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> There are real limits to how much money we have. I think it's very important for us to be aware that while this is true for private individuals, companies, a

> There are real limits to how much money we have. I think it's very important for us to be aware that while this is true for private individuals, companies, and local governments, it is totally false for monetarily sovereign governments like the US federal government. There is no limit to how much money it can spend. Any discussion of budgets at that level in terms of deficits etc. is completely flawed, and not just because a lot of politicians are extremely hypocritical about it, but because it just makes no sense in terms of economics and finance. When thinking about the spending and taxation of a monetarily sovereign governments, the only real constraint is inflation. This is because the only real constraint is the amount of real resources that are available. For what it's worth, this approach is part of what's called "functional finance".

akvadrako 9y ago
So we can spend an unlimited amount of money? Seems like eventually you'll run out of space in the universe to hold all the zeros you'll be adding due to inflation.
spdionis 8y ago
There is no limit to how much money the government can spend but there is a limit because inflation? What?
- golemiprague 8y ago
  What he meant is that government can print more money but that will create inflation
- slfnflctd 8y ago
  Rather than being a hard limit imposed by a physical pile of rare metal (which it was in the U.S. until 1971), fiat currency is instead tied to the trust level of the government issuing it. This means that theoretically, yes, the folks in charge of your country could expend tremendous effort filling up warehouses with printed cash (or bank accounts with billions of 'fresh' digital dollars) if they wanted. However, there are innumerable practical limits on such behavior: Any country that suddenly declared it had more money than all the others combined and was now buying up all the available land on the planet would find themselves in a heap of trouble. Trust still has to be earned & maintained, and this involves continuous demonstrations that no one is 'cheating'. Localized experiments by playing with 'created' money (responsibly) are fine, however, and through this aspect, fiat currencies provide very useful flexibility which is now essential to modern life. If the government just gave everyone a million dollars, the purchasing power of that money would quickly disappear as purveyors of the most popularly sought limited resources raised prices to meet demand. This is inflation. Eventually most people's extra million dollars would be spent, and almost no one could afford the items with jacked up prices any longer. In turn, those prices would fall back down to - once again - meet demand (deflation). Sellers need buyers and vice versa. Money would change hands, there would be winners and losers, and it would be hugely disruptive-- but eventually life would return to normal for 99% of folks and it would pretty much be like it never happened.
  - spdionis 8y ago
    All of this is clear to me and pretty obvious. My point was that the following paragraph from GGP is contradictory: > There is no limit to how much money it can spend. Any discussion of budgets at that level in terms of deficits etc. is completely flawed, and not just because a lot of politicians are extremely hypocritical about it, but because it just makes no sense in terms of economics and finance. > When thinking about the spending and taxation of a monetarily sovereign governments, the only real constraint is inflation.
    - slfnflctd 8y ago
      A tad bit pedantic, but I see your point that "There is no limit" and "real constraint" are in opposition. I think the comment was just trying to say there is no fixed ceiling.
    - nhaehnle 8y ago
      Different kinds of limits and constraints. I may not have made that perfectly clear in my original comment, but on the other hand, the real meaning should have been obvious if you had used a generous reading of what I wrote. The point is that in the typical political discourse, people extrapolate their own personal experience to government. They seem to think that if the government spends too much, then at some point it will literally be unable to spend more -- and that's just wrong. Inflation doesn't change that. Inflation is simply the answer to the obvious question that comes next. After all when you tell people the truth that government has no limit to how much it can spend, they tend to become understandably suspicious. TANSTAAFL and all that. Inflation doesn't affect how much money the government is able to spend, but it does affect whether more (net) spending is a good idea, so it is a constraint in that sense. But it's qualitatively very different from the entirely fictional budget constraint that most people seem to be worried about.
  - nhaehnle 8y ago
    I largely agree with you, although I think one should place less focus on "trust". It is too vague a concept, and I believe it is too often used to confuse rather than enlighten, and to beat well-intentioned politics into submission (aka, "you have to earn the trust of the market", which means precisely nothing). In this particular case: > Any country that suddenly declared it had more money than all the others combined and was now buying up all the available land on the planet would find themselves in a heap of trouble. Trust still has to be earned & maintained ... why not be more specific and say that if a country did that, its currency would immediately drop in value on the foreign exchange markets. Anyway, I'm not saying that trust is irrelevant, and I do largely agree with you, I just think it tends to be overrated in these kinds of discussions.

