[Zerogouki]

In fact, governments issuing debt is no different from simply "printing money" -- although few people grasp this.

Illustration:

(blah blah blah)

And remember, the net assets of the government = the net money supply of the private sector, so government surpluses are actually a way of saying that the government is destroying your money and net assets. This is why private savings rates are mirror images of deficits. This is why personal savings in the Clinton surplus era collapsed entirely, and why savings rates are going up right now in America -- because we're in a huge deficit, which allows for people to save in the private sector. Govt surpluses just mean the govt is destroying your money.

[Mod Note: Please don't use image macros. If you want to express confusion, write about how or why something confuses you. Macro removed.]

On a tangential note, I find the list of countries by external debt far more interesting. Norway has 2.5 times the debt per capita of the USA? So much for being the #1 country in the world. Luxembourg's debt is almost 40 times its GDP, and its debt per capita is 10 times ours! Suddenly, the total implosion of the US economy no longer seems so imminent.

[Kman]

The govt net assets are now down $100 -- the liquid cash is gone, but it still has the debt obligation of -$100 out to the private sector. And what about the private sector? It is now +$100 because it has the debt asset (the bond) and also the $100 from the govt spending. Essentially, the private sector bought something, and then got refunded the money but kept what it bought!

Debt is not money until it is repaid.... in your situation the government has just borrowed 100$ from the private sector, it then spends that 100$ on a bridge but it still has to pay back the loan which it took out, but because it spent the money on the bridge the government is BROKE!
The only way the government can fulfill its debt obligations in such a situation is by printing money and giving it to the person holding the IOU, this money printing in turn increases the money supply and causes prices to rise by 100$ overall (for simplicity's sake we will just assume that printing 100$ is the same as taxing 100$, it doesnt work exactly like that but its close), this means what the government does in essence in such a situation is to take 100$ from the private sector in order to buy the bridge, then it taxes a further 100$ via inflation in order to pay back the loan it took for the bridge, meaning net result is the private sector lost 100$ in purchasing power which could have been used on buying something else (sports cars, factories, whatever).

The private sector would give $120 in taxes to the govt, resulting in: 0 net assets for both. We're back to square one!

No your not back to square one, in such a situation where you tax the private sector 120$ in order pay back the loan, then your simply transferring 120$ from the private sector to the government for a little roundabout and then pay back the government loan with the private sector's own money, meaning in reality the government would still have stolen 120$ from the private sector since the government in such a situation never pays back its original loan.

This is very bad, because presumably in the last five years, real productive potential of the economy has gone up, but now we've erased $120 of the money supply in the private sector.

You havent erased any money, you have simply taken money and spent it, this money then goes back out into the private sector economy. If the government does not inflate the money supply then the only way that it can back the loan which it owes is by taxing the money from the people straight up and honestly.
Meaning there is no reduction of the money supply, you simply transfer money around if you use taxes or you tax the money necessary for paying back the loan with the inflation/money printing tax.

except that borrowing actually results in more money supply creation in the long term due to interest (which is a good thing, but sort of a roundabout way of doing things).

It only results in money supply creation if the central bank decides to pay its interest payments with the inflation tax, if it pays its interest payments with normal taxes then there is no increase in the money supply.

well, we're already doing it! Government debt is therefore not like regular household or business debt, because we can pay it by creating new financial assets (new money) out of thin air, which businesses and households cannot, because their debt is loaned against real assets (there is a limit to their borrowing), so the net amount never actually goes up.

There is a price for creating money out of thin air in order to pay interests and other expenditures and that is an increase in the money supply which means more money chasing the same amount of goods which leads to higher prices, these higher prices mean that the average citizen will have lower purchasing power (and lower purchasing power is the exact same effect which normal taxes have, hence why I call money printing an inflation tax). There is no magical solution to government spending like you apparently believe, every penny that it spends means that there will be one penny less spent by the working class schmucks.

What this means for interest payments -- they don't actually limit the government's budget, because the government budget is not inherently limited. The concept of borrowing money to spend money, for the government, is entirely silly and misunderstanding of how a modern monetary system works that extends all the way up the chain to the central bank and the treasury (well, they get it, but the politicians who charge them with their duties do not!).

They are limited, interest payments have to be paid for one way or another, either with normal taxes or the inflation tax, there is no magical pain free solution. If you dont want to pay them honestly straight up with taxes then you will simply cause prices on everything to rise, its because of Keynesians like you that the dollar has lost 95% of its value since 1913.

And remember, the net assets of the government = the net money supply of the private sector, so government surpluses are actually a way of saying that the government is destroying your money and net assets.

WHAT??? government surplusses removes the need for them to use the inflation tax, meaning the money will hold its value. Historically it has always been governments or kings that couldnt pay their bills who resorted to destroying the value of their currency, since its a way of seizing wealth from the general population and use it to lower the amount of debt owed.

This is why private savings rates are mirror images of deficits.

I havent read any studies detailing this but im guessing the reason why these phenomenons are interlinked is because when governments are running huge deficits then the people instinctively know that there is something seriously wrong with the economy, so they save in order to protect themselves from economic disaster.

