TropicalK wrote:I don't see how this is possible without an extreme police state and crushing price controls. Maybe you could provide an argument instead of a statement.
Well I think the logic has been laid out quite a bit in my previous posts (and thus didn't intend to make what would be taken as a baseless statement) but I'm happy to illustrate!
First, we have to talk about how inflation works, I think. I don't think I'm making any grand or controversial statements when I say that inflation is caused by, essentially, more dollars chasing the same amount of goods. Right? This is macro 101 material -- again, I don't think this is particularly controversial. The government prints more money, this means there is more money in the private sector that can be used to purchase the same amount of goods. Therefore, as that money gets split up among all the available output, that output is priced higher. Makes sense, easy stuff.
Now, what happens if you keep the money supply stable, but productivity goes up? Then you have, essentially, the same amount of dollars chasing more real output. This means that there's not enough money to keep prices stable among real output, and you get deflation. Now, this was what happened very regularly (as we all know) in the era of the metallic standard. Bank panics and financial collapses were regular, and lost output was often extremely devastating; our current recession pales in comparison to the 6 depressions we had in the pre-fiat era (including the Great Depression), and many of the recessions and credit bubble collapses.
Why do credit bubbles pop up when money supply is too small? Well, again, to just go through some very well-accepted, non-controversial, 101 material -- when banks lend, they create money, functionally speaking. Repayment destroys this money, but if the private sector -- as a whole -- continues to leverage itself ever higher, the money supply is effectively increased. Now, unfortunately, private households and businesses (and banks) have a default risk, since they are leveraged against real assets (and when those assets become devalued, such as in the housing crisis...well, look out!), so eventually there is a crisis of confidence resulting in huge defaults, and massive destruction of the money supply, which then results in deflation (and as we know, deflation is absolutely brutal -- it leads to huge unemployment, massive losses in output and growth, etc. Inflation is, in real terms, absolutely nothing compared to deflation). Theoretically, if there could exist a financial regime in which private banks simply decided to lend to each other indefinitely, they could effectively create money indefinitely by loaning each other money to pay off previous loans to each other. It's just that it's very hard to get human beings to trust each other enough for this to ever happen.
OK, so we've gone over inflation and deflation a bit (and discussed how deflation is much much worse than inflation). The key point being that much of the price level revolves around how much money is available to purchase all of the real output of an economy.
Now, insert my previous arguments about how government deficit spending (whether financed by debt such as bonds or not -- it doesn't make much difference) increases the money supply, and how government surpluses decrease the money supply. If a government tuned its spending based on market factors such as AD and real output, theoretically the government could tune the money supply to be, as closely as is reasonably possible, tuned to the size of real output. After all, real output does generally increase. So, if the money supply stays constant (government runs budget-neutral), then this will actually be deflationary because we will have the same number of dollars chasing ever more goods and services. In order for 0 inflation and deflation, you actually need to have the money supply steadily increase to keep pace with increases in output. Otherwise you produce credit bubbles -- because if productivity increases and there are available goods, but people don't have enough money to purchase them, they will borrow. This is why government surpluses always mirror increases in private sector leveraging/decreases in the private savings rate. And if this continues for too long, the bubble pops and you have deflation and unemployment (as now).
In fact, this recession right now is a great illustration! We have expanded the non-private-credit money supply dramatically since 2008, and yet many economists argue that we may actually be experiencing real deflation, as many indexes of deflation do not factor in house prices. A simply model of "MORE MONEY = INFLATION" fails to explain this, but it makes perfect sense if you realize that after so much money was destroyed in the recent credit collapse, even huge public spending will barely manage to replace that lost money, and additionally we have huge untapped productive potential. We would have to put far more people back to work before we could start seriously worrying about substantial demand-pull inflation. Realistically, Modern Monetary Theory is the best explanation for our current crisis that other schools (be they Keynesian, Monetarist, Austrian, or whatever) are struggling to explain. MMT would anticipate both a private credit bubble resulting from the Clinton surplus that ultimately led to the 2001 recession, which we then "solved" by inducing the private market to hugely overleverage itself on the housing market (to replace overleveraging on tech stocks/startups).
Anyway, the point being that a government could, theoretically, print money without ever financing it and run a deficit perpetually and still never produce more than trivial inflation.
Now, add in the complicating factor of trade deficits. Trade deficits represent real money supply leaving the economy. This is not necessarily bad -- getting useful goods that make people's lives better at low prices is a good deal, and represents efficient allocation of resources and labor. I would not advocate ever for tariffs or other restrictive trade practices. However, it does represent a decrease in domestic money supply, as money is leaving the country. So, essentially, that leaves the domestic market with less money chasing our real output -- and thus deflation and unemployment. So, even if real output were not increasing, the government could still need to run a big deficit to counter a large trade deficit.
Conversely, if you were in the position of running an economy with about 2% unemployment, and a trade surplus, you'd probably want to run a large government surplus because there are no reservoirs of untapped labor to rapidly increase output, and additionally tons of money coming in from other countries, so you would need to be constantly destroying domestic money supply in order to prevent high inflation.
If the effect is small enough, it will not outweigh its costs. Magnitude is important.
Fair enough. I think this is just a good argument for not issuing debt when printing money though.
You are misunderstanding me. Governments wish to devalue their debt regardless of whether they can default. Nobody is talking about default because it is irrelevant. They devalue their debt for a simple reason: to make it less economically burdensome. If your argument is that debt is not burdensome because money can simply be printed, than each dollar printed has a marginal effect of inflation. A simple substitution shows that a marginal printed dollar could either go to welfare of citizens or paying off debt. For a given amount of inflation (whatever that amount may be) a choice must be made to either enrich citizens or enrich debt-holders. Given these parameters it is even more obvious that debt is harmful.
Well if the debt is domestic, then paying it off still does add to the overall domestic money supply. If it's foreign, then it adds to their domestic money supply, so printing more money to spend domestically wouldn't "stack" with foreign interest payments. So, really, they're almost like separate accounts, if that's a metaphor that makes sense. One could have huge interest payments, but still spend as much, in real terms, as one wants to on domestic investment without driving up inflation domestically anymore than if one had no interest payments at all.
Argentina, Russia
Currently?
Argentina has about, what, 15% inflation? That's not hyper-inflation. Russia has about 8.8% currently. Also not hyper-inflation.
Neither of these are ideal, but they're not terrible either. Also, I haven't done much research into the root cause of either of these countries' inflation, but I wouldn't be surprised if it had to do with some condition that was causing declining real output. Or, they might be facing cost-push inflation -- I'm not an expert in either country's economic woes, so I'm not sure, but it should be noted that all this discussion thus far has dealt with demand-pull inflation (which is vastly more common).
But, again, even if it is demand-pull inflation -- be it related to falling output or too large of a money supply -- the theories I'm advocating have a very clear solution to inflation -- raise taxes/lower government spending. But that's not something you do
until you're facing undesirable levels of inflation. If you practice austerity in a time of unemployment (lowered real output), or in a time of low inflation/some deflation, you're asking for disaster.