–Inflation hurts; so why not deflation?

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●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The more federal budgets are cut and taxes increased, the weaker an economy becomes. .
Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
●Austerity is the government’s method for widening
the gap between rich and poor.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Everything in economics devolves to motive,
and the motive is the Gap.
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Over the years we have published many posts about inflation (a general increase in prices). [See all the “inflation” links on the left side of this page.]

Inflation and its opposite, deflation, are complex. They are not just a simple matter of the government spending too much or too little money. See: Federal deficit spending doesn’t cause inflation; oil does In fact, too much or too little government spending seem to be the least cause of inflation or deflation.

Inflation and deflation are the result of complex relationships among the Supply and Demand for money and for goods and services. See: The economics of chaos. What we know for sure. The value of money (inflation) formula/u>.

Debtors (except for the federal government) generally welcome inflation, because the money necessary to pay debts is easier to obtain during inflationary periods. (The federal government doesn’t care about inflation, since it creates dollars ad hoc, when it pays bills.)

Inflation and deflation are all but impossible to measure, because the goods and services being purchased continually change. Today’s cars, appliances and jobs are different from yesterday’s. The CPI (Consumer Price Index) is an estimate of many estimates, all of which have changed over time.

All this complexity leads to the title question, “Why not deflation?”

We all would rather pay less than pay more, and we have seen examples of the terrible damage excessive inflation can cause. So again, why not deflation?

The standard logic is: When people anticipate the lower prices of deflation, they delay buying, waiting for those lower prices, and this delayed buying negatively impacts the economy.

It all sounds so logical, but is it true?

One place to find the answer is the electronics industry. Today, I saw an advertisement for a 60″ TV set: $499.00. Just a few years ago, I paid $5,000 for a set of similar dimension, and it wasn’t nearly as good as the one being sold today. Talk about deflation!

Today’s smart phones give you much more value for the dollar than did the portable phones of yesteryear. Pay less + Get more = Deflation.

The deflation in electronics has not caused the kind of delayed buying economists fear so much.

One might point to holiday sales as an example of delayed buying. People defer making some purchases in September, waiting for those “50% Off” sales in November.

But a few months delay has scant effect on economic growth, especially when those holiday sales actually encourage bargain hunters to buy more than they would have otherwise. People might temporarily delay purchases, but over time, people buy what they want — especially if prices are lower.

One might give the example of Japan, the government of which has been trying to create inflation as a way to stimulate the economy:

monetary sovereignty

And indeed, at various times, GDP and inflation appear to move together. Does this indicate that deflation is recessionary — or does it indicate that recessions cause deflations — or most likely, does it indicate these two complex events are connected only tenuously and coincidentally?

Here is the picture for the U.S.:

monetary sovereignty

The common belief: Federal spending is stimulative and also is inflationary, so reduced federal spending must be recessionary and also deflationary. So stimulus and inflation must “go together,” while recession and deflation also must “go together.”

But it doesn’t seem to be true.

I’ve searched for evidence that deflation causes delayed spending which, in turn, causes recession, and I can’t find any. I’ve come to think it’s one of those beliefs that sounds reasonable — something like “the federal government must live withing its means” — but hasn’t a factual basis.

If you’ve found evidence to support the reduced spending –> deflation –> recession pattern, please let us know.

Until then, we’ll view it as a myth, and a harmful myth at that, for it forces us into an unnecessary inflation.

Rodger Malcolm Mitchell
Monetary Sovereignty

===================================================================================
Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually. (Refer to this.)
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)

10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)

The Ten Steps will add dollars to the economy, stimulate the economy, and narrow the income/wealth/power Gap between the rich and the rest.
——————————————————————————————————————————————

10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
1. A growing economy requires a growing supply of dollars (GDP=Federal Spending + Non-federal Spending + Net Exports)
2. All deficit spending grows the supply of dollars
3. The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
4. The limit to non-federal deficit spending is the ability to borrow.

THE RECESSION CLOCK
Monetary Sovereignty

Monetary Sovereignty

Vertical gray bars mark recessions.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.

#MONETARYSOVEREIGNTY

44 thoughts on “–Inflation hurts; so why not deflation?

  1. Rodger-

    The deflation delaying purchases = hurting GDP is largely a myth as you point out.

