4 ms·

since all inflation is created by the US government as an unofficial policy [...] to fund an ongoing operating deficit This is crackpot conspiracy theory state

since all inflation is created by the US government as an unofficial policy [...] to fund an ongoing operating deficit This is crackpot conspiracy theory stated as fact. There is a very obvious reasons why this theory doesn't make any sense: People know about inflation, and are free to adjust their behavior accordingly. The simple fact is that if inflation were lower, nominal interest rates would be lower to match as well, and vice versa. In the end, the real interest rate will end up in the same place. So the real story is much more nuanced. One important aspect is that monetary policy works better with higher inflation, because it takes longer to hit the Zero Lower Bound. This is why many economists have recently advocated raising the inflation target, with the hindsight experience of the ongoing aftermath of the Great Recession. Another important aspect is essentially the Red Queen Hypothesis of economics. Due to the way pricing works in the real world outside of financial markets and auctions, prices move up more easily than they move down. For markets to work well, relative prices must adjust quickly to reflect changing underlying conditions. This relative adjustment is easier to get when the overall price level tends to move upwards.

reedlaw 13y ago
Crackpot conspiracy theory? The Fed doesn't think so [1]. As that FAQ explains, the FOMC judges that maintaining a 2% inflation rate is optimal for price stability and maximal employment. The federal government operates at a deficit [2]. The Federal Reserve Banks holds U.S. Treasury debt as collateral for the Federal Reserve notes put into circulation by the Fed [3]. Therefore, although the quoted statement is somewhat inaccurate, the essential idea that government policy is responsible for inflation and finances its operations is true. 1. http://www.federalreserve.gov/faqs/economy_14400.htm http://www.federalreserve.gov/faqs/economy_14400.htm 2. https://www.cbo.gov/publication/21999 https://www.cbo.gov/publication/21999 3. http://www.federalreserve.gov/faqs/currency_12770.htm http://www.federalreserve.gov/faqs/currency_12770.htm
- a_c_s 13y ago
  Low, positive inflation is the ideal for many reasons that have nothing to do with the federal budget: inflation encourages investment, spending, makes people feel richer when their salaries go up every year, and it reduces debts. Given that most americans carry some form of large debt (student loans, mortgages, etc.), this is good for most citizens.
- nhaehnle 13y ago
  We are talking about slightly different things. I responded to the claim that inflation is created with the goal of financing a government deficit, and I stand by the claim that that's crackpot conspiracy theory. To substantiate that claim, you would have to prove somehow that the real interest rate is lower than it would be without this inflation.
  - reedlaw 13y ago
    While I wouldn't defend the wording of the original post, I don't believe it's too far from the truth. What do you mean by the _real_ interest rate? While Fed Chairman Ben Bernanke claims the Fed is simply "managing the monetary base" [1], the Fed does in fact purchase US Treasury Bonds without requiring the Treasury to pay back the debt. This monetization of debt allows the Treasury to increase government spending. The outcome is an increase in the monetary base which leads to rising price levels, or inflation. So while saying that inflation is created with the goal of financing government deficit is somewhat backwards, it's only a conflation of cause and effect--not a "crackpot conspiracy theory". 1. http://research.stlouisfed.org/publications/es/article/9644 http://research.stlouisfed.org/publications/es/article/9644
    - nhaehnle 13y ago
      By the real interest rate I mean the interest rate after taking inflation into account. If you think about it, the average long term nominal interest rate in the economy is going to be roughly in line with nominal growth of GDP, because there are market mechanisms in place to make it so: If the nominal interest rate exceeds nominal growth in GDP, then wealth effects (aka people have more money thanks to interest and therefore spend more) will eventually encourage faster growth of nominal GDP - either by stimulating more production (real GDP growth) or by driving up prices (inflation), or, more likely, by a mix of both. If nominal interest rates are below nominal growth in GDP, then it becomes more profitable to borrow money to invest in production. People will do this, and this will adjust interest rates up (you can understand this from two directions: on the one hand, profit is being spread around via interest, on the other hand, demand for loan drives up interest rates). These adjustments do not take over night - they probably operate on the timescale of years (unfortunately, economics tends to pay very little attention to how fast such market mechanisms operate, so we basically have no scientific