the country–in the game it seems often paid abroad for peace, in trade, or other applications without a direct domestic impact. The third reason is that the long-run effects of a loan are already in the model above–if your income is enough to pay the debt and interest, you are fine. If you run short, you must either borrow more or run a deficit to meet the obligation.

Repayment of loans, however, should be affected by inflation. If we assume that the loan is to be funded and repaid in hard currency ducats, the interest rate at which repayments are made and perhaps also the principal repayments should be subject to the inflation premium to reflect conversion into hard currency. For example, with 20% inflation, 10% interest on a 250d loan would be 25d x 1.2 = 30d, and, if it had to be repaid, the repayment would be 250 x 1.2 = 300d. A country that undergoes inflation is also likely to be a bad credit risk, so the base interest rate should be appropriately higher depending on the country’s bankruptcy and inflation history as well as its current debt.

How to deal with bankruptcy in such games? Wars have been started and territories seized to force repayment of debts–this is a serious matter. Bankruptcy would affect inflation indirectly by its effects on revenues and expenditures.

In the game the source of the loans is unknown, but presumably it comes from a variety of domestic and foreign sources, often from banking firms represented in the game by merchants and nearby centers of trade. These would be unhappy about the bankruptcy, so a decline in relations based on merchant representation in these COTs would be one logical effect. Further loans should be unavailable or at a high premium interest rate, OR with collateral such as ships, mines, etc. which can be removed from the game if foreclosed upon.

The domestic political and economic effects should also involve reduced stability and increased revolt risk in proportion to the size of the bankruptcy, and disruption of trade and economic production by a proportionate percentage for at least the next year (since domestic businesses and traders are likely to suffer losses as creditors of the government and may themselves be forced to curb production or go bankrupt). In this pre-bailout era, the economic crisis would be sharp but over quickly.

Note that a national bankruptcy and its domestic ripple effects could also be an opportunity for foreign traders to step in to buy assets cheaply and step into the lost profit opportunities of traders and businesses of the bankrupt country who are constrained by losses in the bankruptcy. This could be easily modeled by splitting up part of the lost profits of the country’s traders in each COT around the world among the other countries’ traders located there. One could also split up the lost domestic production among foreign merchants located in any COTs within the bankrupt country, but I think any profits from the situation would be offset by such foreign traders' losses on “voluntary” loans cancelled in the bankruptcy.

Troops in this era were often owed back pay, making them creditors too, so the bankrupt country should also face risk of mutiny or desertion, in addition to reduce morale. All in all, bankruptcy should be a final expedient, but sometimes a necessary one, and sound fiscal and monetary policy should enjoy its historical rewards of economic growth, trade, and stability.
 
Yeah, what he said ^ . :)

Mike,

Very good comments. My Money & Banking class (so long ago) was one of my favorites. I had an Austrian economist disciple teaching it. :)

I believe the increase of gold in the game should increase inflation. It would be nice to have a ripple-effect as the gold made its way to all of Europe, but we could settle for what is modelled now - it increases the inflation of the country mining the gold, though it seems it is not the greatest factor as it seems the inflation in those countries is not a multiple of that in others. In reality, yes this was more gradual, though since I haven't played Spain yet, I don't know the effects of a lot of gold; I've only had a little bit of gold and the effect wasn't much.... For our purposes I think it could affect inflation in the game, perhaps not changing it.

The game does not currently allow deficit spending, unless it is financed by loans. This is OK, though it would mean loaned money should increase inflation. If the loans wer paid back by debased currency, loans would increase inflation. IF loaning on margin was allowed then (was it?), it really DOES increase the money supply and therefore should contribute to inflation.

Default on a loan from another nation gives a Casus Belli now, which is good. The other effects you mentioned are all good considerations. I know now that your troops' morale suffers, but I also think the effects should be taken into account in your income/production, your traders suffering in the COTs, and yes, increased attrition in your armies.

Tying inflation to increasing your money supply faster than production due to borrowed money (not always domestic in those days, but from the Fugger or Medici bankers, for example) would help the game. The AI nations which do not borrow money would not suffer as much while human players who increase their money supply by borrowing (again, from external sources in this game) would be more hampered by inflation. If this can be coupled with having the AI fight inflation a little more, I think it would also help improve the play balance of the game.

On the other question, the peace settlements and perhaps other expenditures are fixed amounts, so you pay with money of less worth. Are the costs for colonist placement, etc. indexed to inflation as well? If not, there is a quite an advantage in these areas if you let inflation run rampant.

[This message has been edited by Tom (edited 28-12-2000).]
 
The inflation level in the game reflects an increase in prices equal to the inflation level, i.e. 50% inflation makes troops 50% more expensive.

But if what I remember from national economics is worth anything, then the inflation level would keep increasing the price levels, year after year, not to mention the fact that some hellhole colony city governor sure as hell can't affect the national inflation level.

Furthermore, from what I can tell, you can't go above 100% inflation. I haven't actually tried it, but I gathered from other posts on this list. I wonder what the German economists of the 1920s would have to say about that.

Finally, as MikeP pointed out, modelling real inflation is almost an impossible task, and quite possibly unballancing the game. (Oh, by the way, the loans in the game are not from 'unknown source'. =)

Hence, I interpret the 'inflation level' in the game as an abstract phenomenon; the word 'inflation' chosen because it reflects the increase in prices.
 
While it's true that a governor of a small place wouldn't drastically effect national inflation, these are governors of large provinces. In reality, yes, monetary policy would better be served by things at the national level. As it is, I think to simulate the reduction in corruption a governor could bring, Paradox chose the effect of governors to be a reduction in inflation. We were just carrying on with what they had already chosen as the effect; just suggesting modifications to it. It is possible that they would have some effect as their enforcement of monetary (and other) laws would have an effect on price level. Perhaps only for that province, so it could be the province's % of the total national income that is effected ...
 
With the increasing interest :) in players controlling small non-colonial powers with very limited scope for expansion it does make the governor solution very limiting. Tight financial control should not be proportional to the size of the nation. Perhaps it would be better to have the ability to build a governor annually in your capital province only. That would allow you to reduce inflation by up to 1% per year instead of discovering tech 5 and having inflation immediately collapse from say 25% to 0% in a month if you have the money and 25 provinces to get building in.
 
inflation

Just a thought:
Isn't it possible to set your monthly income slider to 0% and set the stability slider to a certain amount, thus bypassing the inflation check? When you have a stability of +3 any additional money should go directly to your ready cash.
as I said this is just a thought and I haven't checked it myself (yet..)
 
Once your stability gets to +3 the bar should drop to minimum and be impossible to raise. Whether the perpetual monarch and art bonus is lost, becomes uninflationary real cash or just counts as treasury money I do not know.
 
I will not make long developments but...

EU is attempting to simulate a real historical period. During this period, inflation was huge, bankrupcy a current practice, market system had a very much reduced place than today and last knowledge of economics was poor.

So the game mechanics aren't real in the way they work but they attempt to be right in the goal researched: making inflation a problem unavoidable.

Human players can easily maintain inflation at a very low level. I don't see why it would be useful to give new tools for that. But if you want to play historically, I would suggest to decide at strat of the game to go in deficit and take loans to fill the gap until the bankrupcy arises. I know, it's silly, but any major nation with a few exceptions (Prussia for a time) was doing so. There wasn't budget in modern sense: kings spent without considering much how many they earned.

in clear, the current system gives the possibility of a modern gestion which is totally unrealist for this time. And the inflation event isn't during sufficiently long for simulating that.
 
Just inserting a note. In the FAQ it mentions that 'inflation' in the game is really an inflation index (is that the right word?). If the game says you have 50% inflation all that means is that your money is worth 50% less than what it was in 1492 - NOT that your money lost 50% of its value in one year. That said, how can you have 0% 'inflation' (as some people have mentioned) unless it's very early in the game? I'd assume that you get at least a little every year and that after 300 years you could easily have an inflation index greater than 100.
 
The simple answer is governors. Your inflation will rise between 0%-1% a year depending on how much monthly income you put in the bank instead of spending on research and to lesser extent whether you have any gold producing provinces. Running loans and defaulting on them will increase this figure too. Then when you hit Infrastructure tech 5 you can build a governors house. Every province you do that in permanently erases 1% of accumulated inflation. So if you have 50 provinces and 25% inflation you can knock inflation back to 0% and run the economy at 100% cash for up to 25 years just building another governor as necessary. A 1 province nation can get inflation to fall by 1% and then is stuck.
 
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