    However, deflation does cause three unambiguously bad economic outcomes:

    1) Wages fall
    2) debt contracts hurt the debtor as they are written in nominal terms and always at some positive nominal interest rate

    And there is no such thing as a supply and demand curve for money. You cant buy money, its not a commodity that can be purchased.

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    1. Actually, you can and do buy money all the time. Bonds, notes and bills are forms of money. Travelers’ checks are money. A bank account is a form of money.

      You buy them every day. Foreign exchange also buys money.

      The reason raising U.S. interest rates makes the dollar “stronger” is because that increases the Demand for the dollar.

      The Value of any commodity, including money is:

      Value = Demand / Supply

      If Demand were infinite, Value would be infinite. Also, if the Demand for money were infinite, no one would buy anything (i.e. exchange money for goods and services). You never would want to part with the stuff.

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      1. “Actually, you can and do buy money all the time. Bonds, notes and bills are forms of money. Travelers’ checks are money. A bank account is a form of money.”

        I disagree with this. You are simply exchanging forms of money with differing liquidity which garners different interest rates, or maybe you’re buying a service. I dont consider any of this buying money. I dont consider myself to be buying a 6-month CD. Maybe you do, this would be a definition problem. I’m correct via my definition and you via yours.

        “You buy them every day. Foreign exchange also buys money”

        Again, exchanging money for money is not buying in my lexicon.

        “The reason raising U.S. interest rates makes the dollar “stronger” is because that increases the Demand for the dollar.”

        Sounds good in theory, the historical evidence certainly doesnt correlate with this claim:

        https://research.stlouisfed.org/fred2/graph/?graph_id=208574

        “If Demand were infinite, Value would be infinite. Also, if the Demand for money were infinite, no one would buy anything (i.e. exchange money for goods and services). You never would want to part with the stuff.”

        This is a good counter point and I dont have a good enough response at the moment. Maybe my using the term infinite is inappropriate. I’ll have to think more about this. But people arent trying to acquire billions of TVs, houses, cars, jeans, watermelons, movies, rounds of golf, haircuts etc. So clearly the notion of supply and demand curves are different between money and all other commodities.

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        1. Auburn, one reason the demand for goods is finite is that the usefulness of them applies only to a limited quantity. You may want 2 or 3 TV sets, but not 10 or 100. There’s no place to put them and make use of them. That doesn’t apply to money. Your bank account can always hold higher numbers at no extra cost, so there’s no reason to not want more money. In that sense, you’re right, there is not a limit to the demand for money like there is on other things, but that is semantics, not macroeconomics.

          Rodger is right because in order to get money you must give up something else, even if it is only the things you could have bought with the money you already have. Depending on how much money you have, and how much other stuff, and your plans for your future, you may or may not want to bear the cost of acquiring more money. In that sense, the demand is finite.

          Your graph shows, like all other economic data, that there are no controlled experiments in economics. Lots of other things influence exchange rates, the interest rate on one side of the exchange being only one of many. US interest rates are historically low today, but the dollar rises because rates are even lower in Europe. Raising US rates would enhance that trend. The dollar rose at various times of global strife because the US has a stable government compared to some trading partners, and not because of interest rates. Comparing only two variables obscures cause and effect.

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          1. Good points John, Its a complex concept.

            WRT interest rates and FX, my point is that RMM’s claim cant be inherently true, and for all the reasons you mention. There are many variables that go into the FX rate of the dollar, so we cant make unequivocal claims that interest rates increases always raise the FX of the dollar.

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          2. Well, whenever you say “always” it’s almost always false. Capital does tend to flow toward a higher risk-adjusted real after-tax interest rate. Risk, of course, is subjective, too.

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      2. Although I must say you didnt address my points about why deflation really is bad for economy. It doesnt have much to do with delaying purchases, as you mention.

        On the debt deflation side, the propensities to spend relative wealth of the debtors and creditors plays an important role as well.

        For example, higher than expected inflation may eat into some of the creditors profits, but they wont be taking a nominal loss, however, deflation could put the debtor into default which opens up a whole new can of cascading effects. Which is why we never experience depressions with inflation.

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          1. And maybe the psychological affect of falling wages is more powerful than falling prices?
            The propensities to spend of the creditors and debtors are different, to the extent that debtors spend more of their income, this would hurt GDP. Not to mention that deflation leads to defaults which are terrible for the system. Another point that you’ve ignored

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          2. Golferjohn notes below that inflation makes it easier, over time, to pay off mortgages (and debts in general). The flip side of that is Auburn Parks’ point #2, that deflation makes debts harder to pay off. With deflation, prices go down and possibly wages with them, but debts don’t. Unless they are somehow indexed to prices, which they typically aren’t. I think that the economy could do ok with either moderate inflation or deflation, as long as there was predictability. But deflation would hurt debtors.

