[Steve_American]

It is said that “Money doesn't grow on trees,” but it is created from thin air every business day. This meme was created when the Gold Standard was still in effect.

Your parents probably told you “Money doesn't grow on trees”, but money is created from thin air in 2 ways.
. . 1] When the US Gov. deficit spends it creates dollars and a bond. The holders of the dollars have money and the bond holders also have money because they can sell the bond at anytime to get money.
. . 2] Whenever a bank makes a loan, it just makes a deposit into an account at that bank (owned by or in the name of the person who was lent the money). The bank does not transfer money that it already has in to the account, it just credits the account with money that comes from thin air. This is a little different from Gov. deficit spending because there is also a legal contract created that specifies how the loan is to be repaid. This exactly offsets the new money created. However, the money is created now and the repayment is mostly in the medium or long term future. So, until the loan is repaid there is more money in the national economy than there was before the loan was make.

The US dollar is a fiat currency and this means that the US Gov. can always just create money (=dollars) to payoff any bond that comes due on any given day. I claim that the damage to the economy and to the wealth of the 1% would always be much, much more if the bond were defaulted on than if the Gov. found a way to create the dollars to redeem the bond. So, generally, the Gov. will find a way to redeem all the bonds that come due, EVEN IF it can't sell new bonds to do it. You can see the truth of this by looking at the actions of the Fed. Res. Bank and the US Gov. in the crisis of 2008. In the crisis, literally, Trillions of dollars were created to shore up the banks. Legal or not didn't matter, it was done.

My point is that --- while everyone is being told to worry about the Gov. deficit and the Gov. debt because they will cause inflation, almost nobody is saying we need to worry about the creation of money by banks because of the inflation that this causes. Why? Is it because the Repud party has an agenda that requires the people to suffer hardships while the 1% get richer?

What this means is --- that all demands that the deficit must be reduced because someday in the future the shit will hit the fan are just lies. That the Repuds recently cut taxes on Corps. and also the wealthy people who own them and now the same Repuds are claiming that they need to reform (=cut) Soc. Sec. because the deficit is too big.

The Repud Party has done this sort of thing in several States already and now wants to do it at the federal level. However, the USA is not a state and it can (and it has in the past) created cash dollars out of thin air. This ability means that the Gov. does not need to worry too much about deficits. The only possible downside is inflation and inflation is not that bad. Unless it gets totally out of hand, and if that happens it can only be because taxes were not high enough to stop it. The simple solution when inflation strikes [i.e. when there is too much money in the system rather than when there is too little resources or production in the economy] is to raise taxes. If the 1% want to see inflation continue enough to block the raising of taxes then they will see their dollar holdings fall in value. The 1% can make a choice --- inflation at 100plus% a year or higher taxes.

Those of you who disagree with this are guilty of using “Gold Standard economic thinking”. The world is now off the Gold Standard; and economic thinking has not caught up to this fact yet. Part of the problem with economics is that the results matter too much to too many people. Consider the 4 disciplines: Physics, Astronomy, Paleontology, and Economics. All are considered sciences by some people. However, they are not the same. Physics can mostly do reproducible experiments, so it is clearly a science. Astronomy can do some reproducible experiments and nobody really cares what the current best thinking is, so it is a science. Paleontology can't do hardly any experiments, but nobody cares about the results, so it is a science. However, Economics very much impacts people's incomes, so they care what the results are, i.e. what theory is being used to shape public policy. Also, Macro-economics can't do hardly any reproducible experiments. The combination of these 2 factors means that Macro-economics is not a science. It is not possible for the experts in the field to reach a consensus in any reasonable amount of time, i.e. not in decades or centuries, because the required experiments can't be done and the experts are pulled in different directions by pressure from people outside the field, but that deeply care what theory is chosen for the consensus.

This means that every informed layman will have to do some in-depth research and form his own conclusions about Macro-economics. Anything less is just believing what the 1st authority told you. And there is no economic authority that you can trust. They all have an ax to grind.