This is why personal savings in the Clinton surplus era collapsed entirely

Savings rates in the western world have collapsed not because of Clinton's surplusses but because we have abandoned the gold standard and this has allowed bankers and the central bank to constantly print money which in turn has caused steady and constant inflation. This constant inflation punishes savers and rewards spenders since inflation causes their savings to drop in value and it causes the people who take on massive amounts of debt to get away with it easier. The people are not idiots, if you punish them for something (saving money) then they will do it less.

and why savings rates are going up right now in America -- because we're in a huge deficit, which allows for people to save in the private sector.

The savings rates going up in the US only has something to do with the deficit to the extent that the sheer size of it is scaring the shit out of average americans, they can probably sense that the whole system is becoming unstable so they are trying to insulate themselves from disaster by saving up money and converting their dollars to gold.

Govt surpluses just mean the govt is destroying your money.

Wrong..... I suggest you start reading some austrian school economics instead of the bullshit Keynesian theory which I can tell that you have been indoctrinated with. Your statement is also ridiculous to anyone who has just a basic amount of knowledge of history, the countries that have destroyed their money have as far as I know always been countries that were running enormous deficits.

[backwardsname]

On a tangential note, I find the list of countries by external debt far more interesting. Norway has 2.5 times the debt per capita of the USA? So much for being the #1 country in the world. Luxembourg's debt is almost 40 times its GDP, and its debt per capita is 10 times ours! Suddenly, the total implosion of the US economy no longer seems so imminent.

Well, that's not the public/govt debt of Luxembourg. You're also including private debt in that, and given that Luxembourg is a huge banking and investment capital of the world...

But, anyway, Luxembourg also has historically high employment, high income, stable growth, and low inflation.

So, perhaps not something to fear so much?

Debt is not money until it is repaid.... in your situation the government has just borrowed 100$ from the private sector, it then spends that 100$ on a bridge but it still has to pay back the loan which it took out, but because it spent the money on the bridge the government is BROKE!

What does this mean? Rather, what do you mean when you say the government is "broke?" Governments cannot go bankrupt -- they cannot default (assuming they have sovereign control to issue their own fiat, floating-exchange currency. This, therefore, does not really include eurozone countries or historical instances of a metallic standard). Government can always print more money to satisfy its debt obligations (or issue more debt, functionally identical to printing more money). Government can run a deficit, and inflation can happen, but who cares? Here in America we've had fairly stable inflation for years (with the notable hiccup being a cost-push inflation that would have happened regardless of govt action), generally fairly low, and we've had great real growth. We've run a deficit nearly the whole duration of this country, and the 6 depressions we've had have all followed surpluses.

So, I'm not following what you're saying when you say the govt is "broke." AFAIK, that is not a precise economic term. It is a very emotionally loaded term though.

The only way the government can fulfill its debt obligations in such a situation is by printing money and giving it to the person holding the IOU, this money printing in turn increases the money supply and causes prices to rise by 100$ overall (for simplicity's sake we will just assume that printing 100$ is the same as taxing 100$, it doesnt work exactly like that but its close), this means what the government does in essence in such a situation is to take 100$ from the private sector in order to buy the bridge, then it taxes a further 100$ via inflation in order to pay back the loan it took for the bridge, meaning net result is the private sector lost 100$ in purchasing power which could have been used on buying something else (sports cars, factories, whatever).

But inflation does not usually reduce purchasing power in reality, as wages also rise. Even neoliberal economists stipulate to that. I mean, if you want to stake out a position even more neoliberal than Friedman or Mankiw, then I suppose you can but it's silly.

wiki sums this one up nicely, actually:

If money income stays the same, but the price level increases, the purchasing power of that income falls. Inflation does not always imply falling purchasing power of one's real income, since one's money income may rise faster than inflation.

Also, I'd like to point out that you didn't actually demonstrate any operational realities in what you posted. Please explain step-by-step, using a balance sheet, what is happening in your hypothesis. I think doing this will reveal to you that you are incorrect.

Govt (G):
-$100 debt obligation
+$100 cash

Private sector (P):
+$100 debt asset
-$100 cash

Then --
G transfers $100 cash from G to P
G: -100debt P:+100asset

G creates $100 in new money to P to satisfy debt obligation:
G: -100debt +100 cash P:+100 asset
-------------Transfers money--------------
G: 0cash 0debt P:+100 cash

P now has $100 more than when this whole transaction began. In real terms the money supply has increased for the private sector. Does this drive some very mild inflation? Yes. But inflation does not reduce purchasing power of the private sector nor does it destroy the money supply. So, ultimately, what we've ended up with are more dollars in P chasing the same amount of goods, which means aggregate demand has increased, which means more people get jobs which means more growth.

I think you fundamentally misunderstand how inflation operates and even more so how the modern monetary system works in sovereign fiat nations (you are in the Eurozone, so I guess these things are legitimately of more concern to you, but I mentioned in the beginning of my post that my arguments don't refer to Eurozone nations or nations otherwise without the ability to issue their own currency).

No your not back to square one, in such a situation where you tax the private sector 120$ in order pay back the loan, then your simply transferring 120$ from the private sector to the government for a little roundabout and then pay back the government loan with the private sector's own money, meaning in reality the government would still have stolen 120$ from the private sector since the government in such a situation never pays back its original loan.

Again, I think you will benefit from making your operations more explicit. Trust me -- it helps me think through my arguments, it's a very useful tool.