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          3. You are correct.

            Private debtors use income to pay their debts.

            So, inflation helps those private debtors whose income rises with inflation. Deflation helps those debtors whose income falls slower than the rate of deflation.

            Often people claim that the federal government wants to “inflate its way out of debt.” This is wrong, because the federal government does not use income to pay its debts. It creates dollars ad hoc, to pay creditors.

            Further, T-securities are deposits, not what people think of as “debt.” Deposits are “paid off” by transferring existing dollars from one account to another.

            Unfortunately, the public does not understand the differences between a Monetarily Sovereign entity and a monetarily non-sovereign entity.

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        1. Completely missed the point. Economists believe the ANTICIPATION of lower prices during deflations is what causes delayed purchases, and these purchase delays cause recessions.

          As I said, it sounds somewhat logical, but I’ve seen no evidence that says deflation causes recession, though the two often are linked. (Recession may cause deflation).

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          1. Economists say all sorts of stupid things (as you well know), you and I are talking here, Im not here to defend the nebulous term “economists” wrt this discussion.

            It doesnt sound logical to me at all, for all the reasons you’ve pointed out. What does sound logical is that deflation could lead to recessions as recessions are 2 quarters of negative nominal growth and if prices and wages and falling, its takes even more activity just to match the same nominal spending level. Thats pretty obvious.

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          1. Hyperinflations are related to societal collapse or at least regime collapse, but you are right. Regime Collapse would be depressionary

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    2. 1) like with inflation, wages may rise or may fall. Wages are not a result of inflation nor deflation – it depends on labor demand. There has been a steady 2-4% inflation in the US for the past 30 years with no wage growth at all.

      2) steady inflation, like today’s, benefits those with first access to credit (the wealthy and the banks). During deflationary times there are some bankruptcies which may remove debt – which technically relieves the debtor of much debt.

      Also, when you work, you are actually trading your labor more money. When you purchase a good/service, you are trading your money for them.

      Lower wages and debt contracts are 2 more items to add to the list of myths.

      In my opinion, you will not find any issues with deflation because deflation is the natural state of affairs. If some business/industry/sector is lucrative, it will cause more people to want to invest in it and do it, which theoretically should result in lower prices. There hasn’t been a point in history where competition and free markets were bad to the common folk. That’s the reason the average mainstream economist will push this 2% nonsense – because they’ve been bought out by the banks/wealthy. And this detail (coupled with other Keynesian debt hawk ideas), as minor as they seem, is the reason our economy is in dire straights. That is the big lie….

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      1. 1) you’re confusing nominal wages with real. Real wages have been falling in the US, but nominal wages have been rising, just not as fast as consumer prices. Nominal wages rise with inflation and fall with deflation. Anything else would become unsustainable, and reverse itself, in short order.

        It may be that deflation was the natural order of things in the US in the 19th century, as land and natural resources were abundant. Today it is different. In the 1970’s, as Rodger has often pointed out, it was oil supply disruptions that drove US inflation. But that 2-4% has been around since 1913, except for the Great Depression, and stayed around as oil went from $40 down to $12, and again from $150 down to $75. Energy is important because it is an input to the production of almost everything else. So are land and labor. In the early 20th Century the rise of labor unions caused steady increases in the cost of labor, which were reflected in prices. In the late 20th Century the US became essentially “built out”. The “new” land being brought into use today is farther away from population centers, less accessible, and less suited for use. It costs more, because it is no longer easily available and easily usable. As population increases, it can only continue to cost more, and since it is an input to the production of almost everything else, I think we may be stuck with that 2-4% “forever”.

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        1. It was not oil that drove inflation. See this chart:

          http://upload.wikimedia.org/wikipedia/commons/8/87/Oil_Prices_1861_2007.svg

          From the high prices in the 1970s caused by the oil embargo, oil prices saw huge declines up until 2000. If oil was the cause of inflation, than food prices would have increased 10 fold in the early 2000s when oil went from 15 to 150. Oil is only a fraction of input costs, there is also labor, raw materials, etc…. In my opinion, you are wasting time by looking at these since we have not run out of oil and probably won’t any time soon.