[jimjam]

We have descended a long way from gold to the "full faith and credit of the government".

[Crantag]

This system which collapsed in 1972 and which was instituted in 1944 was the Bretton Woods System, not the Gold Standard. The Bretton Woods system was based on the convertibility of the dollar to gold for foreigners, which was a means to fix exchange rates.

However, during most of the Bretton Woods System, indeed since 1933, Americans were literally forbidden by way of serious legal penalty from owning or trading gold, anywhere in the world. The only exception was for jewelers, and gold jewelry was not banned.

Just thought I would point that out.

The Gold Standard was somewhat similar with respect to the principal of fixed exchange rates and the basis on gold. The Gold Standard was based principally on the British Pound, and it slipped and basically became ineffectual after WW1, and completely collapsed in the 1930s. The effects of the slipping and then collapsing of these two respective systems led to the evaporation of systemic restraints on finance. The operators of finance have reacted by hatching innovations designed to further undermine constraints and to make economic exchange more flexible, etc. This has been accompanied by substantial bubbles, the systematic externalization of financial risk on the part of the players within the financial sectors, unbridled speculation, etc. One recent book title sums up such a situation well, "Profiting Without Producing: How Finance Exploits Us All."

The fact of the matter is that human societies have yet to work out a tenable international monetary system. The technical problems associated are both lagging behind the realities of global trade, and are undermined by the political power dimensions which are prevailing throughout the relevant periods.

It is possible that digital currency could provide some workable means to addressing the technical flaws by offering a sufficient propensity for conducting the relevant accounting operations on a sufficient scale. That last bit is mere speculation on my part and not based on specific studies on the matter, as is for the most part my discussion of the problems of international monetary regimes. The bits about the lack of constraints on finance resulting from the collapse of the Gold Standard and Bretton Woods, as well as the effects of prevailing norms with respect to finance under the post-Gold Standard and post-Bretton Woods periods (the latter period encompasses the present) are largely lifted from studies on these matters.

[Steve_American]

Crantag,
I'm not at all sure what your points are.
Under Bretton Woods economic policies were limited by the amount of gold the nation had. If they ran a deficit for long enough then people and comp. from other nations could suck all their gold out. Without gold their currency would be worthless, so that had to be avoided at all costs.

With the fiat dollar that is not a problem. MMT holds that inflation is the only real problem. And MMT says that taxes to suck money out of the economy are the most important way that the national Gov. has to fight inflation. And of course to suck money from the bottom 90% when they are just getting by can't go on for very long. Either they stop buying and cause a recession, or they go out in the streets and demand Gov. action to help them [and vote the current party out of office].

Slashing taxes on the super rich, the dead rich, and corporations is not a good idea according to MMT. Paul Ryan [speaker of the House] this week said that now that there is a $1.9 trillion deficit that Soc. Sec. and Medicare were unsustainable. So, I guess he intends to cut them, maybe for those down the road some. Of course there isn't a $1.9T deficit. That number refers to the new additional deficit [over the next 10 years] that his tax cuts will cause. The actual deficit is actually much larger. The Repud Party is NOT the party of fiscal responsibility. It is the party for increasing the inequality in wealth and incomes in the US. That is ALL that it is.

[Crantag]

Crantag,
I'm not at all sure what your points are.
Under Bretton Woods economic policies were limited by the amount of gold the nation had. If they ran a deficit for long enough then people and comp. from other nations could suck all their gold out. Without gold their currency would be worthless, so that had to be avoided at all costs.

With the fiat dollar that is not a problem. MMT holds that inflation is the only real problem. And MMT says that taxes to suck money out of the economy are the most important way that the national Gov. has to fight inflation. And of course to suck money from the bottom 90% when they are just getting by can't go on for very long. Either they stop buying and cause a recession, or they go out in the streets and demand Gov. action to help them [and vote the current party out of office].