G: -120debt P: +120asset (NET: G-120, P+120)
--Govt taxes +120 from P--
G: -120debt, +120cash P: +120asset -120 cash (NET: G+0, P+0)
----Govt pays P's debt asset---------
G: 0debt, 0cash P:0asset 0 cash.

As you can see, if you make your operations clear, you realize that net private money supply is equal to net government deficit. There's no way to rearrange this. Inflation changes nothing about this. Also, no inflation occurs in this because the private money supply shrank -- in fact, you have deflation, which means fewer dollars chasing the same amount of goods, which means some productivity becomes discarded, which means unemployment and less growth (or even reversal of growth).

You havent erased any money, you have simply taken money and spent it, this money then goes back out into the private sector economy. If the government does not inflate the money supply then the only way that it can back the loan which it owes is by taxing the money from the people straight up and honestly.
Meaning there is no reduction of the money supply, you simply transfer money around if you use taxes or you tax the money necessary for paying back the loan with the inflation/money printing tax.

You seem to be operating on the strange assumption that government gets its money "to start with" (for lack of a better term) from the private sector, but this is not so, as govt is the issuer of currency. Govt does not create productivity or physical assets, true, but govt is the sole issuer of currency. Here's a little example that is fun and easy to follow.

Let's say I found a new nation: The nation of Backwards. Now, before I issue or spend any money, apparently I must raise some currency, according to your model, yes? So, I demand a tax of 100 BackwardsBucks (BB) from my populace. Oops! They have no currency, because I have injected none into the system. They cannot pay, and are all jailed.

See how absurd this scenario is? The private sector does not have any currency to be recuperated in the form of taxes in the first place unless govt has issued money that it did not have -- i.e., deficit spent.

It only results in money supply creation if the central bank decides to pay its interest payments with the inflation tax, if it pays its interest payments with normal taxes then there is no increase in the money supply.

You don't understand how the money supply works, I'm beginning to think. You seem to think that inflation can create or destroy money -- this is false. Inflation is driven by the creation or destruction of money -- you've got your causality backwards.

There is a price for creating money out of thin air in order to pay interests and other expenditures and that is an increase in the money supply which means more money chasing the same amount of goods which leads to higher prices,

But what if you have more productive potential left over? For example, when you have high unemployment and much underutilized capital, as nearly all the Western World does at this moment? Then instead of prices rising (although perhaps they initially do, temporarily), productivity increases by utilizing currently latent potential (e.g. unemployed workers). So, suddenly, those dollars are chasing more goods. That's what happens when prices rise -- people are incentivized to produce more stuff. Indeed, even an Austrian or a Monetarist would champion that this is the very purpose of prices -- to communicate how much of what is needed where. Rising prices is a very good thing when you have vastly under-utilized productive potential (e.g. capital, labor).

these higher prices mean that the average citizen will have lower purchasing power (and lower purchasing power is the exact same effect which normal taxes have, hence why I call money printing an inflation tax).

Nope. We went over this already. This is seriously Econ 101 stuff. What you're stating is not economics in any school, even the Austrians -- it's pure political theater.

There is no magical solution to government spending like you apparently believe, every penny that it spends means that there will be one penny less spent by the working class schmucks.

Care to show your operations? Because mine show that every penny spent by govt is actually another penny that can be spent by working class schmucks. I did mention how savings rates mirror govt deficits, right? People cannot save in a surplus. Let's go back to the balance sheet:

OK, this time let's illustrate a surplus, again starting at a net 0 for both public and private assets/money for sake of simplicity.

G:0assets 0cash P:0debt 0cash (NET: G+0, P+0)
-----Govt taxes $100--------
G: 100cash P: -100debt

P presumably has had to leverage itself to pay its tax -- essentially, we have created a credit bubble (just like the one that put us in our current recession!). Now, if P had some net cash to start with (as when the govt has been running a deficit for some time), it would look more like this:

G: 400debt 0cash P:0debt 400cash (NET: G-400, P+400)
-------govt taxes $100-------------------------
G: 300debt P: 300cash (NET: G-300, P+300)

We've just destroyed $100 in the private money supply, meaning that the private sector now in literal terms can no longer save that $100. Also, it means AD has gone down because we have less money chasing the same amount of goods. Unemployment follows.

They are limited, interest payments have to be paid for one way or another, either with normal taxes or the inflation tax, there is no magical pain free solution. If you dont want to pay them honestly straight up with taxes then you will simply cause prices on everything to rise, its because of Keynesians like you that the dollar has lost 95% of its value since 1913.

You still don't understand that I'm talking about the money supply, and inflation neither destroys purchasing power nor destroys money. You really need to read your basics on reserve accounting and money supply, as well as inflation. I don't think even Mises could arrive at these conclusions.

WHAT??? government surplusses removes the need for them to use the inflation tax, meaning the money will hold its value. Historically it has always been governments or kings that couldnt pay their bills who resorted to destroying the value of their currency, since its a way of seizing wealth from the general population and use it to lower the amount of debt owed.

What actually follows inflation though? Why are you afraid of it? It has relatively minimal costs ("menu" costs, "shoe-leather" costs, etc), whereas unemployment has enormous costs in terms of lost real output (and therefore lost growth).

You seem to have an emotional and irrational (I mean this not disparagingly, but merely that this my observation from where I stand) abhorrence of inflation, but I think this is not well grounded in economic fact. Most of what you have stated thus far is contradicted by the most basic of economics -- things that are taught from the most conservative to the most liberal departments in the world to 101 students. I would hope you examine what you don't like about inflation, and try to divine if it is perhaps not some emotional uneasiness with the idea of ever-devaluing money (even though it's real effects are negligible).