          As I said above, deflation is the natural state of affairs. Consistent inflation, on the other hand, is not a\ normal economic situation – it’s an artificially caused and monetary one. Inflation = a constant increase in the supply of money which manifests in higher prices.

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  2. I can’t say it extends to macro effects, but I know that when IBM was about to ship a new computer model (more power and more functionality for maybe only a little bit more money), nobody would buy the old one unless the price was reduced. And the conventional wisdom now is that the iphone 5 sits on the shelf forever once the iphone 6 is due out, unless the price goes way down. I’m sure the same applies to your 60″ TV.

    But are you sure you can’t at least say that more government spending (or lower taxes) is the cure for deflation? QE has been shown not to work. If not monetary policy, and not fiscal policy, what are Japan and Europe supposed to do, go to war again?

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    1. golfer,

      The point is: I bought the TV for $5,000 knowing it would be better and cheaper the following year. So the price deflation did not delay my purchase.

      The question is: Does price deflation delay purchases in any significant way, or is this just a “logical” belief, without factual substantiation?

      Since, all other things being equal, federal deficit spending increases the supply, more spending would be inflationary.

      But, deflation, like inflation, is complex, and all other things never are equal. And federal spending accounts for a comparatively small amount of money creation.

      So, one cannot reliably predict that increased deficit spending would “cure” deflation.

      And the word “cure” is misleading. So far as I can tell, deflation is not an economic disease, which is the point of the above post.

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  3. I would actually say that the opposite is true, inflation is what delays purchases.

    I have been meaning to purchase a TV myself, a 60 inch decent quality Smart LED TV. I have not purchased it because I am not willing to pay near a thousand bucks. If I could get the TV for half the price, I’d probably buy it immediately.

    I also have a worn coat I’d like to replace and am going to push it another year (maybe 2) if I can’t get one that fits in my budget.

    High prices, however, do result in people delaying purchases. And the issue is not only price, it’s also debt burden. There is a point where your wages cannot support purchases because it all goes to repay your debts – so there is no disposable income. We had a chance to delete a lot of the debt in 2008 and opted to keeping it. I keep asking myself everyday how can we be so dumb as a nation that we prefer to be debt slaves to “save” the banks.

    I cannot think of one single reason I would delay a purchase because an item is decreasing in value.

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    1. You will get that TV for half the price next year, and that is why you delay the purchase.

      As for the coat, if you can’t afford it now, and it’s going to cost double next year when your old coat is no longer usable, what are you going to do then? You would be smarter to borrow the money to buy the coat today, and repay the loan with tomorrow’s (less valuable) dollars.

      Owning real estate during inflation makes people feel good only if they have a mortgage on it. All the gains in real wealth come from paying off the loan with depreciated dollars. The real estate, if you’re lucky, barely keeps up with other prices. Buying it for cash is break-even at best, and a big loser if you have to pay taxes on the illusory gains.

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  4. One thing that I meant to point out is that inflation has a “good fell” effect to it. See…. most people have a home and they “feel good” when their homes and share prices go up in price. Even if they don’t sell or plan on selling, having your home and shares go up 20 – 40% feels good. Those asset owners would never like to see the opposite and truth is most people own a home and stocks.

    The funny thing is that by the time the majority wants to buy homes and stocks en mass, the wealthy and banks are probably lone gone with the real money, just like during the housing crash.

    So the joke is on you people. Inflation is not “normal”, deflation is…

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    1. Here I have to agree. Inflation should generally be non-existent given that we are constantly improving our technology, i.e., able to do more and more with ever less input. As mechanical efficiency generally increases, overhead should decrease throughout the entire tech sector.

      I’m very suspicious that the “buy now before prices go up” is a mantra designed to stimulate the economy for the current moment, another one of those scare tactics used by business and economists. Prices should be dropping actually. But this only seems to happen in the fast moving/improving and competitive electronics industry. (I remember my first hand held scientific calculator cost $133 in 1975.)

      Unfortunately other slower moving sectors, especially poisonous energy (fossil, fission) production and the snail pace building arts with their centuries old brick and mortar, hammer and nail construction, are wanting to keep increasing in price for selfish profit reasons and/or to satisfy stockholders. They improve little over time for fear of losing their grip on their money making model. Scientific progress would kill them.