Slashing taxes on the super rich, the dead rich, and corporations is not a good idea according to MMT. Paul Ryan [speaker of the House] this week said that now that there is a $1.9 trillion deficit that Soc. Sec. and Medicare were unsustainable. So, I guess he intends to cut them, maybe for those down the road some. Of course there isn't a $1.9T deficit. That number refers to the new additional deficit [over the next 10 years] that his tax cuts will cause. The actual deficit is actually much larger. The Repud Party is NOT the party of fiscal responsibility. It is the party for increasing the inequality in wealth and incomes in the US. That is ALL that it is.

My point was to introduce clarity, because Bretton Woods and the Gold Standard were two completely different regimes, and so there was a thread of mistaken concepts going on in this thread.

As for MMT, I tried watching some of the stuff you posted on it. What I found was the presenters were entirely smug and arrogant. That is often a symptom of groupthink and a giant red flag for me. That doesn't mean I can entirely dismiss it, but it does mean that I am not willing to accept their arguments as a matter of faith, as you are.

I think you should go re-read your own comments about how economics is not a science, because your critiques will apply directly to MMT, as well.

That's also not to say MMT doesn't have good contributions, I would say virtually (or perhaps literally) all branches of economics have some good contributions. There is also a lot of nonsense written on economics. I've edited a fair number of economics articles for publication, in the role of English proofreader, and I've had to facepalm my way through more than a couple of them. It's that whole writing for the purpose of publishing thing as opposed to writing as a servant of the truth. That's a critique with a general scope, but the phenomenon is pervasive.

Now, I by no means dismiss MMT. But, I haven't by no means ever become a convert to the 'deficits don't matter' camp. This notion has basically infiltrated mainstream analysis, just as deficits have expanded to substantially higher and higher levels (again, refer back to your own critique of economics as not a science.)

As for Bretton Woods assuring that "economic policies were limited by the amount of gold the nation had"; just how did that work out? Let me give you a hint. It didn't work out, and as a result Bretton Woods was abandoned.

And this goes to one of my main points, a technically sound monetary system to facilitate world trade is something which has never actually been worked out. The Gold Standard was based on Imperial Britain, the Bretton Woods and Fiat USD standards are both based on Imperial USA. Moreover, all of these systems had or have many flaws. What Bretton Woods and the Gold Standard did have is embedded mechanisms for restraining and regulating finance. However, Bretton Woods and the Gold Standard both collapsed under their own weight. It's a bit of a riddle, wrapped in a mystery, wrapped in an enigma.

As for the 'deficits don't matter' line, one issue I have with it is that it seems to presume a state of permanence for the current monetary regime. The current monetary regime is not a sustainable arrangement. Efforts of subverting it have long been underway, going back to the Special Drawing Rights provision of the IMF. China is already subverting the fiat dollar regime in other ways, especially through bilateral trade pacts, and are moving to make the Chinese Yuan an alternative reserve currency. What worked in Libya and Iraq for the US Empire when threats to the dominant USD arose will not work in China. The inability to fully subordinate China to the global economic arrangements on the part of dominant Western imperial powers has been a constant theme of modern history, and there is commonality in the case of currently prevailing global monetary arrangements. An aspect of the emerging Chinese monetary alternative is an expansive role of digital currency. In China, digital payment is already the dominant means of payment for ordinary individuals, although it is still a function of the national currency, e.g. the Renminbi, which is basically synonymous to the Chinese Yuan; and the Chinese Yuan derives its value basis from a basket of foreign currency (the USD being the most significant one, but the relative significance of the USD in the Chinese monetary basket has declined over the years. Here is another means by which China is subverting the dominant position of the USD. In addition to the currency basket, the value of the Chinese Yuan also derives from close government management of the rate. This is based on the non-free convertibility of the Yuan. While this is the basis of the phony labeling of China a 'currency manipulator', they are moving to make it convertible. Ironically perhaps, it is this which might constitute a mighty blow to the prevailing monetary system because this will constitute the most sweeping component of the move to make the Chinese Yuan an international reserve currency). This is sort of an emergent area of money science.