I havent read any studies detailing this but im guessing the reason why these phenomenons are interlinked is because when governments are running huge deficits then the people instinctively know that there is something seriously wrong with the economy, so they save in order to protect themselves from economic disaster.

Odd then that all 6 depressions in US history were preceded by surpluses and low savings rates, whereas our best period of economic growth and lowest unemployment was preceded by the largest deficit ever and large savings rates.

If you are right that people save in these circumstances out of fear, then people must be very poor estimators of future economic fortunes.

Savings rates in the western world have collapsed not because of Clinton's surplusses but because we have abandoned the gold standard and this has allowed bankers and the central bank to constantly print money which in turn has caused steady and constant inflation. This constant inflation punishes savers and rewards spenders since inflation causes their savings to drop in value and it causes the people who take on massive amounts of debt to get away with it easier. The people are not idiots, if you punish them for something (saving money) then they will do it less.

The gold standard? Really? Are you familiar with economic history during the metallic standard? If you want to go back to massive periodic deflation causing regular and huge recessions that destroyed enormous chunks of real output and caused massive unemployment, then I question whether you are operating on the same values as nearly everyone else in economic debates. Also, it's worth noting that a metallic standard was a brief invention. Most of history money was for all intents and purposes fiat money -- coins were metal but until about the Enlightenment, they were far too irregular in weight and alloy to possibly be anything but tokens, though this is a very common historical misconception.

The savings rates going up in the US only has something to do with the deficit to the extent that the sheer size of it is scaring the shit out of average americans, they can probably sense that the whole system is becoming unstable so they are trying to insulate themselves from disaster by saving up money and converting their dollars to gold.

Also they are physically capable of saving now because they're no longer over-leveraged.

Wrong..... I suggest you start reading some austrian school economics instead of the bullshit Keynesian theory which I can tell that you have been indoctrinated with. Your statement is also ridiculous to anyone who has just a basic amount of knowledge of history, the countries that have destroyed their money have as far as I know always been countries that were running enormous deficits.

Haha, "indoctrinated with." Also, I've read Austrians, but you're not even representing their arguments properly. Certainly Hayek, Mises and the rest did not assert that inflation destroyed real money supply, which you seem to be stating (which is both a radical and nonsensical position).

Also, secondly, my positions are very much counter to the prevailing neoliberal misconceptions that rule econ classrooms these days. Nearly all econ professors will teach you that deficits are somehow unsustainable and undesirable. Hell, that's how they're presented in the most popular basic macroecon text in America -- Mankiw's Principles of Economics. And, of course, these are Modern Monetarist positions (similar to Chartalism), not Keynesian positions. Keynes never articulated these notions. He was still stuck in gold-standard thinking too, although did a better job of figuring things out than most in his time.

[hannigaholic]

As you can see, the net private money supply is in fact exactly equal to the govt deficit. What the government has done by issuing debt is creating money. It is literally no different from simply printing money. Both contribute in the same way to aggregate demand by increasing the money supply.

Not at all. What actually happens is:

To start with we have

Government:
Assets 0
Liabilities 0

Private:
Assets 0
Liabilities 0

Then the government creates the government bond and sells it to the private sector, at the interest rate of 20% over the lifetime of the bond that you used

Government:
Assets +100 (the cash payment for the bond)
Liabilities -120 (what the government owes in the future)

Private:
Assets +20 (+120 for the future value of the bond, -100 for the cash)
Liabilities 0

Then the government spends the money

Government:
Assets 0
Liabilities -120

Private:
Assets +120 (Now adding in the cash the government has spent within the economy)
Liabilities 0

Then when the government receives the tax that is used to pay off the debt.

Government:
Assets +120
Liabilities -120

Private:
Assets 0 (They were at +120, but now they pay back 120 in taxes)
Liabilities 0

Then the government pays back the private sector and, crucially, the bond ceases to exist.

Government:
Assets 0
Liabilities 0

Private:
Assets 0
Liabilities 0

There is no net change to the money supply from governments issuing debt. What is happening is deferred taxation. Government debt is eventually paid off by the taxpayer.

Yes, it's possible that governments might increase the money supply to pay off their debts, but advanced economies are unlikely to do so, because we've seen what happens to countries who have done so in the past (Germany, I'm looking at you). And yes, we should definitely account for inflation in more complex calculations because it happens due to the fractional reserve banking system, but inflation is not an innate consequence of government debt finance.

[backwardsname]

@hannigaholic

Yes, the operations you posted are absolutely correct. However, what really happens in most cases is that debt is not paid off by taxation, it's paid off by issuing more debt to pay for the maturation of old debt obligations. It is this real-world practice that is functionally equivalent to printing money. I feel that even an Austrian or Monetarist would agree with this statement (although with negative opinions about it) -- i.e., a revolving door of debt is equivalent to new money creation.

In fact, isn't that rather similar to what the Federal Reserve does to increase the money supply, albeit with private debt? Open Market Operations tend to just leverage the private sector at ever higher rates, and the newly created credit (again, functionally, until it is paid back) functions as more money. The problem is that unlike governments, private sector businesses and households cannot issue currency, and their debts are held against real assets. This means they have a real risk of default, as they cannot simply print new money (with all its attending consequences, I understand this) to pay their debts.

