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FTA: "For decades, politicians and pundits on the right have told us that we need to balance the federal budget in order to keep inflation low; this remains a s

by viggity 16y ago

FTA: "For decades, politicians and pundits on the right have told us that we need to balance the federal budget in order to keep inflation low; this remains a staple of libertarian thinking (even though economic research demonstrates that except in wartime, there is effectively no relationship between the size of government spending and the existence of inflation)" Sure there is no correlation between size of government and the existence of inflation, but that isn't what the "politicians and pundits on the right" have said, they said "we need to balance the federal budget in order to keep inflation low". It isn't overall government spending is going indicate inflation, but rather large deficit spending and/or large gov debt that is going to lead to inflation because the only way to pay off creditors is to print more money, the more money in circulation the less value it has => inflation. Am I wrong? Isn't there some awful inflation going on right now in Zimbabwe because they government keeps printing more and more money to pay off its debt?

noelchurchill 16y ago
You're right. Inflation actually refers to an increasing number of dollars in the economy, not increasing prices of goods. More dollars in the economy will lead to higher prices of goods and services, so this leads to the common misconception. But like you said, if government spending is larger without larger deficits, this would mean they're spending more existing dollars, no new dollars are created, and prices of goods stay the same.
- deleted 16y ago
  [deleted]
  - lionhearted 16y ago
    Well, you're both right, or you're both wrong, depending on how you look at it. From your Wikipedia link: > The term "inflation" originally referred to increases in the amount of money in circulation. Today, the term monetary inflation is generally used to distinguish such an occurrence from a general rise in prices, sometimes called price inflation. "Price inflation" is the increase of prices. "Monetary inflation" is increases in the size of the money supply. Economists originally used to use the term "inflation" to mean monetary inflation (larger money supply), and if it's an economist not speaking to a popular audience, that's probably what he means. A larger money supply (monetary inflation) typically results in higher prices (price inflation).
  - jakehow 16y ago
    Gotta love the confidence. You are talking about price inflation, the parent is talking about currency inflation. Maybe you guys should stick to Merriam Webster's definition which masterfully butchers them into one: "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services" http://www.merriam-webster.com/dictionary/inflation http://www.merriam-webster.com/dictionary/inflation
chrismealy 16y ago
That's not been the case for Japan. The cause of the inflation in Zimbabwe is the collapse of their economy, not the other way around. More here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773
gahahaha 16y ago
There is actually deflation in Zimbabwe now. From Wikipedia: """In an effort to combat inflation and foster economic growth the Zimbabwean Dollar was suspended indefinitely on 12 April 2009. Zimbabwe now allows trade in the United States Dollar and various other currencies such as the South African Rand, Euro, Sterling, and Botswana Pula. The use of the US Dollar yielded enormous results within weeks as inflation actually fell below zero to -3 percent.""" Also, a brief repetition of what we have learned from Keynes: """Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully. Government policies to increase demand, by contrast, can reduce unemployment quickly. Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach""" This is the point we are at now "government spending must step into the breach". And we can borrow to our harts content because we are in a liquidity trap where rates are zero, and deflation is the clear and present danger, not inflation. If inflation comes back, we should cheer, because that means that the economy is doing better again. Comparing the US to Zimbabwe is complete nonsense.

by viggity 16y ago

noelchurchill 16y ago

You're right. Inflation actually refers to an increasing number of dollars in the economy, not increasing prices of goods. More dollars in the economy will lead to higher prices of goods and services, so this leads to the common misconception. But like you said, if government spending is larger without larger deficits, this would mean they're spending more existing dollars, no new dollars are created, and prices of goods stay the same.

deleted 16y ago
[deleted]
- lionhearted 16y ago
  Well, you're both right, or you're both wrong, depending on how you look at it. From your Wikipedia link: > The term "inflation" originally referred to increases in the amount of money in circulation. Today, the term monetary inflation is generally used to distinguish such an occurrence from a general rise in prices, sometimes called price inflation. "Price inflation" is the increase of prices. "Monetary inflation" is increases in the size of the money supply. Economists originally used to use the term "inflation" to mean monetary inflation (larger money supply), and if it's an economist not speaking to a popular audience, that's probably what he means. A larger money supply (monetary inflation) typically results in higher prices (price inflation).
- jakehow 16y ago
  Gotta love the confidence. You are talking about price inflation, the parent is talking about currency inflation. Maybe you guys should stick to Merriam Webster's definition which masterfully butchers them into one: "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services" http://www.merriam-webster.com/dictionary/inflation http://www.merriam-webster.com/dictionary/inflation

chrismealy 16y ago

That's not been the case for Japan. The cause of the inflation in Zimbabwe is the collapse of their economy, not the other way around. More here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773

gahahaha 16y ago

There is actually deflation in Zimbabwe now. From Wikipedia: """In an effort to combat inflation and foster economic growth the Zimbabwean Dollar was suspended indefinitely on 12 April 2009. Zimbabwe now allows trade in the United States Dollar and various other currencies such as the South African Rand, Euro, Sterling, and Botswana Pula. The use of the US Dollar yielded enormous results within weeks as inflation actually fell below zero to -3 percent.""" Also, a brief repetition of what we have learned from Keynes: """Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully. Government policies to increase demand, by contrast, can reduce unemployment quickly. Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach""" This is the point we are at now "government spending must step into the breach". And we can borrow to our harts content because we are in a liquidity trap where rates are zero, and deflation is the clear and present danger, not inflation. If inflation comes back, we should cheer, because that means that the economy is doing better again. Comparing the US to Zimbabwe is complete nonsense.