What this means for the conversation of unlimited deficits is that such a setup requires the acquiescence of other nations. That this acquiescence has until now been attained (in some instances requiring the aid of military intervention) has resulted from the necessary functions of money, in the presence of the lack of alternatives to the fiat USD regime. Without regards to philosophical discussion, businesses and indeed governments require a functional means of settlement on the spot, and because the dollar provides such a functional means (imperfect though it is), they will utilize it. That is why commercial banks in every country hold dollars, they are a necessary implement of international exchange. It is a delusion to think that these arrangements are permanent; as such, it seems to me that MMT is itself grounded in delusion.

[Steve_American]

Crantag,
1] I have not been able to figure out how to copy a reply into my reply.
Now, not in any order ---
2] Yes, I totally include MMT in my attack on all Macro-economic theories.
3] I am totally aware that the current system [what you describe as the fiat dollar as an international reserve currency] will not last forever. But, then neither will the Rocky Mountains.
4] I have a deep distrust of all cyber currencies. My quite limited understanding is that new bitcoins are created by using large amounts of electricity to run computer programs on large expensive computers. This doesn't seem like a good way to limit their creation.
5] I never meant to say that deficits don't matter. They do. Deficits can cause inflation. The Gov. should spend dollars on good things. I believe that cutting taxes on the rich is the same as spending. I don't see a difference between giving rich people money and giving poor people money. I don't necessarily accept that the incomes of the rich were earned fairly doing something that the society needs. So, I have no compunction in taxing their incomes and even net wealth.
6] Huge wealth and income inequalities are not a good thing. If $20,000 is a poverty income for a family of 3 or 4, then the largest incomes functionally allowed should not be more than 5000 times that much. And net worths over $500Million can be heavily taxed.
7] I'm even thinking that a graduated corporate tax could make a lot of sense to discourage the growth of companies.
8] I think that a major reason that the US economy did so well in the 50s and 60s was that the top marginal tax rate was 90%. The rich didn't want their companies to pay them too much and see 90% of that pay go to the Gov. Therefore, they had their comp. plow the profit back into research and growth creating by the comp. Also, the comp. had less reason to not pay their workers well, i.e. 90% of what they didn't pay their workers was going to be taken by the Gov. anyway. So, why not pay the workers more. This meant their and all other company's workers had more money to spend buying the goods and/or services the company produced. It worked out well.
. . I know there is another explanation -- that the rest of the world was still recovering from WWII. That may have been part of it, but I still like my reason more.

Enough for now.

[Crantag]

3] I am totally aware that the current system [what you describe as the fiat dollar as an international reserve currency] will not last forever. But, then neither will the Rocky Mountains.

Not very dexterous with your dodge attempt there. I gave ways in which the prevailing currency regime is already being undermined, as well as giving rationale having to do with the functionality of it which maintains it--for now. To me, its expiration is a foreseeable thing. You are fixated on the domestic side of the American monetary system, but the dollar is a world currency. It is its position as a world currency which enables the US to print dollars willy nilly. The two things are directly linked. The one directly proceeds from the other.

4] I have a deep distrust of all cyber currencies. My quite limited understanding is that new bitcoins are created by using large amounts of electricity to run computer programs on large expensive computers. This doesn't seem like a good way to limit their creation.

I wasn't talking about bitcoin and the like. China is where digital money is the biggest, in terms of paying by way of phone transfer. Incidentally, bitcoin and other crypto-currencies are banned in China. I don't know where digital money is going, and it could go a number of ways I'm sure. What I was talking about is the function of digitalization of money as a basis for accounting. What's more, personal value judgements are useless when it comes to extant phenomena. The best one can do is to attempt to grasp the circumstances.

