5 ms·

What is the hypothetical scenario in which deficit spending (creating more money supply) doesn’t lead to more dollars chasing the same goods and services?

thaumasiotes 5y ago
The standard scenario would be that the addition of liquidity allows trade to occur when it otherwise wouldn't. The growth in real production can exceed the growth in the money supply. This is generally what we imagine happening with credit cards and other forms of finance.
SamReidHughes 5y ago
Simple example: A government goes from spending 1% of GDP to deficit spending 6% of GDP to build an interstate highway network. CPI goes down, because we have _more_ goods and services. Also, with higher interest rates, more people would buy government bonds instead of investing privately. Deficit spending on its own doesn't logically imply inflation or money-printing, or even an inflation pay cut. Wasteful spending does.
- kortilla 5y ago
  > government goes from spending 1% of GDP to deficit spending 6% of GDP to build an interstate highway network. CPI goes down You talked past the conclusion here.
trinovantes 5y ago
Japan didn't experience much if any inflation in the early 2000s QE after the 2007 financial crisis also didn't cause much inflation
- SamReidHughes 5y ago
  QE made the inflation rate above-zero instead of being negative. Its purpose was to stave off deflation.
  - trinovantes 5y ago
    And in both examples, inflation did not skyrocket like it is today. Therefore QE is not solely responsible for most of the inflation that we are seeing
- coryrc 5y ago
  Look at housing prices and tell me again there's been "not much inflation". Who cares if goods which are ten percent of your spending went down in price when housing and healthcare skyrocketed?
  - trinovantes 5y ago
    Skyrocketing housing prices are caused by restrictive zoning and speculative investors than the 2007 QE Not to mention there are some real estate markets that have lost value in recent years
  - slg 5y ago
    Look at computer prices and tell me again there has been inflation. Cherry picking one or two categories which are impacted by countless other issues does nothing to prove your point.
    - Ekaros 5y ago
      Top of the line smartphones certainly have gotten lot more expensive.
      - slg 5y ago
        You actually hit on a great example of why inflation numbers are flawed. The product you are comparing is "top of the line smartphones". However, the 2022 version of that product is barely even comparable to the 2012 version. The phone, the computer, the car, the house, or the medical care that you purchase today is greatly improved compared to the same item you would have purchased in the past. That improvement is ignored in inflation calculations.
        chii 5y ago
        It's not ignored. There's an adjustment called the hedonic adjustment for this very purpose. However, I personally don't really agree with it.
mbesto 5y ago
If I understand global economics correctly... Relatively speaking, if the dollar is strong and the US continues to export goods/services, then some of the inflation is absorbed by other countries.
neilwilson 5y ago
You're a doctor. I hire you in the public sector for $100 and you save that $100 in a drawer (or a bank account). How does putting money in a drawer cause prices to go up? How do you have a deficit without somebody somewhere putting money in a drawer? Money supply is a stock. Spending is a flow. Spending is from income less taxation, which means the next person earning the income gets less than you spend. If the spending continues then all the income disappears in tax. There is a finite transaction sequence and no deficit. What that tells you is that government spending even if there is a balanced budget can cause inflation - because it depends upon the level of flow, not the stock.
- willcipriano 5y ago
  > How does putting money in a drawer cause prices to go up If I know lots of drawers stacked with cash exist, I'll value it less. At some point those dollars will chase the goods and buying and render the dollars I'm holding less valuable.
  - neilwilson 5y ago
    "If I know lots of drawers stacked with cash exist, I'll value it less." Pension funds are stuffed full of savings, and they get bigger with every passing year. Do they ever decrease? If not then when is that going to happen? Are you valuing your income less because of the ever increasing level of savings? Because nobody else is.
    - willcipriano 5y ago
      Let's say I have a cryptocurrency and I premine a thousand units and make a hundred available for use. Those 900 could enter the market at any time and drop the value, so for me, I'd price that in. Same thing with cash in a drawer, it may exit the drawer someday.
      - neilwilson 5y ago
        It may, but it doesn't - because insurance and status. Similarly all the oxygen molecules in the room may spontaneously move to one corner of the room long enough for you to suffocate. But I bet you don't walk around in a diving suit.
8note 5y ago
you give all the money to people who have nothing more to spend on. Is it hypothetical?

thaumasiotes 5y ago

The standard scenario would be that the addition of liquidity allows trade to occur when it otherwise wouldn't. The growth in real production can exceed the growth in the money supply. This is generally what we imagine happening with credit cards and other forms of finance.