This is exactly the sort of thing that got us where we are today. We over-leveraged the hell out of the private sector, and used that credit essentially as new money supply in order to chase the ever-increasing amount of goods as productivity has continued to skyrocket in recent years as technology marches ever forward. Then that debt bubble popped, in truly spectacular fashion, and all that functional money (credit) evaporated through default, and now unemployment refuses to budge because simply put, we have too few dollars chasing too many goods. In fact, as homeowners continue defaulting, functional money continues to be destroyed, yet most countries have attempted to reign in their deficit spending -- the exact opposite of what is called for right now.

But, yes, to get back to your post, you absolutely are underlining my point that taxation is a tool to destroy the money supply and cause unemployment -- that is literally the purpose of taxation and of government surpluses, as governments do not need to raise money in order to spend it. In fact I illustrated in my post above how governments must deficit spend before any currency can even exist in the economy (they do not, however, have to issue debt, per se). Now, some taxation is important, as it gives currency some of its value (as tax liabilities can only be discharged in the sovereign currency in a fully fiat nation), and also if we did just run an infinitely high deficit, inflation would be atrociously high.

But the point is that inflation is not a mystical beast to be feared without reason or anticipation. It's not a dragon that emerges from its den to punish the profligate, like some fable told to scare children into saving money. It's something that occurs when more money chases the same amount of goods, because it effectively pushes aggregate demand higher by doing so. However, as long as a nation has under-utilized productive resources (unemployed workers, languishing capital resources, untapped natural resources), aggregate demand will not outstrip real output -- it will rather transmit the information that real output must increase.

Once you hit a full employment level (about 2% unemployment, arguably), as we had here in America in the 1950s, you would absolutely reign in deficit spending, and/or raise taxes, because you no longer need to keep pushing aggregate demand aggressively higher. You likely do need to keep running some sort of deficit, as productivity will continue to increase with technology, and this leads to unemployment if AD does not rise concurrently, but this would be a time to pull back compared to periods of higher unemployment.

And austerity measures would be completely justified if aggregate demand grew vastly higher than productive potential -- if you were in a Zimbabwe situation, for example, where civil war destroyed 80% of your real output by destroying long-term capital (in this case, it was all the white-owned farms which employed about 80% of the population and were most of the economy which were seized for moral reasons, but unfortunately in the chaos of war, most of that productivity evaporated). Then you need to raise taxes dramatically and cut spending to as little as possible to run a huge surplus, because your money supply is simply far too vast for the very limited amount of goods your nation can now produce.

[Kman]

What does this mean? Rather, what do you mean when you say the government is "broke?" Governments cannot go bankrupt -- they cannot default (assuming they have sovereign control to issue their own fiat, floating-exchange currency.

If a government or king has to resort to high amounts of money printing (which then leads to hyperinflation) then that is for all intents and purposes a default, its true that the people who loaned money to the government will still get their money in nominal terms, but they wont get back the same or more real purchasing power which they gave to the government when they gave them the loan, since the money will have lost most of its value.

Government can run a deficit, and inflation can happen, but who cares?

Yeah who cares about hyperinflation, it has only been responsible for the fall of the Roman Empire and the rise of Nazism in Germany and the complete destruction of the Zimbabwean economy..... It is also a blatant wealth grab by governments which depresses economic growth. When you have a highly inflationary enviroment you lower the rewards that people get for working since inflation will simply eat up alot of the purchasing power that they earn, inflation depresses economic activity just as badly as taxes do.

Here in America we've had fairly stable inflation for years (with the notable hiccup being a cost-push inflation that would have happened regardless of govt action), generally fairly low, and we've had great real growth.

You call this stable inflation??

Real wage growth has also been stagnating in the last 40 years, even the Keynesian Paul Krugman admits that:

The stagnation of real wages — wages adjusted for inflation — actually goes back more than 30 years. The real wage of nonsupervisory workers reached a peak in the early 1970's, at the end of the postwar boom. Since then workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973.[5]

And just to prove my point that money supply is directly related with the value of the currency I think you should look at this chart and compare it to the amount of inflation that the US has experienced in the last 50 years.



Your also wrong about what causes inflation, a free market has no natural inclination towards rising prices, infact its the opposite under a non-inflationary currency like a gold standard, in such a situation people get to keep the rewards of their labor which in turn causes productivity to increase and this increased productivity efficiency enables manufacturers to sell their goods at a cheaper price per unit, this in turn causes ''deflation'' (as its measured by Keynesians, Austrians measure deflation and inflation by looking at the overall money supply).

Inflation is caused by one of 2 things, either the government is printing money or factories/farms are becoming more inefficient which then causes unit costs of goods to rise.

But inflation does not usually reduce purchasing power in reality, as wages also rise. Even neoliberal economists stipulate to that.

It does for a while, lets say that tomorrow the US government doubles the money supply and uses this extra cash to pay off some of its debt, then it has just appropriated a huge amount of money and given it away, now its true that if the government doesnt tamper with the money supply after that and it then allows the free market to adjust wage levels and prices to the new money supply then after X amount of years the price structure will have adapted to this new supply of money by doubling the wages and prices of everything. That doesnt change the fact that the US government in such a scenario stole a huge amount of purchasing power and the people will have to compete with the extra government currency for resources for a long time, meaning they get less resources for themselves until the price levels fully adjusts to this new money supply.