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  5. Would it be true in saying then, that ‘inflation’ is the ‘cost’ of money? If I had $10 12 months ago which bought me 10 loaves of bread, and I then find today, 12 months later, that $10 only buys me 9 loaves of bread, the loss of one loaf of bread of purchasing power over 12 months (which would equate to 10% in this circumstance) is the ‘cost’ of using that money?

    If on the other hand I worked for the same bakery that made the bread, and instead of paying me money they paid me bread tokens, each worth a loaf of bread, then having 10 bread tokens 12 months ago would be worth the same as having 10 bread tokens today – both buy me 10 loaves and so no inflation and no ‘cost’ attached to holding those tokens?

    So the question becomes, who and how do we pay for this ‘inflation cost’? If I do not issue this same money that comes at a cost, how can I ever pay for it?

    https://mythfighter.com/2010/04/06/more-thoughts-on-inflation/

    you said in this post:

    Ask a debt hawk why he hates federal deficits and he will give you four main reasons:

    1. Federal debt must be paid back by taxpayers. (But, because the federal government has the unlimited power to create the money to pay its bills, there is no need to ask taxpayers to do it.)

    2. Federal debt adds to the government’s interest paying burden. (Again, interest is no burden to a entity having the unlimited ability to create money.)

    I have asked the above question several times now to several different people around the world and no one wants to answer it, but it seems that you are saying in the affirmative here Rodger…what it seems you are saying is that:

    The ‘cost’ of money is not a cost or burden to the government, because the government has the unlimited power to create the money to pay for any burden, interest, inflation, production costs, etc associated with the money it issues. Correct me if I am wrong.

    But is the government actually off-setting these costs, or are we being asked to do it? And if we are being asked to do it, why and how are we doing it?

    Why is it that a few months ago $100 bought me a lot more than what it buys today, and what is it that I have done wrong to society in order to have been punished in this way? Why is it if I have been working just as hard a few months ago as I am today, I am being punished by not being able to buy as much food as I did back then? I want an answer as to why I am paying for this inflation cost?

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  6. You have asked a very complex question, with no sure answers.

    Usually, interest is considered the cost of money.

    Inflation is not a burden on the government, for several reasons:

    1. You are correct that the U.S., being Monetarily Sovereign, feels no burden about paying its bills.

    Additionally:

    2. Inflation is not a burden to any debtor. In fact, the opposite is true. Assume you owe someone $100 and inflation is high, say 5% a year. If you pay that $100 ten years later, you still pay $100.

    Meanwhile, salaries tend to go up during inflationary times, so there is a probability that $100 too less of your labor to accumulate.

    Of course, if you were paying interest on that $100, the story might be different, depending on the interest and the inflation numbers.

    There are no good ways to measure inflation or “burden,” but if you want to measure the effect of inflation, you might ask yourself, “How many minutes do I have to work to buy that loaf of bread, and how does that compare with ten years ago?”

    My first job out of school paid me $6,000 per year, equivalent to about $54,000 today. An average car cost about $2,000 then, but those cars were not nearly as good as today’s cars,

    Gas was about 22 cents a gallon.

    On balance, low inflation (2%-3%) usually is not a burden on consumers, because incomes increase, too.

    Higher inflation is a burden on consumers, but no level of inflation is a burden on the federal government.

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    1. Inflation is a transfer of wealth from savers to debtors. Since the private sector is a net saver, and the government sector a net debtor, …

      Within the private sector, there are savers and debtors. Anyone with a mortgage and a job loves inflation. Retirees living off their savings, or a fixed annuity, or an old-style pension, not so much.

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      1. You are correct.

        Inflation transfers money value from savers to debtors.

        Think of inflation as being the opposite of raising interest rates. Inflation is currency weakness and raising interest rates increases the demand for currency — i.e. creates currency strength.

        That is why the Fed raises interest rates to combat inflation.

        Many central banks believe a little inflation is preferable to no inflation or to deflation, so they lower rates to cause inflation.

        When that doesn’t work, they sometimes even will cause negative interest rates, which cheapen the local currency even more.

        One of the differences between MMT and MS is the approach to inflation. MMT believes raising rates causes inflation, by increasing business costs.

        MS and the Fed believe raising rates fights inflation. The strengthening effect on the value of the dollar is much greater than the increased cost effect.

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  7. Thx Rodger and golferjohn,

    So when you say the price of money is the interest rate, how does this relate to someone who was paid directly by the govt? For example, if I build a bridge and the govt pays me $10,000, how does the interest rate (cash rate, overnight fed rate whatever) affect society in relation to this $10,000?

    Doesn’t the $10,000 deposit into my own account also mean that the banks reserve account at the Fed also goes up $10,000, and isn’t the Bank being paid some interest on this $10,000 in their reserve account, or if not, don’t they exchange this non-interest bearing money into interest bearing assets (such as treasuries), and if so, does society have to pay the interest on these treasuries, or does the govt itself simply extinguish the interest on it?

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    1. Saying the interest rate is the price of money refers only to the options people have for dealing with their money: saving/lending it and earning the interest, spending it and forgoing the interest, or borrowing and paying the interest, hoping to invest in something with a higher return, or simply spreading the cost of a large purchase over time. As rates change, their preferences change.

      Yes, the Fed is now paying interest on reserves, and when the government puts $ in your bank account, your bank’s reserve account goes up. The interest rate on reserves is very close to the rate on short-term Treasuries, so banks are relatively indifferent as to which ones they hold. In the aggregate, though, banks do not control the amount of reserves; the Fed does that. Longer-term Treasuries ordinarily pay a higher rate, but banks, in the aggregate, cannot reduce their reserves by buying them: the reserves simply move to another bank’s account.

      “Society” doesn’t pay the interest on Treasuries or on reserves. The government creates that money, as it does all the other money it spends.

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      1. Part of that is wrong. Banks cannot use their reserves to buy Treasuries. They can only lend them to other banks, or let them sit there.

        Banks can own Treasuries in their “own account”, just like you and I can do, but reserves are not their money to do with as they please. They are clearing balances. Banks can’t spend them.

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  8. Inflation is a transfer of wealth from savers to debtors. Since the private sector is a net saver, and the government sector a net debtor, …

    I’ve got to say, it is a strange concept to call the govt a debtor…being a debtor implies borrowing or the owing of an obligation. I guess the government has made the promise to accept its money in the payment of taxes, but taxes are an obligation of the private sector, so its making an obligation to accept its tokens in exchange for the private sectors obligations, which really makes the private sector the debtor.

    This would suggest to me that taxes are in fact the real cost of money, and it explains to me why Proudhon explained in his book on Property why the rich are always attempting to divert taxes away from them and onto the lower classes.

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    1. Federal spending exceeds federal taxes.

      Is it really a mystery as to why the rich want to divert taxes away from themselves onto the lower income groups? Read any of the posts about the Gap.

      “Rich” is a comparative term. The only way to be “rich” if for others to be poor. And the poorer the poor are, the richer the rich are. This is a tautology.

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    2. They operative word is Net. On balance, the government owes more than is owed to it.

      What government owes to the non-government is its fiat currency, in the amount of the bonds that it has sold to them. What non-government owes to government is taxes, also payable in the same fiat currency.

      The bonds are more than the taxes, so the government is the net debtor.

      Being the net creditor, the non-government sector has positive net financial assets, which assets decay over time as the general level of prices, expressed in the unit of account of those financial assets, increases.

      If you have a $1000 bond, the government owes you $1000 of its fiat currency. Today, that might be 300 loaves of bread. When you’re ready to cash in the bond, it might be 200 loaves of bread. You’ve suffered a loss, in real terms, but the government still only owes the same amount.

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  9. “What government owes to the non-government is its fiat currency, in the amount of the bonds that it has sold to them.”

    plus interest, correct?

    and isn’t the interest it pays on those bonds nothing more than future taxes?

    and aren’t taxes simply a mechanism to drain reserves?

    and so why the need to drain reserves?

    “Is it really a mystery as to why the rich want to divert taxes away from themselves onto the lower income groups? Read any of the posts about the Gap.

    “Rich” is a comparative term. The only way to be “rich” if for others to be poor. And the poorer the poor are, the richer the rich are. This is a tautology.”

    It’s not a mystery at all…it just proves that not everyone can be ‘wealthy’ in economic terms (or debt)..its mathematically impossible and so the better you are at being rich the more chance you have.

    Even the courts recognize that not everyone can have wealth

    http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/sa/SASC/2007/365.html?stem=0&synonyms=0&query=%22autonomy%22
    Individual Autonomy
    1. In a competitive world where one person’s economic gain is commonly another’s loss, a duty to take reasonable care to avoid causing mere economic loss to another, as distinct from physical injury to another’s personal property, may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage: