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You can get inflation in two ways. One way: people and firms are expending more money that the economy can digest. If a government wanted to compensate this, c

You can get inflation in two ways. One way: people and firms are expending more money that the economy can digest. If a government wanted to compensate this, could raise taxes or, ironically, retiring money from the system emitting debt. The other way: the money that people is expending is the same but the economy, for some reason, shrink. That would be a supply shock. That is what happened in the 70's with the oil cartel.

Retric 11y ago
That's not really true. At its core Money has value as a means to pay Taxes and Debt. If the economy shrinks people need to pay less in Taxes which lowers the demand for dollars. At the same time it's harder to pay debt which generally causes deflation not inflation. Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency. For really high rates of inflation the only viable option is for the government to print money. EX: If your inflation rate is 18% the economy would have to be 1/5th the size in 10 years and 2.5% in 20 years which just flat does not happen.
- RobertoG 11y ago
  " If the economy shrinks people need to pay less in Taxes which lowers the demand for dollars." If the demand for dollars is due to taxes, more taxes create more demand and it's not decided by the size of the economy but by the level of demanded taxes. " Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency." I suppose you mean, devalues its currency respect another currencies. This is not always the case, but if it is, that would imply that imports are expensive and export cheaper. At the end of the day, what counts is the real economy. If in order to reduce debt you are downsizing the real economy you are not doing a good business. I don't understand your last paragraph.

Retric 11y ago

That's not really true. At its core Money has value as a means to pay Taxes and Debt. If the economy shrinks people need to pay less in Taxes which lowers the demand for dollars. At the same time it's harder to pay debt which generally causes deflation not inflation. Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency. For really high rates of inflation the only viable option is for the government to print money. EX: If your inflation rate is 18% the economy would have to be 1/5th the size in 10 years and 2.5% in 20 years which just flat does not happen.

RobertoG 11y ago
" If the economy shrinks people need to pay less in Taxes which lowers the demand for dollars." If the demand for dollars is due to taxes, more taxes create more demand and it's not decided by the size of the economy but by the level of demanded taxes. " Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency." I suppose you mean, devalues its currency respect another currencies. This is not always the case, but if it is, that would imply that imports are expensive and export cheaper. At the end of the day, what counts is the real economy. If in order to reduce debt you are downsizing the real economy you are not doing a good business. I don't understand your last paragraph.