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But is inflation a realistic debt-reducing tool in the modern economy? Inflation rates are very low, particularly when considering the debt load. We could quite

by AlanSE 6y ago

But is inflation a realistic debt-reducing tool in the modern economy? Inflation rates are very low, particularly when considering the debt load. We could quite simply increase the target inflation rate from 2% to 4% inflation, but this would only affect the servicing of the current loans, and the next round to refinancing will correspondingly increase the borrowing rates. There's still the matter of principal. The US government, for instance, could absolve itself of almost all debt liability by going into high-inflation mode, erasing the burden of most T-bills. Again though, this is a one-shot thing. It could eliminate most of the current debt, but would do nothing about the deficits. As long as large deficits remain (and are politically intractable), it doesn't seem workable in any meaningful sense. The working quantity of cash out there is also fairly small. The entire point of a bank is that it minimizes the cash in the system by balancing deposits against loans. That means that changing the cash supply will affect the price levels more violently than what would otherwise be expected. That just means that there's less cushion to absorb large amounts of new cash that government issues, again, kind of reducing the benefit of "free" money.

runako 6y ago
> But is inflation a realistic debt-reducing tool in the modern economy? Yes, when you consider that we don't need actual CPI inflation in order to reduce the debt. Economic growth works just as well. In hard terms, we can inflate money so the debt is smaller. We could also all get richer so the debt is proportionally smaller. Pro-growth policies like the strengthened safety net we in the US are experimenting with as pandemic response could have the impact of increasing overall growth to make debts more easily serviceable.
bubbleRefuge 6y ago
what burden of T-Bills ? T-Bills are a private sector asset(a good thing) and a public sector liability which doesn't matter since the treasury can just issue new T-Bills in order to 'fund' debt service ad-infinitum. Never ever has funding(i.e. US treasury account balances) prevented government spending from occurring in the modern era. I think we spend 6 Trillion in 2020 on stimulus programs, etc. Where do you think that money came from ?
- AlanSE 6y ago
  The Federal government pays interest on T-bills with tax revenue. I don't understand why people give me resistance on this. The higher the debt is, the higher the interest payments are. Taken to its logical extreme, why bother collecting taxes at all? Just pay for all government spending with this magic money machine.
  - dragonwriter 6y ago
    > The Federal government pays interest on T-bills with tax revenue. Generally, no, it pays the interest on T-Bills (or any other marginal increase in spending) with additional borrowing. > I don't understand why people give me resistance on this. Because it's mostly false. > The higher the debt is, the higher the interest payments are. Ceteris paribus, yes, but that doesn't support your other claim. > Taken to its logical extreme, why bother collecting taxes at all? MMT adherents will tell you “for the monetary impacts of withdrawing the amount of funds, and the distribution of funds, collected by the taxes from circulation”.
    - AlanSE 6y ago
      You comments have prompted me to start reading the book The Deficit Myth. I am looking into this because people I respect are saying things that surprise me. I abjectly disagree with your sentiments and the core points of the book, so far. I'm looking to see if this book will change my mind. It's hard to even pin down what MMT is saying. What I'm saying is that our national debt is productivity borrowed from our future, from our children, used for today. This translates into real investment, because I fully expect that our debt crowds out physical investment, like renewable energy or nuclear power plants in favor of plants with lower capital but higher operating costs. It's entirely possible to borrow from our children