Also, I'd like to point out that you didn't actually demonstrate any operational realities in what you posted. Please explain step-by-step, using a balance sheet, what is happening in your hypothesis. I think doing this will reveal to you that you are incorrect.

Id rather not use your equations, they create far more confusion than they help average people to understand your claims, I had to read your previous post 3 times in order to find the error in your calculations. I think my way of explaining economics is much easier to understand than your nonsense (there is a reason why Zerogouki couldnt understand you).
You also dont need a balance sheet to understand what I wrote, its pretty simple actually.

But inflation does not reduce purchasing power of the private sector nor does it destroy the money supply.

No it just devalues the money.

The first thing you need to learn about economics backwardsname is that there is no free lunch..... your talking as if government spending puts no burden on the private sector, im sorry to inform you but that is simply wrong.

So, ultimately, what we've ended up with are more dollars in P chasing the same amount of goods, which means aggregate demand has increased, which means more people get jobs which means more growth.

The aggregate demand formula is a pile of horseshit, according to this infinitely wise formula one of the best economic periods of the US was during WW2 when there was rationing and people couldnt buy new cars....
Inflation doesnt create jobs either, it destroys them since it reduces the incentives for working hard and setting up businesses, if your thesis that inflation grows an economy then why isnt Zimbabwe booming? they have massive hyperinflation after all.

I think you fundamentally misunderstand how inflation operates and even more so how the modern monetary system works in sovereign fiat nations (you are in the Eurozone, so I guess these things are legitimately of more concern to you, but I mentioned in the beginning of my post that my arguments don't refer to Eurozone nations or nations otherwise without the ability to issue their own currency).

Yeah thanks for the concern but I have a very good understanding of how inflation works and what causes it, if anyone is misunderstanding economics here it is you.

You seem to be operating on the strange assumption that government gets its money "to start with" (for lack of a better term) from the private sector, but this is not so, as govt is the issuer of currency. Govt does not create productivity or physical assets, true, but govt is the sole issuer of currency.

It doesnt have any resources that it doesnt take from the private sector, the government doesnt make any cars or chairs or computers. It can re-distribute resources from one section of the economy and send it somewhere else, but it does not create any resources on its own.

Let's say I found a new nation: The nation of Backwards. Now, before I issue or spend any money, apparently I must raise some currency, according to your model, yes? So, I demand a tax of 100 BackwardsBucks (BB) from my populace. Oops! They have no currency, because I have injected none into the system. They cannot pay, and are all jailed.

See how absurd this scenario is? The private sector does not have any currency to be recuperated in the form of taxes in the first place unless govt has issued money that it did not have -- i.e., deficit spent.

Obviously you need a currency in order to run an economy efficiently, straight up bartering is very inefficient.
People will usually invent some sort of money on their own, you dont need the government to interfere in stuff like this. Let people decide for themselves whether they want to use pieces of paper, gold coins or sea shells as a means of exchange.

You still don't understand that I'm talking about the money supply, and inflation neither destroys purchasing power nor destroys money. You really need to read your basics on reserve accounting and money supply, as well as inflation. I don't think even Mises could arrive at these conclusions.

Im pretty sure he could, this is basic austrian school theory that if you print more money then there will be a higher supply of money chasing a limited amount of goods, meaning the value of each money unit will go down, simple supply and demand theory here dude.....

The gold standard? Really? Are you familiar with economic history during the metallic standard? If you want to go back to massive periodic deflation causing regular and huge recessions that destroyed enormous chunks of real output and caused massive unemployment, then I question whether you are operating on the same values as nearly everyone else in economic debates.

A gold standard is not deflationary, it simply causes the supply of money to remain constant and it allows workers and manufacturers to keep the value of their savings and wages, the gold standard protects against kings and other government officials from stealing your wealth because it makes it alot harder to get away with using the inflation tax. The gold standard protects people from unemployment because it makes the economy run smoother with much smaller boom and bust cycles (which are created by inflationary policies of banks).

Also, it's worth noting that a metallic standard was a brief invention. Most of history money was for all intents and purposes fiat money -- coins were metal but until about the Enlightenment, they were far too irregular in weight and alloy to possibly be anything but tokens, though this is a very common historical misconception.

Ehm no, gold has been used as money for 3000 years, what is a recent invention is fiat currencies, historically the average life span of fiat currencies has been around 25 years, that is how long it took on average for the typical ruler to succumb to that very alluring temptation to just print more money to pay his/her bills, this is why gold has been used as money for so long, its because it cannot be inflated.

Theoretically a fiat currency could work just as well as a gold backed currency, the only thing you would need for that is a constant succesion of honest leaders who will not become morally corrupted by their positions of power and take the easy solution to solve tax revenue problems, good luck finding that.........

Haha, "indoctrinated with." Also, I've read Austrians, but you're not even representing their arguments properly. Certainly Hayek, Mises and the rest did not assert that inflation destroyed real money supply, which you seem to be stating (which is both a radical and nonsensical position).

I didnt say it destroyed the money supply, I said printing money lowers the value of the currency, that is basic austrian school economic theory btw.

Also, secondly, my positions are very much counter to the prevailing neoliberal misconceptions that rule econ classrooms these days. Nearly all econ professors will teach you that deficits are somehow unsustainable and undesirable.