5] I never meant to say that deficits don't matter. They do. Deficits can cause inflation. The Gov. should spend dollars on good things. I believe that cutting taxes on the rich is the same as spending. I don't see a difference between giving rich people money and giving poor people money. I don't necessarily accept that the incomes of the rich were earned fairly doing something that the society needs. So, I have no compunction in taxing their incomes and even net wealth.
6] Huge wealth and income inequalities are not a good thing. If $20,000 is a poverty income for a family of 3 or 4, then the largest incomes functionally allowed should not be more than 5000 times that much. And net worths over $500Million can be heavily taxed.
7] I'm even thinking that a graduated corporate tax could make a lot of sense to discourage the growth of companies.
8] I think that a major reason that the US economy did so well in the 50s and 60s was that the top marginal tax rate was 90%. The rich didn't want their companies to pay them too much and see 90% of that pay go to the Gov. Therefore, they had their comp. plow the profit back into research and growth creating by the comp. Also, the comp. had less reason to not pay their workers well, i.e. 90% of what they didn't pay their workers was going to be taken by the Gov. anyway. So, why not pay the workers more. This meant their and all other company's workers had more money to spend buying the goods and/or services the company produced. It worked out well.
. . I know there is another explanation -- that the rest of the world was still recovering from WWII. That may have been part of it, but I still like my reason more.

Still no appreciation of the global dynamics which underpin the status of the dollar.

[Rugoz]

This ability means that the Gov. does not need to worry too much about deficits. The only possible downside is inflation and inflation is not that bad. Unless it gets totally out of hand, and if that happens it can only be because taxes were not high enough to stop it. The simple solution when inflation strikes [i.e. when there is too much money in the system rather than when there is too little resources or production in the economy] is to raise taxes. If the 1% want to see inflation continue enough to block the raising of taxes then they will see their dollar holdings fall in value. The 1% can make a choice --- inflation at 100plus% a year or higher taxes.

I don't now where this idea comes from that an inflation tax would hurt the rich, it would hurt those who hold non-interest bearing assets (cash), which are mostly the poor, relatively speaking. It would hurt asset-holders only at the beginning, i.e. when the inflation tax regime would be introduced, since that would be unexpected. In any case, a simple calculation shows that the revenue you can raise with an inflation tax is marginal at reasonable inflation rates. It's a non-starter.

[Crantag]

Crantag,
I'm not at all sure what your points are.
Under Bretton Woods economic policies were limited by the amount of gold the nation had. If they ran a deficit for long enough then people and comp. from other nations could suck all their gold out. Without gold their currency would be worthless, so that had to be avoided at all costs.

I just realized it seems you are still talking about the Gold Standard here.

I was deceived at first because when you said "the nation" I thought you were specifically talking about the US.

The Bretton Woods system was based on the convertibility of the US dollar to gold, by foreigners. In theory, this essentially grounded the basis of value of the dollar, and other currencies were in effect valued as a reflection of the dollar. Basically the dollar was a proxy for other currencies.

[Steve_American]

Rugoz,
It is not an "Inflation tax". Rather, all taxes take money out of the non Gov. economy and then the Gov. can spend the revenue without causing more inflation. [Note: here inflation means a general rise in prices, not "an increase in the money supply", as some economists redefine it.]

All taxes have this effect. Some more than others.

MMT claims that since all IOUs are destroyed as soon as they reach the hands that created them, that therefore, the Fed. Gov. can't deposit the dollars from tax revenue into its account at the Fed. Res. Bk. I say this is not a necessary part of the theory and just confuses people.

[Steve_American]

Crantag,
I am just a layman. I have little knowledge about Bretton Woods and international debt settlement payment systems thru time.

MMT says that the US went off the Gold Standard in 1972. You say it was some other time. Why should I take your word for it over the word of professional economists?