basis for such statements, just common sense and gut feelings). Still, you cannot escape those adjustments of the interest rate in the long term. What does this have to do with governments, inflation, and financing the deficit? If the government consciously acted to increase inflation to finance its deficit [1] this would indeed temporarily benefit borrowers. However, this is a temporary measure and certainly not the case today. Furthermore, governments have also consciously acted to decrease inflation, which obviously has the opposite effect. So in the end, it's at best a wash. One last point: the Fed does in fact purchase US Treasury Bonds without requiring the Treasury to pay back the debt The same happens in the real economy as well. Firms operate using debt that is effectively never paid back. The debt is regularly rolled over, sure, but it is de facto permanent and contributes to a permanent increase of the money supply, which is what matters (if any of those quantities matter). The Fed does buy mostly Treasuries to create the monetary base (which is necessary for purely technical reasons), but what else would you have them buy? I personally wouldn't want "my" central bank to gamble on risky assets. [1] Also, I find it fascinating that the goldbugs never point to actual examples where this happened. I suspect they don't because it's a myth, at least in the countries those people come from outside of wartime.
dredmorbius 13y ago
This is crackpot conspiracy theory stated as fact. It's not crackpot, though it's slightly inaccurate. The Federal Reserve is established by Congress and its chairman appointed by the President. It's otherwise somewhat independent, is part public and part private, but might be considered a de facto fourth branch of the government. And among its remits are to manage the long-term inflation rate through open-market transactions (buying and selling treasury bills). You pretty much allude to that -- how could you have a target inflation rate ... without some means of aiming for and hitting that target. Now, the question of how effective monetary (and fiscal) policy are in actually affecting long-term economic growth is a whole 'nother barrel of tadpoles. I subscribe to the thermoeconomic / biophysical economic heterodoxies (very strongly influenced by ecology) which say that the cheapness (which is to say, ease of access) and abundance (flow rate) of energy are principle.
- nhaehnle 13y ago
  Yes, the Fed is supposed to manage long-term inflation. I was reacting the rather extraordinary claim that it does so to help finance the government deficit. This claim would only make sense if a long-term (and therefore known and expected by everybody) stable inflation could have an effect on the real interest rate. Evidence for that seems not to be forthcoming, so I stand by my statement.
  - dredmorbius 13y ago
    Growing the money supply -- inflating it -- does help finance the deficit, by allowing federal debt to be repaid with deflated currency. The US has grown its way out of past debts. Because real wealth and economic activity was also growing, the inflation, while significant, was still reasonably limited. Attempting to continue growing the money supply while the real economy is stagnant or contracting won't have that effect. Unless the Fed directly injects money into the Federal treasury, where it's paid out. In which case, unless the money is then lost through nonproductive economic activity, it will inflate the currency. In any event, the ability to continue immense levels of Federal borrowing will end. I'm not inclined to swallow the Republican line, but I'm coming to see long-term Federal deficits as a looming and increasing problem. Keep an eye on those Federal Reserve interest rates.
Canada 13y ago
> People know about inflation, and are free to adjust their behavior accordingly. People are not free to adjust their behavior accordingly. The average person is forced to transact in the official currency. Any alternative that threatens to become liquid enough for the average person to use will be shut down. (Thus the interest in this Bitcoin backers meet government regulators article) Sovereign countries with key energy resources must sell them for US dollars exclusively and they must recycle excess dollars into US government bonds, or receive freedom and democracy. This is the Petrodollar system, and it is the reason why the Feds can run endless deficits, and the Fed can put trillions of dollars of unmarketable assets onto its balance sheet without creating Weimar-style problems.
- nhaehnle 13y ago
  The Fed does not run endless deficits, in fact, it makes a profit. And any central bank can do crazy amounts of QE without inflation once the economy hits the Zero Lower Bound. The ECB did something rather similar. All of this has nothing to do with my central point, which was about real rates of interest.
  - Canada 13y ago
    Please notes the use of Feds and Fed. The Feds run the endless deficit, not the Fed. And in my humble opinion, the Petrodollar system has a great deal to do with real rates of interest.