SamReidHughes 5y ago

Simple example: A government goes from spending 1% of GDP to deficit spending 6% of GDP to build an interstate highway network. CPI goes down, because we have _more_ goods and services. Also, with higher interest rates, more people would buy government bonds instead of investing privately. Deficit spending on its own doesn't logically imply inflation or money-printing, or even an inflation pay cut. Wasteful spending does.

kortilla 5y ago
> government goes from spending 1% of GDP to deficit spending 6% of GDP to build an interstate highway network. CPI goes down You talked past the conclusion here.

trinovantes 5y ago

Japan didn't experience much if any inflation in the early 2000s QE after the 2007 financial crisis also didn't cause much inflation

SamReidHughes 5y ago
QE made the inflation rate above-zero instead of being negative. Its purpose was to stave off deflation.
- trinovantes 5y ago
  And in both examples, inflation did not skyrocket like it is today. Therefore QE is not solely responsible for most of the inflation that we are seeing
coryrc 5y ago
Look at housing prices and tell me again there's been "not much inflation". Who cares if goods which are ten percent of your spending went down in price when housing and healthcare skyrocketed?
- trinovantes 5y ago
  Skyrocketing housing prices are caused by restrictive zoning and speculative investors than the 2007 QE Not to mention there are some real estate markets that have lost value in recent years
- slg 5y ago
  Look at computer prices and tell me again there has been inflation. Cherry picking one or two categories which are impacted by countless other issues does nothing to prove your point.
  - Ekaros 5y ago
    Top of the line smartphones certainly have gotten lot more expensive.
    - slg 5y ago
      You actually hit on a great example of why inflation numbers are flawed. The product you are comparing is "top of the line smartphones". However, the 2022 version of that product is barely even comparable to the 2012 version. The phone, the computer, the car, the house, or the medical care that you purchase today is greatly improved compared to the same item you would have purchased in the past. That improvement is ignored in inflation calculations.
      - chii 5y ago
        It's not ignored. There's an adjustment called the hedonic adjustment for this very purpose. However, I personally don't really agree with it.

mbesto 5y ago

If I understand global economics correctly... Relatively speaking, if the dollar is strong and the US continues to export goods/services, then some of the inflation is absorbed by other countries.

neilwilson 5y ago

You're a doctor. I hire you in the public sector for $100 and you save that $100 in a drawer (or a bank account). How does putting money in a drawer cause prices to go up? How do you have a deficit without somebody somewhere putting money in a drawer? Money supply is a stock. Spending is a flow. Spending is from income less taxation, which means the next person earning the income gets less than you spend. If the spending continues then all the income disappears in tax. There is a finite transaction sequence and no deficit. What that tells you is that government spending even if there is a balanced budget can cause inflation - because it depends upon the level of flow, not the stock.

willcipriano 5y ago
> How does putting money in a drawer cause prices to go up If I know lots of drawers stacked with cash exist, I'll value it less. At some point those dollars will chase the goods and buying and render the dollars I'm holding less valuable.
- neilwilson 5y ago
  "If I know lots of drawers stacked with cash exist, I'll value it less." Pension funds are stuffed full of savings, and they get bigger with every passing year. Do they ever decrease? If not then when is that going to happen? Are you valuing your income less because of the ever increasing level of savings? Because nobody else is.
  - willcipriano 5y ago
    Let's say I have a cryptocurrency and I premine a thousand units and make a hundred available for use. Those 900 could enter the market at any time and drop the value, so for me, I'd price that in. Same thing with cash in a drawer, it may exit the drawer someday.
    - neilwilson 5y ago
      It may, but it doesn't - because insurance and status. Similarly all the oxygen molecules in the room may spontaneously move to one corner of the room long enough for you to suffocate. But I bet you don't walk around in a diving suit.

8note 5y ago

you give all the money to people who have nothing more to spend on. Is it hypothetical?