this post was submitted on 28 Apr 2024
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Economics
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Very puzzling to me that anyone is blaming government spending for inflation. Is that just a corporate scapegoat?
No, new money entering the economy comes from the government and government spending is one of the ways that happens.
Government spending is doing some heavy lifting here.
Yeah, if you are Zimbabwe and you are minting your currency like there's no tomorrow while all your debt is in USD. Your currency is at a huge disadvantage and you'll hit trillion dollar bank notes in no time.
Rich countries trade massively while they require poorer countries to hold debt in the currency the richer country controls. This makes rich countries too big to fail, because their currency failing hurts everyone. As long as a rich country is growing their economy they can mint as much as they want.
Japan is taking this to extreme levels with their debt to gdp because they are fighting deflation from an aging population. Russia had double digit inflation because of Western sanctions, but they literally spent their way into single digit inflation with their war economy.
This "fiscal responsibility" from conservatives is actually hurting the US economy. The only inflation the fed is fighting rn is high wages for workers. Don't fall for the propaganda.
How does having international trade and loaning out money make it so increasing the money supply doesn't cause inflation? And since we're talking about government spending, this isn't just adding to the money supply in a way where those dollars will sit hoarded in a bank account somewhere, with government spending people are being paid to do something, that's going directly into the heart of the economy, and more dollars flying around -> economic stimulus -> inflation.
That isn't to say I think the measures the government takes to fight inflation are justified and without blame. That thing about the fed fighting high wages is true and they literally admit it probably because wages and inflation are associated metrics so fighting high wages and fighting inflation are basically the same thing in economic terms.
What they tell us about money is often propaganda. My understanding about what money is changed after I realized:
A) Money is not fair, it will never make a lot of sense because the leaders who control a currency always use it to their benefit. It can take Americans tens of thousands if not hundreds of thousands of hours of labor to make a million dollars. But an ex politician / government official can earn that from a handful of 30 minute speeches.
B) Taxes never fund a government. Taxes are one of the tools to create demand for a currency. But a government creates it's own currency, why would they need tax revenue to spend when they are the ones creating money? This would be like saying we can't mail anymore because we ran out of stamps. The limiting factor for how much we produce is manpower, never money.
It is true that there is a lot of misleading propaganda about money in the media. It isn't true that money is purely a conspiracy of the wealthy and follows no other logic than their interests (though, granted, government economic policy does prioritize their interests). Economics is real.
Does this contradict what I've argued? I'm not seeing the connection.
You originally made the argument about spending and inflation. It implies money is limited resource to a central bank.
How does it imply that? The cause of inflation would be the same regardless of whether central banks can print as much as they choose (of course they can?). What do you think causes inflation if not money going into the economy?
What caused recent inflation? That is easy. It's caused by many things including supply chain disruptions, lack of competition, war, and non-existent government oversight.
Whatever the reason, companies are making more money and workers are producing more than any time in history. So back to your point, companies need an excuse for their price gouging. The money supply is their biggest scapegoat. They also blame theft and high wages. But none of those arguments hold up to scrutiny.
What scrutiny? Your only criticism of the widely accepted, evidence backed idea that putting money into the economy is a cause of inflation seems to be that companies you don't trust are supposedly saying it, but that isn't scrutiny of the idea itself.
If you accept that markets are real, and that supply and demand works roughly the way it is understood to work by the field of economics, it should be very straightforward why adding money causes inflation; in dollar terms, it increases demand, while supply stays the same, moving the equation towards higher prices. There is disagreement about whether all forms of adding money cause inflation; I've heard reasonable arguments that the money supply itself is not important but rather the velocity of money and whether people who will spend it are getting it is what matters, which I'm not sure I fully agree with, but since we're talking about government spending, that is well known to be one of the most direct forms of economic stimulus and those arguments don't apply.
There is not much evidence that a rich country growing deficits* causes inflation. Russia and Japan are recent examples.
*growing deficits = throwing money into the economy
Markets are real as in they exists and the free market was a historic idea used by capitalists to explain why the 19th governments shouldn't interfere with them. But as a consumer living in the 21st century, the free market might as well be a fairytale. But if you still believe, who am I to bring you down.
I'm not really making an argument about what should be done, or the usefulness/applicability of the term 'free market'
Not sure that's really equivalent since deficit growth could also be contributed to by other factors, like reduced revenue. It's also not a fair expectation that government spending should always be followed by a rise in inflation, because that spending is likely to be an intentional stimulus effort made to counteract expected forces going in the other direction.
Could you say more about why you think Russia and Japan's recent history represents evidence (I'm assuming you meant this instead of absence of evidence which would be confusing) that spending does not cause inflation? I haven't been following it much, but I heard Japan's currency is devaluing hard against other currencies atm.
Google Japan's inflation and gdp vs debt ration since the 90s. Why are they more afraid of deflation than inflation.
Russia is under sanctions and is waging a costly war. They managed to drop their inflation and grow their economy with higher government spending.
Countries will all face economic issues at times, but inflation due to government spending is not something leaders of rich countries actually worry about.
This is a logic that seemed intuitive to me as well for a long time. However, it doesn't make much sense to me anymore when I think about money as simply a representation of wealth or value.
Imagine somebody spending their time and Know-how to build a chair which can be sold at 50$ more than what the original materials are worth. Through their work, they created wealth. The still unchanged amount of money does not accurately represent the currently avaliable wealth anymore and in order to still be redistributed among all goods and services relative to their worth, prices would need to drop (deflation). Now of course, the value of a chair and other goods generally declines over time such that wealth can also disappear, which will cause inflation if it happens excessively. If the government decides to stimulate the economy, ergo creating new money and distributing it, there will still be no inflation if this money is in some way or form used to create the same or more wealth than the equivalent of the newly introduced money. This can easily happen when there are bottlenecks in the current economic situation such as high unemployment or underdeveloped infrastructure.
If of course the new money isn't used to create more wealth, either because it is pocketed by some entities or because there simply are no people or natural resources available, it will lead to inflation.
It's a long-standing observation of economists that government spending leads to inflation. Probably the simplest model is that the government is increasing demand without increasing supply.
Note that in this model, taxes have a deflationary impact because they reduce demand from individuals.
This is not an opinion on how much government spending is affecting current inflation (nor how much inflation is to blame for any particular category of goods).