As I understand it under Bretton Wood a nation could settle international debts either with gold or with "hard" currency, dollars and maybe some others like the UK Pound.

I also have not replied to your thoughts on the international impact of too much US deficit spending for the same reason, i.e. I have little knowledge on this subject.

[Crantag]

Crantag,
I am just a layman. I have little knowledge about Bretton Woods and international debt settlement payment systems thru time.

MMT says that the US went off the Gold Standard in 1972. You say it was some other time. Why should I take your word for it over the word of professional economists?

As I understand it under Bretton Wood a nation could settle international debts either with gold or with "hard" currency, dollars and maybe some others like the UK Pound.

If MMT says that, it is quite telling of how ignorant the proponents of it are.

You do know how to google, don't you?

https://en.wikipedia.org/wiki/Gold_stan ... d_standard

Abandonment of the gold standard
The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of World War I, when Treasury notes replaced the circulation of gold sovereigns and gold half sovereigns. Legally, the gold specie standard was not repealed. The end of the gold standard was successfully effected by the Bank of England through appeals to patriotism urging citizens not to redeem paper money for gold specie. It was only in 1925, when Britain returned to the gold standard in conjunction with Australia and South Africa that the gold specie standard was officially ended
(...)
Many other countries followed Britain in returning to the gold standard, this was followed by a period of relative stability but also deflation.[25] This state of affairs lasted until the Great Depression (1929–1939) forced countries off the gold standard. In September 19, 1931, speculative attacks on the pound forced Britain to abandon the gold standard.

Bretton Woods

After the Second World War, a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange rate of $35 per ounce; this option was not available to firms or individuals. All currencies pegged to the dollar thereby had a fixed value in terms of gold.[5]

Starting in the 1959–1969 administration of President Charles de Gaulle and continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing US economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock").

I also have not replied to your thoughts on the international impact of too much US deficit spending for the same reason, i.e. I have little knowledge on this subject.

Discussion of the true functions and trends of the US dollar are meaningless without an international component.

[Steve_American]

Crantag,
As I said, I'm just a layman.

However consider this --- If a school of Macro-economics can redefine the word "inflation" to mean "an increase in the supply of money" [thus making it by definition that an increase in the money supply will *always* be linked to inflation;

then, why can't a school of Macro-economics say that Bretton Woods was a sort of new Gold Standard. After all you said above, "a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements" and "All currencies pegged to the dollar thereby had a fixed value in terms of gold." This looks like a gold standard to me.

[Crantag]

Crantag,
As I said, I'm just a layman.

However consider this --- If a school of Macro-economics can redefine the word "inflation" to mean "an increase in the supply of money" [thus making it by definition that an increase in the money supply will *always* be linked to inflation;

then, why can't a school of Macro-economics say that Bretton Woods was a sort of new Gold Standard. After all you said above, "a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements" and "All currencies pegged to the dollar thereby had a fixed value in terms of gold." This looks like a gold standard to me.

What you mention in the first paragraph is just another iteration of the "Quantity theory of money." The banking vs currency school (the latter adherents of the quantity theory) debates go back atleast to the 17th century (in England), long before the days of Adam Smith. Ben Bernanke is also an adherent to the quantity theory of money.

The difference is that the Bretton Woods gold exchange standard was based on the convertibility of US dollars to gold (though only for foreigners--as I noted before US citizens were forbidden from so much as owning, or trading, gold anywhere in the world--which went back to a Roosevelt edict in 1933). This goes to that photo posted by another poster of a US bank note with 'in gold we trust' on it, Americans couldn't so much as possess gold between 1933 and 1966 or so.

The Bretton Woods system, based on US Dollar convertibility to gold, is very different from all the national currencies being linked to gold. You mentioned a situation previously whereby current account deficits lead to gold flowing out of a country's coffers. That applied under the Gold Standard, not the Bretton Woods regime.