in terms of physical allocation of assets. While the debt is just some numbers in computers, it changes the way we allocate real productive resources. I fully agree that we can, and should, step on the inflation pedal more. If our deficit were fully paid for by printing money, then I would not have a problem with it. I would hardly even consider it a deficit. This is miles away from reality. Issuing T-bills is not the same as issuing cash, and this book I'm reading (and commentators like you) are reckless with the distinction. I also agree with the book's claim that we should increase taxes. This appears to be the opposite of what the MMT headline argument is, which is that deficits don't matter.
fuoqi 6y ago
Yes, it is. There is nothing magic about modern economy, increase supply of something more than there is demand for it and eventually it will lose its relative value. Many argue that real yield of T-bills is already negative. This is why the Fed has to buy them itself (thus effectively it prints money out of thin air), since there is not enough domestic or foreign investors which are willing to invest into them on such conditions. I think we don't see big inflation (relative to the amount of the injected money) for two reasons: - Slow velocity of money due to the effects of the pandemic. It's a temporary effect and we already see raises of oil and steel prices. - Money distribution. The Fed (and the US government in general) policy mostly benefits the rich. Thus we do see inflation of real estate and financial assets (including cryptocurrencies). It works well for now (well, let's forget about the moral aspect of such policy for now), but such capital is very mobile and it can migrate to other jurisdictions very fast on the very first signs of danger, thus aggravating the situation which has caused this migration even further. A bigger factor from which the "magic" comes in my opinion is the reserve status of the dollar, highly disproportionate to the global share of the US economy. There are signs that this status gradually being lost, which in 10-20 years probably will lead to big tectonic shifts in the global economy. I think that in 20-30 years, the US economy will be far more "normal" than currently, i.e. it will not be able to exploit the reserve status anymore.
willcipriano 6y ago
> Inflation rates are very low, particularly when considering the debt load. We could quite simply increase the target inflation rate from 2% to 4% inflation. You probably mean CPI, not inflation. Inflation is really only loosely correlated if at all with the price of goods that consumers actually buy. Things like hedonic quality adjustments leave CPI largely up to whims of the regulators.
- ls612 6y ago
  No, that isn’t what it’s doing. All it’s doing is saying that we aren’t going to announce a 99.99% deflation in hard drives because now they are measured in TB instead of MB in the 90s, and things of that nature. In a platonic ideal the CPI aims to measure an unchanging basket of goods, but when this becomes impossible in reality something needs to be done.
  - willcipriano 6y ago
    The trouble is CPI is not generated in a transparent enough manner to prove your or my assertion.
    - dragonwriter 6y ago
      > The trouble is CPI is not generated in a transparent enough manner to prove your or my assertion. It's obviously a complicated domain, but I think it is dishonest to say that it is transparency issue. It's not like BLS keeps adjustment methodologies secret.
      - willcipriano 6y ago
        Methodologies sure, I can pull up some of the formulas they use. The dataset on the other hand, that is secret. A independent party cannot calculate CPI and end up at the same result as BLS. For something as important as inflation, and for this to be considered remotely scientific, the results need to be repeatable by independent parties.
imtringued 6y ago
2% inflation is a policy goal, not some trickery to mess with debts. Debt is one way to drive inflation to the 2% goal. As long as there are productive investments it would be foolish to just let your money sit around instead of investing it. Unfortunately central bank money isn't driving any investments, just a stock market bubble.

