–Can increased federal deficit spending actually prevent inflation?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.

Can increased federal deficit spending actually prevent inflation?

TIME magazine recently ran an article about inflation, which supplements what I’ve written earlier about the cause of inflation (See: The Cause of Inflation)

Think Commodity Prices Are High Now? Just Wait
Posted by ZACHARY KARABELL Monday, May 16, 2011

The just-released monthly inflation report showed that prices for most goods eased a bit. The exception of course is oil, and even though oil prices globally have declined in recent weeks, most Americans are paying ever more for gasoline even as inflation overall remains statistically tame.
[. . .]
But the real issue today is that inflation is almost entirely a product of rising raw material costs and for now, these are being born not by individuals but by companies. Many economists assume that eventually, these rising input costs will be passed on to consumers in the form of higher price tags.
The emerging world is hungry for goods, for food, cars, appliances, gadgets, homes, and clothing. And governments in Sao Paulo, Beijing, and New Delhi are authorizing vast spending on modern infrastructure. China’s is well known, but Brazil and India both have significant needs that are only now beginning to be met.

I just returned from a conference with some of the world’s leading money managers, and one theme was clear: there has been massive underinvestment in the global supply chain of industrial metals and raw materials. This is less about oil and gas than about things like copper, iron ore, palladium, titanium, zinc, rhodium, and a host of other “iums” that are the essential, irreplaceable inputs for the industrial world that we all inhabit and that billions are on their way to inhabiting. Simply put there is yawning gulf between demand and supply. . .

That means we are in for a period of rising commodity inflation, including oil and of course food as more people consumer more calories and crop yields strain to increase.
[. . .]
So unless China truly implodes or Brazil stops growing, or hundreds of millions in India and Indonesia stop believing that they have a right to the same middle class lifestyle that has characterized the West for the past century, we are at the early stages of a spike in commodity prices the likes of which we have never seen. And judging from debates in Washington over how much to spend on Planned Parenthood and how much to reduce pension of state workers, we are nowhere near prepared for this world that we are entering.

Debt-hawks endlessly cite the Weimar Republic’s hyper-inflation (which occurred 90 years ago under special economic circumstances) as an example of what growing U.S. federal deficits will cause “soon,” “some day” or “inevitably.” Factually they are wrong.

Hyper-inflation has been caused by circumstances unique to each affected nation, but always involve massive printing of money in response to existing inflation, not as the cause of, inflation. Analogy: Gasoline is necessary to make a car run, but if the car bursts into flame, you don’t keep adding gasoline. Hyperinflated nations pour gasoline on an already burning car.

Mr. Karabell writes the truth. Historically, inflation has been caused by rising production costs. In the economists’ mantra, “Inflation is too much money chasing too few goods.” The debt hawks focus on the “too much money” side, while the real cause has been too few (or really, too expensive) basic goods. Oil, whose price is manipulated, has been the main culprit, (See: INFLATION) and as a result of insufficient spending on basics, many other commodities are about to have increased involvement.

So yes, there will be inflation, “soon,” “some day” or “inevitably,” just as the debt-hawks predict, but the cause will not be federal deficit spending, as they surely will claim, but rather, oil prices and shortages of other basics.

In fact, inflation could be prevented were the U.S. to pump more money into oil exploration, other energy development, mining, plant and equipment development, R&D of all types, farming, wood and other basics. Pumping more money would include tax breaks as well as deficit spending.

To build our economy efficiently, we need increased investment in its foundations.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up my future.”


6 thoughts on “–Can increased federal deficit spending actually prevent inflation?

  1. The chance of more deficit spending doesn’t look too good right now. Do you think raising interest rates can prevent inflation caused by shortages?


  2. Money is a commodity. The value of a commodity is determined by supply and demand. Demand is determined by risk and reward. The reward for owning money is interest, so increasing interest rates increases the reward, which increases the value of money, thereby reducing inflation.

    I should mention that this is disputed by MMT, which says increasing interest rates increases production costs, thereby causing inflation. See item 12. at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/

    I suggest the historical facts are on my side in this debate.

    Rodger Malcolm Mitchell


    1. Are you saying inflation will remain low as long as we raise interest rates, even if the world is running out of basic materials?


  3. This is a paradox I’ve been wondering about after reading you, and Mitchel etc. views on hyperinflation.

    In an effort to “balance the budget”, I wonder if all these austerity measures various governments are engaging in will cut the productive capacity of the society. If you cutback on education, everything from primary schools through trade schools onto universities, are you not in effect de-skilling your future workforce. Same with medicare, if more of the population are ill or in someway incapacitated due to lack of access to decent healthcare, that’s also going to cut the productive capacity of a society.

    One question, do you think this could be the real risk with running constant trade deficits with countries like China, that by offshoring your manufacturing industries you are losing all the technical know-how and skills base that accompanies them?


    1. It’s no paradox. Austerity will cut the productive ability of an economy. For a Monetarily Sovereign nation, austerity is ridiculous.

      Our trade deficits with China have not cost us our technical know-how. On the contrary, we have been able to focus on more advanced techniques, while they focus on using people-power.

      Their trade advantage does not come from their superior technical abilities, but rather from the fact their labor is cheap.

      Rodger Malcolm Mitchell


  4. Fields,

    Raising interest rates is the preferred method for fighting inflation. I suppose there can be circumstances in which inflation factors are so powerful they can’t be overcome by raising interest rates, in which case reducing the money supply would be necessary. But, that would be an extremely sick economy, indeed.

    Rodger Malcolm Mitchell


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s