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This assumes an erroneous loadable funds model where loans are supply driven; loans have always been demand driven. It's the same reason why QE isn't inflation

• dllthomas 13y ago
  Doesn't adding dollars to the economy (through payment rather than loan) increase the ability to repay loans of those paid, those paid by those paid, etc, and thus their corresponding creditworthiness? Also, if people have money to spend, companies will borrow to service their needs. It's not about the ability of the banks to loan the money out (which is part of why QE isn't very meaningful).
  • kaonashi 13y ago
    It depends entirely on where it's added. If it is added where it will directly translate to demand (e.g. eliminating payroll tax) then you will get more spending, which will cause businesses to hire, take on loans to meet the new demand. At some point if you keep adding, you will surpass the ability of the market to absorb the demand and you will get inflation. If it is added on top of already flush corporate balance sheets (e.g. eliminating corporate taxes), then you most likely won't see much difference in the current environment. They won't use it to hire more people because the demand isn't there. Loans in and of themselves don't add net dollars to the private sector, as they create a liability for the exact amount of the loan (plus interest). For the domestic private sector to experience a net increase in financial assets, either the sovereign government (whoever's name is on the money) or the foreign sector must increase its deficit.