Can government print more money without causing inflation? - Politics Forum.org | PoFo

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This thread concerns a longstanding debate, about whether government can print more money without causing inflation.
Some of you might be familiar with the economic theory MMT (Modern Monetary Theory) which advocates this.

The argument in favor of this notion seems to be that natural economic growth results in deflation (assuming money supply is fixed), and that therefore government can print money to counteract this natural deflation, resulting in no inflation at all.
For example, if a factory produced one widget before, and now due to economic improvements in efficiency that factory can produce two widgets in the place of one, for the same input cost, then the price of widgets in this hypothetical economy should go down by half. Which we would call deflation.
But by printing more money, the government can keep the price of widgets at the same level it was before, thus theoretically resulting in no change in inflation or deflation.

This is how I understand the argument of those who claim government can expand the money supply in proportion to economic growth without causing inflation. Please correct me if I am wrong here.

As additional supposed evidence, this side points out the fact that there was not really any noticeable inflation after the Fed embarked on a massive 'quantitative easing' policy (expanding the money supply) in the wake of the Housing Crisis in 2007.

I pointed out that there were several reasons the inflationary effect of this policy would not have been visible.

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The housing bubble had led to inflation in the economy. Then, rather than let it collapse, the Fed propped it up and set that inflation (which had already happened) in concrete, printing more money to replace the housing equity that no longer existed. If the Fed hadn't implemented "quantitative easing" at that time, the economy would have simply deflated back down to the normal healthy level.

To put it one way, it resulted in big inflation that filled the hole of big housing deflation, right after the bubble popped.

That's what "propping up the economy" means. When you have lots of money that isn't there (overinflated housing values), and suddenly that is gone, then you print money to bail out the mortgage lenders.

The inflation it caused was neutralized by the housing deflation that was going on at the time, which was basically the whole intended point of the policy.
Thanks to their quantitative easing, housing prices did not come down (at least not in dollar price amounts, and at least not as much as they otherwise would have). If you think that's a good thing.

In one sense, the inflation that was caused could be seen leading up to the housing bubble.
Of course that bubble was not sustainable, but the Fed's policy set that inflation into stone.

Basically the inflation was hidden within the massive ebb and flow of the economy.
(It should also be pointed out that government policy very much contributed to this bubble in the first place, another topic)

As anyone familiar with economics knows, a lot of the "money" in the economy is just money in bank accounts and reflects the value of homes that there are loans on.
So when those home prices became inflated beyond what was sustainable, it led to bigger loans, and more "money" circulating around in the economy. (People thought there was more wealth than there actually was)

Once the housing market began to deflate, suddenly a lot of the money in those bank accounts wasn't actually there. The loans went bad.

This would have resulted in deflation back down to normal levels if the Fed had not intervened.

I will also point out there were some additional reasons you did not see inflation.
Wages went down as so many became unemployed in the wake of the housing crisis. This helped prevent prices from going up. Then of course housing prices went down, because the housing market collapsed.
And finally, the Saudis lowered oil prices at the request of the US to try to help at the time.

That does not mean there was not inflation, it just means you didn't see it.

Or rather to say, it prevented overall prices from going up at a time when the dollar became worth less.
So of course it would not show up in the inflation statistics. ​
........

The claim was basically that the Fed pumped out money during the housing crisis, and we didn't seem to see inflation. I suggested a very legitimate reason why that does not mean printing more money does not have an inflationary effect.

I also argued that even if the claims of those who say more money will not necessarily cause inflation are true, the effect would not be very big.

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I believe the potential gains from harnessing the natural deflation rate, and trying to put it to work, are pretty minimal.
The rate of economic growth is actually smaller than people commonly think, and the figures are inflated due to monetary inflation.
Suppose a natural rate of deflation at 0.7%. That would mean the government could only get a free 0.7% of all the money in circulation that year.
There is $1.75 trillion US dollars in circulation. (And about 60% of that is abroad, by the way, so it isn't reflective of the US economy)
Let's assume 700 billion US dollars. 0.7% of that would be 4.9 billion.
That's not a lot of money. ​
........

So here, condensed into a single neat and tidy post, are all the claims and arguments laid out on the table.

This is a huge economic issue, and has a lot of implications for government monetary policy.
There actually are a lot of people and some economists who believe government can print more money and do not worry about it causing inflation.
Of course, it could turn out to be disastrous if they are wrong.

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