[Steve_American]

Cranag,
I may be wrong but, under Bretton Woods something flowed out of a nation's holdings if it kept running a balance of trade deficit. Dollars or gold, it makes no difference. As soon as the nation was out of gold and dollars its money had nothing to back it, and in any case it then couldn't buy more stuff from other nations.


On another subject, MMT IIRC seems to think that it really doesn't matter that much if the US dollar falls in value against other currencies. They think this will lead to the US making more stuff to either use themselves or sell to others. Both of which increases the US GNP and maybe employment.
It is sort of like the people who think that resources can't run out on a finite planet, even given runaway exponential growth in their use. They seem to think that this will just cause the market price to adjust and make other resources more attractive or be used as a substitute. They think the market will adjust to absorb any problem.
The 2nd I doubt, the 1st I'm not at all sure that I doubt.

Anyway, you said in this thread that the days of the US dollar as the only international currency are numbered anyway. So why are you afraid of this happening if there is too much deficit spending?

[Crantag]

Who said I was afraid of anything?

I've heard It said that in the Middle Ages wars were fought between aristocrats and the peasants didn't really care who ruled them.

I just aim for matter of fact understanding. But actually I now live in China and earn Chinese Yuan. Therefore I hope for the Yuan to appreciate in the future. I also think it will.

[Rugoz]

Rugoz,It is not an "Inflation tax". Rather, all taxes take money out of the non Gov. economy and then the Gov. can spend the revenue without causing more inflation. [Note: here inflation means a general rise in prices, not "an increase in the money supply", as some economists redefine it.]

Well, it's called an inflation tax.

Let's assume the economy is operating at full capacity, i.e. is in its non-inflationary equilibrium (ignoring the business cycle). If the government increases the monetary base by a certain percentage (and consumes/invests the money created), this will translate 1:1 into price increases (inflation). What the governments raises equals what money holders lose. In practice an inflation tax will motivate money holders to reduce money holdings, i.e. will motivate them to consume/invest more money, meaning inflation will actually be higher than the increase of the monetary base, which in real terms will reduce the revenue potential for the government.

[Steve_American]

Rugoz,
You might want to look at what MMT says about this.
MMT says that deficit spending can cause inflation. If deficit spending is causing inflation, then it is better to raise taxes than to continue to spend a lot more than the revenue that is collected. Raising taxes should/will reduce the inflation.
I don't think I remember MMT ever saying that taxing more in any situation would lead to inflation. In fact, MMT says that if the Gov. runs a surplus for several years in a row then there will *always* be deflation when the economy stalls and goes into a recession or depression. [Not all recessions are caused by running a surplus. The 2001 dot com bubble recession was an example of one, but the 2008 recession was not caused by running a surplus.]

.

[Crantag]

Well, it's called an inflation tax.

Let's assume the economy is operating at full capacity, i.e. is in its non-inflationary equilibrium (ignoring the business cycle). If the government increases the monetary base by a certain percentage (and consumes/invests the money created), this will translate 1:1 into price increases (inflation). What the governments raises equals what money holders lose. In practice an inflation tax will motivate money holders to reduce money holdings, i.e. will motivate them to consume/invest more money, meaning inflation will actually be higher than the increase of the monetary base, which in real terms will reduce the revenue potential for the government.

I find this to be a pretty logical post.

Quantity theory is the notion that the government can directly influence economic conditions by directly influencing prices by directly influencing the quantity of money. Monetary economics is heavily adherent to the quantity theory. Ben Bernanke thoroughly believes in it. I for one do not.

[Rugoz]

I find this to be a pretty logical post.

Quantity theory is the notion that the government can directly influence economic conditions by directly influencing prices by directly influencing the quantity of money. Monetary economics is heavily adherent to the quantity theory. Ben Bernanke thoroughly believes in it. I for one do not.

I am not aware of any economic theory that would contradict what I said. The government can always create inflation by monetizing debt.