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> So, what you are saying is that government deficits are inflationary because they add money to the economy, but, on the other hand, government surplus don't r

> So, what you are saying is that government deficits are inflationary because they add money to the economy, but, on the other hand, government surplus don't retire money from the economy? Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything. A deficit or surplus is merely the delta between total revenues and an arbitrarily defined budget. Inflation is caused by additional dollars chasing the same number of goods. Printing money does not create goods and services - it merely decreases the value of each dollar relative to everything else. If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it. I don't know why you would think dollars would be any different. > Yes, but the assets the Fed buy (when practicing QE) are in the accounts of the commercial banks in the Fed. After buying them, those assets are not there anymore, and, instead there is money (1). And money is basically a government bond that pay 0% interest. Yes, the bank exchanges an asset (like a treasury) in exchange for reserves (base money). The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase?

SpaceRaccoon 6y ago
> Printing money does not create goods and services - it merely decreases the value of each dollar relative to everything else. Consider that during a recession, factories have surplus capacity to produce more goods. But people don't have money to spend, so the factories don't use that existing capacity, or increase their capacity. Printing money can stimulate demand and thus increase production of goods. > If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it. Well, they haven't created an infinite amount (yet). What if the demand for your watches grows as fast as your machine can produce them? > why does the monetary base increase? Has inflation kept up with the growth of the money supply?
laurus 6y ago
> Inflation is caused by additional dollars chasing the same number of goods. But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation. > the bank exchanges an asset (like a treasury) in exchange for reserves (base money) The "monetary base" increases because of the way they define the monetary base. In the old days, the money in reserve accounts was convertible into gold, and the money in the Treasury bond accounts wasn't, so they count the money in the reserve accounts as part of the "monetary base" but not the money in the Treasury bond accounts.
- fbonetti 6y ago
  > But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation. I actually completely agree, but with a caveat. It may not cause inflation in terms of this years price level being higher than last years price level, but it will cause a decline in the purchasing power of the dollar. For example, let's say in the absence of intervention the price level would fall by 2%, but with intervention the price level would stay the same. That's still a 2% decline in purchasing power. > The "monetary base" increases because of the way they define the monetary base. The monetary base is defined as the sum of all currency (including coin) plus bank deposits. It increases or decreases completely at the Fed's discretion, because the Fed has the unique ability to create reserves. This isn't some semantic trickery.
  - laurus 6y ago
    Assuming that the fall in aggregate demand will last for several time periods, in the absence of intervention, the companies lay off part of their workforce, since now they don't need to produce as much per time period. So now unemployment is up and overall output is lower. By cutting output, the companies don't necessarily have to cut prices. In short: the lack of intervention doesn't necessarily lead to a fall in the price level. The point of saying that the Treasury bond accounts aren't counted as part of the monetary base while the reserve accounts are is that it doesn't really matter which account your money is in at the Fed. My original comment was pointing out that QE just moves reserves from one account to the other and that this has little effect on overall economic activity because lending by private banks isn't reserve constrained (MMT people do a good job explaining this as well).
RobertoG 6y ago
I'm a little late, but I want to answer for the sake of completeness. >>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything." You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject). Now, it seems to me that we agree also that a government deficit can be inflationary. So, by definition, a government deficit is adding money to the economy. My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money". >>" The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase? " Monetary base increase because that is how it's defined. I think that the problem here is that you subscribe to the fractional reserve banking theory that, I'm afraid, is false. I suggest reading this report from the Bank of England (1) about how money creation works. A private bank lending is not limited for the quantity of reserves available in the system, because central banks have to keep the system of payments working and are targeting an interest rate. So, central banks have to answer any request for additional reserves. The corollary to all this, is that it doesn't matter if the asset of the private bank is a treasury or reserves in the banking system, banks can lend anyway. The central banks sell treasury to the banks for controlling the interest rate, not the quantity of money. 1. - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- fbonetti 6y ago
  > My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money". It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3]. No matter how you look at it, despite the government running a surplus, the money supply continued to increase. How do you square that with your claim that surpluses remove money from the economy? [1] https://fred.stlouisfed.org/series/FYFSD https://fred.stlouisfed.org/series/FYFSD [2] https://fred.stlouisfed.org/series/BOGMBASEW https://fred.stlouisfed.org/series/BOGMBASEW [3] https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE

SpaceRaccoon 6y ago

> Printing money does not create goods and services - it merely decreases the value of each dollar relative to everything else. Consider that during a recession, factories have surplus capacity to produce more goods. But people don't have money to spend, so the factories don't use that existing capacity, or increase their capacity. Printing money can stimulate demand and thus increase production of goods. > If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it. Well, they haven't created an infinite amount (yet). What if the demand for your watches grows as fast as your machine can produce them? > why does the monetary base increase? Has inflation kept up with the growth of the money supply?

laurus 6y ago

> Inflation is caused by additional dollars chasing the same number of goods. But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation. > the bank exchanges an asset (like a treasury) in exchange for reserves (base money) The "monetary base" increases because of the way they define the monetary base. In the old days, the money in reserve accounts was convertible into gold, and the money in the Treasury bond accounts wasn't, so they count the money in the reserve accounts as part of the "monetary base" but not the money in the Treasury bond accounts.

fbonetti 6y ago
> But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation. I actually completely agree, but with a caveat. It may not cause inflation in terms of this years price level being higher than last years price level, but it will cause a decline in the purchasing power of the dollar. For example, let's say in the absence of intervention the price level would fall by 2%, but with intervention the price level would stay the same. That's still a 2% decline in purchasing power. > The "monetary base" increases because of the way they define the monetary base. The monetary base is defined as the sum of all currency (including coin) plus bank deposits. It increases or decreases completely at the Fed's discretion, because the Fed has the unique ability to create reserves. This isn't some semantic trickery.
- laurus 6y ago
  Assuming that the fall in aggregate demand will last for several time periods, in the absence of intervention, the companies lay off part of their workforce, since now they don't need to produce as much per time period. So now unemployment is up and overall output is lower. By cutting output, the companies don't necessarily have to cut prices. In short: the lack of intervention doesn't necessarily lead to a fall in the price level. The point of saying that the Treasury bond accounts aren't counted as part of the monetary base while the reserve accounts are is that it doesn't really matter which account your money is in at the Fed. My original comment was pointing out that QE just moves reserves from one account to the other and that this has little effect on overall economic activity because lending by private banks isn't reserve constrained (MMT people do a good job explaining this as well).

RobertoG 6y ago

I'm a little late, but I want to answer for the sake of completeness. >>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything." You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject). Now, it seems to me that we agree also that a government deficit can be inflationary. So, by definition, a government deficit is adding money to the economy. My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money". >>" The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase? " Monetary base increase because that is how it's defined. I think that the problem here is that you subscribe to the fractional reserve banking theory that, I'm afraid, is false. I suggest reading this report from the Bank of England (1) about how money creation works. A private bank lending is not limited for the quantity of reserves available in the system, because central banks have to keep the system of payments working and are targeting an interest rate. So, central banks have to answer any request for additional reserves. The corollary to all this, is that it doesn't matter if the asset of the private bank is a treasury or reserves in the banking system, banks can lend anyway. The central banks sell treasury to the banks for controlling the interest rate, not the quantity of money. 1. - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

fbonetti 6y ago
> My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money". It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3]. No matter how you look at it, despite the government running a surplus, the money supply continued to increase. How do you square that with your claim that surpluses remove money from the economy? [1] https://fred.stlouisfed.org/series/FYFSD https://fred.stlouisfed.org/series/FYFSD [2] https://fred.stlouisfed.org/series/BOGMBASEW https://fred.stlouisfed.org/series/BOGMBASEW [3] https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE