4 ms·
You've got to look at the combination: (1) Cut taxes, (2) Cut spending too? Or not, (3) If not, is the increased deficit financed by selling bonds to the public
by radford-neal 4y ago
You've got to look at the combination: (1) Cut taxes, (2) Cut spending too? Or not, (3) If not, is the increased deficit financed by selling bonds to the public, or to the central bank?
An increase in the money supply comes about only if (1) taxes are cut, (2) spending isn't cut, (3) the central bank buys the bonds issued as a result, creating the money to do so out of nothing.
A deficit financed by selling bonds to the public might perhaps increase expectations that sometime in the future the central bank will buy bonds using newly created money, but that is likely to have a more muted effect than them actually creating money now.
- imtringued 4y agoThe central bank buys the bonds off commercial banks so you need the commercial banks to create the deposits that the government can actually spend. If the goverment was sitting on central bank money it would have to issue physical dollar notes to actually spend the money.
- radford-neal 4y agoI'm not familiar with all the technical details, which in any case differ from country to country. But if you're trying to claim that the central banks of countries with fiat currencies can't create money to finance government deficits, you're just wrong. They very much can, and when they do to excess, the result is hyperinflation, as seen in places like Wiemar Germany and Zimbabwe. In moderation, it is a crucial part of central bank monetary policy, being the main mechanism by which central banks can expand the supply of base money, which is typically desired in a growing economy in order to prevent deflation. The process is known in economics as "monetizing debt". That this is a thing that central banks can do, and do do, is not in the least bit controversial.