reedlaw 13y ago

Crackpot conspiracy theory? The Fed doesn't think so [1]. As that FAQ explains, the FOMC judges that maintaining a 2% inflation rate is optimal for price stability and maximal employment. The federal government operates at a deficit [2]. The Federal Reserve Banks holds U.S. Treasury debt as collateral for the Federal Reserve notes put into circulation by the Fed [3]. Therefore, although the quoted statement is somewhat inaccurate, the essential idea that government policy is responsible for inflation and finances its operations is true. 1. http://www.federalreserve.gov/faqs/economy_14400.htm http://www.federalreserve.gov/faqs/economy_14400.htm 2. https://www.cbo.gov/publication/21999 https://www.cbo.gov/publication/21999 3. http://www.federalreserve.gov/faqs/currency_12770.htm http://www.federalreserve.gov/faqs/currency_12770.htm

a_c_s 13y ago
Low, positive inflation is the ideal for many reasons that have nothing to do with the federal budget: inflation encourages investment, spending, makes people feel richer when their salaries go up every year, and it reduces debts. Given that most americans carry some form of large debt (student loans, mortgages, etc.), this is good for most citizens.
nhaehnle 13y ago
We are talking about slightly different things. I responded to the claim that inflation is created with the goal of financing a government deficit, and I stand by the claim that that's crackpot conspiracy theory. To substantiate that claim, you would have to prove somehow that the real interest rate is lower than it would be without this inflation.
- reedlaw 13y ago
  While I wouldn't defend the wording of the original post, I don't believe it's too far from the truth. What do you mean by the _real_ interest rate? While Fed Chairman Ben Bernanke claims the Fed is simply "managing the monetary base" [1], the Fed does in fact purchase US Treasury Bonds without requiring the Treasury to pay back the debt. This monetization of debt allows the Treasury to increase government spending. The outcome is an increase in the monetary base which leads to rising price levels, or inflation. So while saying that inflation is created with the goal of financing government deficit is somewhat backwards, it's only a conflation of cause and effect--not a "crackpot conspiracy theory". 1. http://research.stlouisfed.org/publications/es/article/9644 http://research.stlouisfed.org/publications/es/article/9644
  - nhaehnle 13y ago
    By the real interest rate I mean the interest rate after taking inflation into account. If you think about it, the average long term nominal interest rate in the economy is going to be roughly in line with nominal growth of GDP, because there are market mechanisms in place to make it so: If the nominal interest rate exceeds nominal growth in GDP, then wealth effects (aka people have more money thanks to interest and therefore spend more) will eventually encourage faster growth of nominal GDP - either by stimulating more production (real GDP growth) or by driving up prices (inflation), or, more likely, by a mix of both. If nominal interest rates are below nominal growth in GDP, then it becomes more profitable to borrow money to invest in production. People will do this, and this will adjust interest rates up (you can understand this from two directions: on the one hand, profit is being spread around via interest, on the other hand, demand for loan drives up interest rates). These adjustments do not take over night - they probably operate on the timescale of years (unfortunately, economics tends to pay very little attention to how fast such market mechanisms operate, so we basically have no scientific basis for such statements, just common sense and gut feelings). Still, you cannot escape those adjustments of the interest rate in the long term. What does this have to do with governments, inflation, and financing the deficit? If the government consciously acted to increase inflation to finance its deficit [1] this would indeed temporarily benefit borrowers. However, this is a temporary measure and certainly not the case today. Furthermore, governments have also consciously acted to decrease inflation, which obviously has the opposite effect. So in the end, it's at best a wash. One last point: the Fed does in fact purchase US Treasury Bonds without requiring the Treasury to pay back the debt The same happens in the real economy as well. Firms operate using debt that is effectively never paid back. The debt is regularly rolled over, sure, but it is de facto permanent and contributes to a permanent increase of the money supply, which is what matters (if any of those quantities matter). The Fed does buy mostly Treasuries to create the monetary base (which is necessary for purely technical reasons), but what else would you have them buy? I personally wouldn't want "my" central bank to gamble on risky assets. [1] Also, I find it fascinating that the goldbugs never point to actual examples where this happened. I suspect they don't because it's a myth, at least in the countries those people come from outside of wartime.

dredmorbius 13y ago

This is crackpot conspiracy theory stated as fact. It's not crackpot, though it's slightly inaccurate. The Federal Reserve is established by Congress and its chairman appointed by the President. It's otherwise somewhat independent, is part public and part private, but might be considered a de facto fourth branch of the government. And among its remits are to manage the long-term inflation rate through open-market transactions (buying and selling treasury bills). You pretty much allude to that -- how could you have a target inflation rate ... without some means of aiming for and hitting that target. Now, the question of how effective monetary (and fiscal) policy are in actually affecting long-term economic growth is a whole 'nother barrel of tadpoles. I subscribe to the thermoeconomic / biophysical economic heterodoxies (very strongly influenced by ecology) which say that the cheapness (which is to say, ease of access) and abundance (flow rate) of energy are principle.

nhaehnle 13y ago
Yes, the Fed is supposed to manage long-term inflation. I was reacting the rather extraordinary claim that it does so to help finance the government deficit. This claim would only make sense if a long-term (and therefore known and expected by everybody) stable inflation could have an effect on the real interest rate. Evidence for that seems not to be forthcoming, so I stand by my statement.
- dredmorbius 13y ago
  Growing the money supply -- inflating it -- does help finance the deficit, by allowing federal debt to be repaid with deflated currency. The US has grown its way out of past debts. Because real wealth and economic activity was also growing, the inflation, while significant, was still reasonably limited. Attempting to continue growing the money supply while the real economy is stagnant or contracting won't have that effect. Unless the Fed directly injects money into the Federal treasury, where it's paid out. In which case, unless the money is then lost through nonproductive economic activity, it will inflate the currency. In any event, the ability to continue immense levels of Federal borrowing will end. I'm not inclined to swallow the Republican line, but I'm coming to see long-term Federal deficits as a looming and increasing problem. Keep an eye on those Federal Reserve interest rates.

Canada 13y ago

> People know about inflation, and are free to adjust their behavior accordingly. People are not free to adjust their behavior accordingly. The average person is forced to transact in the official currency. Any alternative that threatens to become liquid enough for the average person to use will be shut down. (Thus the interest in this Bitcoin backers meet government regulators article) Sovereign countries with key energy resources must sell them for US dollars exclusively and they must recycle excess dollars into US government bonds, or receive freedom and democracy. This is the Petrodollar system, and it is the reason why the Feds can run endless deficits, and the Fed can put trillions of dollars of unmarketable assets onto its balance sheet without creating Weimar-style problems.

nhaehnle 13y ago
The Fed does not run endless deficits, in fact, it makes a profit. And any central bank can do crazy amounts of QE without inflation once the economy hits the Zero Lower Bound. The ECB did something rather similar. All of this has nothing to do with my central point, which was about real rates of interest.
- Canada 13y ago
  Please notes the use of Feds and Fed. The Feds run the endless deficit, not the Fed. And in my humble opinion, the Petrodollar system has a great deal to do with real rates of interest.