And thank god for that, then maybe there is still hope for the field of economics to regain its former glory.

[Rei Murasame]

But, yes, to get back to your post, you absolutely are underlining my point that taxation is a tool to destroy the money supply and cause unemployment -- that is literally the purpose of taxation and of government surpluses, as governments do not need to raise money in order to spend it.

What?

See, this is why we who are languishing in Eurasia are blaming you lot as the root of the 'evil', as it were. Because when you say things like this, it demonstrates actually where the root of the problem comes from.

You guys actually have done something within the liberal structure that was of course always likely to happen due to its built-in flaws, but what exacerbated it was that you managed to turn what was previously regarded as a 'dark art', into a virtue.

You mentioned that the United States had a lot of growth and relatively low unemployment here:

Government can run a deficit, and inflation can happen, but who cares? Here in America we've had fairly stable inflation for years (with the notable hiccup being a cost-push inflation that would have happened regardless of govt action), generally fairly low, and we've had great real growth. We've run a deficit nearly the whole duration of this country, and the 6 depressions we've had have all followed surpluses.

You need to ask seriously how it was that you managed to pull that off, because the USA is fairly unique in its ability to do nonsense and get away with it - for a time.

Let's rewind to the beginning and very quickly go over how all this started. After the dirigiste models had fallen into complete disrepute, and neoliberalism was looking for a way to rebrand itself after a decade of making itself unpopular with the populace, the "New Democrats" in the USA popped up and basically managed to retool neoliberalism by adding a human face to it. What was essentially a bastardisation of what it means to be Left (or even Right, for that matter) was given a status of virtue by a narrative of this being a necessary compromise. Your 'success' (lol) actually had very little to do with the 'merits' of liberal economics, but rather, the fact that the USA has enjoyed, since the collapse of the Bretton Woods system, the ability to maintain economic hegemony despite the fact that your money is made of paper.

"Made of paper" is a bit sensational, so I'll try to sketch it out in a better way. Your currency survived basically as a reserve currency and a vehicle of the global economic system. You gained a bit more more policy autonomy (which you then immediately offered on an altar to China, but whatever) from ditching the gold standard because it meant that your banks could heap up liabilities in US Dollars at zero-exchange risk. How nice for you. Wall Street more than ever became the centre of global finance. You defined the structure, because you also have the power to shape borrowing and lending preferences worldwide (and thus our politics and economics end up being a mixture of the rest of us trying to cope with you or contain you). You are basically the only blasted state in the world that has the ability to pursue expansionary macroeconomic policies (read: printing buckets of Federal Reserve Notes) without the need for internal adjustment (or so you thought). You devalue the dollar 24/7, the rest of us have to figure out how to deal with that.

The reason that you had higher growth (which turned out to be more bubble than substance in the end, didn't it?) than Europe is because you have the privilege of being able to pursue the policy of turning on printing presses to generate demand, which is one of several factors that contributes to the Dollar-Wall Street Regime's (read: globalists) ability to lord it over every one else.

Combine that with the other key factor, the neoliberal philosophy that caused wages to stagnate for a full 30yrs, and the need to stimulate your middle and lower classes into consuming, and you can see how all those stacks of money are used to... actually you know this story, debt-fuelled consumption, everything eventually collapsing, etc.

Kman basically called it, I partially agree with him - your inflationary policies are bad.

Also, we all need to stop using the US Dollar as a reserve currency, because this situation is beyond ridiculous now.

[hannigaholic]

Yes, the operations you posted are absolutely correct. However, what really happens in most cases is that debt is not paid off by taxation, it's paid off by issuing more debt to pay for the maturation of old debt obligations. It is this real-world practice that is functionally equivalent to printing money. I feel that even an Austrian or Monetarist would agree with this statement (although with negative opinions about it) -- i.e., a revolving door of debt is equivalent to new money creation.

Yes, but that assumes all debt is simply paid off with new debt. For the UK at least, the trend since the end of WW2 has been to pay down debt. This demonstrates that, here at least, debt is not being paid for simply by issuing more debt, as doing so would itself increase the debt burden over time (since you'd always have to issue new debt to the value of the old debt plus its interest).

But, yes, to get back to your post, you absolutely are underlining my point that taxation is a tool to destroy the money supply and cause unemployment -- that is literally the purpose of taxation and of government surpluses, as governments do not need to raise money in order to spend it. In fact I illustrated in my post above how governments must deficit spend before any currency can even exist in the economy (they do not, however, have to issue debt, per se). Now, some taxation is important, as it gives currency some of its value (as tax liabilities can only be discharged in the sovereign currency in a fully fiat nation), and also if we did just run an infinitely high deficit, inflation would be atrociously high.

I disagree with a few points.

1) Taxation is not designed, "literally [for] the purpose" of destroying the money supply and causing unemployment. The very notion that government sets out deliberately to achieve these 'goals' is absurd. Taxation is designed to be redistributive; to forceably shift money around within the system, rather than to destroy it.

2) Governments most certainly need to raise money in order to spend it. Whether they do that through taxation, borrowing, or simply printing money, the mechanics are much the same - the government first acquires a share of the total money supply and then bestows it upon one section of society. Inflation is essentially taxation by other means - since, internationally, exchange rates will adjust to take account of inflation (if the number of USD suddenly doubled, other countries would expect twice as many per unit of their own currency), the only lasting effect is within the domestic economy. Since you can think of taxation in terms of proportions of national income, inflating the money supply can be simply seen as decreasing the proportion held by private citizens so that the government can choose where to spend it (IE it is identical in function to taxation).