akvadrako 9y ago

So we can spend an unlimited amount of money? Seems like eventually you'll run out of space in the universe to hold all the zeros you'll be adding due to inflation.

spdionis 8y ago

There is no limit to how much money the government can spend but there is a limit because inflation? What?

golemiprague 8y ago
What he meant is that government can print more money but that will create inflation
slfnflctd 8y ago
Rather than being a hard limit imposed by a physical pile of rare metal (which it was in the U.S. until 1971), fiat currency is instead tied to the trust level of the government issuing it. This means that theoretically, yes, the folks in charge of your country could expend tremendous effort filling up warehouses with printed cash (or bank accounts with billions of 'fresh' digital dollars) if they wanted. However, there are innumerable practical limits on such behavior: Any country that suddenly declared it had more money than all the others combined and was now buying up all the available land on the planet would find themselves in a heap of trouble. Trust still has to be earned & maintained, and this involves continuous demonstrations that no one is 'cheating'. Localized experiments by playing with 'created' money (responsibly) are fine, however, and through this aspect, fiat currencies provide very useful flexibility which is now essential to modern life. If the government just gave everyone a million dollars, the purchasing power of that money would quickly disappear as purveyors of the most popularly sought limited resources raised prices to meet demand. This is inflation. Eventually most people's extra million dollars would be spent, and almost no one could afford the items with jacked up prices any longer. In turn, those prices would fall back down to - once again - meet demand (deflation). Sellers need buyers and vice versa. Money would change hands, there would be winners and losers, and it would be hugely disruptive-- but eventually life would return to normal for 99% of folks and it would pretty much be like it never happened.
- spdionis 8y ago
  All of this is clear to me and pretty obvious. My point was that the following paragraph from GGP is contradictory: > There is no limit to how much money it can spend. Any discussion of budgets at that level in terms of deficits etc. is completely flawed, and not just because a lot of politicians are extremely hypocritical about it, but because it just makes no sense in terms of economics and finance. > When thinking about the spending and taxation of a monetarily sovereign governments, the only real constraint is inflation.
  - slfnflctd 8y ago
    A tad bit pedantic, but I see your point that "There is no limit" and "real constraint" are in opposition. I think the comment was just trying to say there is no fixed ceiling.
  - nhaehnle 8y ago
    Different kinds of limits and constraints. I may not have made that perfectly clear in my original comment, but on the other hand, the real meaning should have been obvious if you had used a generous reading of what I wrote. The point is that in the typical political discourse, people extrapolate their own personal experience to government. They seem to think that if the government spends too much, then at some point it will literally be unable to spend more -- and that's just wrong. Inflation doesn't change that. Inflation is simply the answer to the obvious question that comes next. After all when you tell people the truth that government has no limit to how much it can spend, they tend to become understandably suspicious. TANSTAAFL and all that. Inflation doesn't affect how much money the government is able to spend, but it does affect whether more (net) spending is a good idea, so it is a constraint in that sense. But it's qualitatively very different from the entirely fictional budget constraint that most people seem to be worried about.
- nhaehnle 8y ago
  I largely agree with you, although I think one should place less focus on "trust". It is too vague a concept, and I believe it is too often used to confuse rather than enlighten, and to beat well-intentioned politics into submission (aka, "you have to earn the trust of the market", which means precisely nothing). In this particular case: > Any country that suddenly declared it had more money than all the others combined and was now buying up all the available land on the planet would find themselves in a heap of trouble. Trust still has to be earned & maintained ... why not be more specific and say that if a country did that, its currency would immediately drop in value on the foreign exchange markets. Anyway, I'm not saying that trust is irrelevant, and I do largely agree with you, I just think it tends to be overrated in these kinds of discussions.