by AlanSE 6y ago

runako 6y ago

> But is inflation a realistic debt-reducing tool in the modern economy? Yes, when you consider that we don't need actual CPI inflation in order to reduce the debt. Economic growth works just as well. In hard terms, we can inflate money so the debt is smaller. We could also all get richer so the debt is proportionally smaller. Pro-growth policies like the strengthened safety net we in the US are experimenting with as pandemic response could have the impact of increasing overall growth to make debts more easily serviceable.

bubbleRefuge 6y ago

what burden of T-Bills ? T-Bills are a private sector asset(a good thing) and a public sector liability which doesn't matter since the treasury can just issue new T-Bills in order to 'fund' debt service ad-infinitum. Never ever has funding(i.e. US treasury account balances) prevented government spending from occurring in the modern era. I think we spend 6 Trillion in 2020 on stimulus programs, etc. Where do you think that money came from ?

AlanSE 6y ago
The Federal government pays interest on T-bills with tax revenue. I don't understand why people give me resistance on this. The higher the debt is, the higher the interest payments are. Taken to its logical extreme, why bother collecting taxes at all? Just pay for all government spending with this magic money machine.
- dragonwriter 6y ago
  > The Federal government pays interest on T-bills with tax revenue. Generally, no, it pays the interest on T-Bills (or any other marginal increase in spending) with additional borrowing. > I don't understand why people give me resistance on this. Because it's mostly false. > The higher the debt is, the higher the interest payments are. Ceteris paribus, yes, but that doesn't support your other claim. > Taken to its logical extreme, why bother collecting taxes at all? MMT adherents will tell you “for the monetary impacts of withdrawing the amount of funds, and the distribution of funds, collected by the taxes from circulation”.
  - AlanSE 6y ago
    You comments have prompted me to start reading the book The Deficit Myth. I am looking into this because people I respect are saying things that surprise me. I abjectly disagree with your sentiments and the core points of the book, so far. I'm looking to see if this book will change my mind. It's hard to even pin down what MMT is saying. What I'm saying is that our national debt is productivity borrowed from our future, from our children, used for today. This translates into real investment, because I fully expect that our debt crowds out physical investment, like renewable energy or nuclear power plants in favor of plants with lower capital but higher operating costs. It's entirely possible to borrow from our children in terms of physical allocation of assets. While the debt is just some numbers in computers, it changes the way we allocate real productive resources. I fully agree that we can, and should, step on the inflation pedal more. If our deficit were fully paid for by printing money, then I would not have a problem with it. I would hardly even consider it a deficit. This is miles away from reality. Issuing T-bills is not the same as issuing cash, and this book I'm reading (and commentators like you) are reckless with the distinction. I also agree with the book's claim that we should increase taxes. This appears to be the opposite of what the MMT headline argument is, which is that deficits don't matter.

fuoqi 6y ago

Yes, it is. There is nothing magic about modern economy, increase supply of something more than there is demand for it and eventually it will lose its relative value. Many argue that real yield of T-bills is already negative. This is why the Fed has to buy them itself (thus effectively it prints money out of thin air), since there is not enough domestic or foreign investors which are willing to invest into them on such conditions. I think we don't see big inflation (relative to the amount of the injected money) for two reasons: - Slow velocity of money due to the effects of the pandemic. It's a temporary effect and we already see raises of oil and steel prices. - Money distribution. The Fed (and the US government in general) policy mostly benefits the rich. Thus we do see inflation of real estate and financial assets (including cryptocurrencies). It works well for now (well, let's forget about the moral aspect of such policy for now), but such capital is very mobile and it can migrate to other jurisdictions very fast on the very first signs of danger, thus aggravating the situation which has caused this migration even further. A bigger factor from which the "magic" comes in my opinion is the reserve status of the dollar, highly disproportionate to the global share of the US economy. There are signs that this status gradually being lost, which in 10-20 years probably will lead to big tectonic shifts in the global economy. I think that in 20-30 years, the US economy will be far more "normal" than currently, i.e. it will not be able to exploit the reserve status anymore.

willcipriano 6y ago

> Inflation rates are very low, particularly when considering the debt load. We could quite simply increase the target inflation rate from 2% to 4% inflation. You probably mean CPI, not inflation. Inflation is really only loosely correlated if at all with the price of goods that consumers actually buy. Things like hedonic quality adjustments leave CPI largely up to whims of the regulators.

ls612 6y ago
No, that isn’t what it’s doing. All it’s doing is saying that we aren’t going to announce a 99.99% deflation in hard drives because now they are measured in TB instead of MB in the 90s, and things of that nature. In a platonic ideal the CPI aims to measure an unchanging basket of goods, but when this becomes impossible in reality something needs to be done.
- willcipriano 6y ago
  The trouble is CPI is not generated in a transparent enough manner to prove your or my assertion.
  - dragonwriter 6y ago
    > The trouble is CPI is not generated in a transparent enough manner to prove your or my assertion. It's obviously a complicated domain, but I think it is dishonest to say that it is transparency issue. It's not like BLS keeps adjustment methodologies secret.
    - willcipriano 6y ago
      Methodologies sure, I can pull up some of the formulas they use. The dataset on the other hand, that is secret. A independent party cannot calculate CPI and end up at the same result as BLS. For something as important as inflation, and for this to be considered remotely scientific, the results need to be repeatable by independent parties.

imtringued 6y ago

2% inflation is a policy goal, not some trickery to mess with debts. Debt is one way to drive inflation to the 2% goal. As long as there are productive investments it would be foolish to just let your money sit around instead of investing it. Unfortunately central bank money isn't driving any investments, just a stock market bubble.