3) It's not taxation that gives a currency its value; it is the acceptance of that currency by the people. Admitedly, we accept fiat currency largely because of laws telling us we must, but taxation is only taken in domestic currency because that currency is universally accepted. If people preferred to store value in, say, rice then taxes would likely be levied in rice, rather than in dollars, or pounds, or euros, because the government would know that it could spend the rice as universally-accepted currency.

But the point is that inflation is not a mystical beast to be feared without reason or anticipation. It's not a dragon that emerges from its den to punish the profligate, like some fable told to scare children into saving money. It's something that occurs when more money chases the same amount of goods, because it effectively pushes aggregate demand higher by doing so. However, as long as a nation has under-utilized productive resources (unemployed workers, languishing capital resources, untapped natural resources), aggregate demand will not outstrip real output -- it will rather transmit the information that real output must increase.

Inflation distorts the price signalling mechanism, as well as incurring real-world costs on the economy (so-called 'shoe leather' and 'menu' costs). Inflation does not stimulate aggregate demand - it merely changes the accounting value we use. Again, if the number of USD in circulation suddenly doubled, the only thing that would change is the paper value of aggregate demand, rather than the level of demand itself. People still want 100 pairs of Nike trainers, but now they get paid twice as much and the goods cost twice as much. The only real effect is that Nike had to go and print new signs saying $200 instead of the old $100, wasting money that could have gone into reinvestment.

Once you hit a full employment level (about 2% unemployment, arguably), as we had here in America in the 1950s, you would absolutely reign in deficit spending, and/or raise taxes, because you no longer need to keep pushing aggregate demand aggressively higher. You likely do need to keep running some sort of deficit, as productivity will continue to increase with technology, and this leads to unemployment if AD does not rise concurrently, but this would be a time to pull back compared to periods of higher unemployment.

And austerity measures would be completely justified if aggregate demand grew vastly higher than productive potential -- if you were in a Zimbabwe situation, for example, where civil war destroyed 80% of your real output by destroying long-term capital (in this case, it was all the white-owned farms which employed about 80% of the population and were most of the economy which were seized for moral reasons, but unfortunately in the chaos of war, most of that productivity evaporated). Then you need to raise taxes dramatically and cut spending to as little as possible to run a huge surplus, because your money supply is simply far too vast for the very limited amount of goods your nation can now produce.

All I can say is that I disagree completely.

I reject the Keynesian notion that deficit spending raises aggregate demand, since every penny that is spent has to be taken out of the economy in the first place (taking it out as borrowing is no different in that respect than taking it out as tax). Government spending in general can be used to finance investment projects that increase the productive capacity of the country in the long term, but the idea that simply taking money from group X and giving it to group Y can itself boost aggregate demand to any noticeable degree has always seemed patently illogical to me. Deficit spending has its place, but that place is short-term maintainance of existing government spending levels when the business cycle turns down and reduces tax receipts. Even Keynes advocated counter-cyclical policy (running surpluses when times were good, deficits when times were bad). What you're suggesting is running constant deficits, which both you and I have already pointed out cause bad effects - either inflation, or costing the taxpayer more than is necessary for the same results, or a bit of both. And remember that if there's one thing that modern economists tend to agree on, it's that inflation is more harmful to the economy than unemployment.

I also reject the notion that government spending is necessary (or even desirable) to reduce unemployment. Yes, cutting government spending can increase unemployment, because taking a little from everybody and creating a job out of it is easy. But beyond those jobs that will benefit the productive capacity of the nation or are necessary/beneficial for the smooth running of proper government functions (police, local government, courts, etc.), I think that simply creating a job for the sake of creating a job is more likely to to harm than good, through robbing the private sector of finance for productive work. The economy will adjust to the new technology, and will either create its own jobs fixing and maintaining the new equipment (server admins, for example) or will increase demand in other areas of the economy (restaurants, for example). The loss of one job will lead to the creation of another as the economy adjusts to the new equilibrium levels of labour and capital usage.

So even if constant deficit spending were to increase unemployment, not only do I think it would do so less efficiently than the private sector in the long term, but also doing so would generate its own costs to the economy which, together with the inefficiency, add up to a situation where you are far better not running a deficit except in those times when the natural spending patterns of government happen to be lower than the natural level of tax receipts due to the business cycle downturns (but these can be paid for by the converse side, when the tax receipts rise during the times of plenty).

Finally, any amount of money is sufficient. It does not matter whether I need £1 to buy a loaf of bread or £10,000. What is important is the rate of change in the money supply (and consequently prices). Zimbabwe does not have problems because there is too much money. Zimbabwe has problems because the amount of money is (was?) increasing too quickly. Look at Italy before the introduction of the euro, or Japan now. Japan has 10,000 yen notes, with average incomes being counted in the millions of yen per year. Does this mean they have excess money problem that will be solved by high taxes? Of course not. It means that the accounting paper value of their currency is higher, and nothing else. As long as the rate of change stays low, the price signalling mechanism will function properly and people can go about their lives knowing that their money will be worth much the same tomorrow as it is today.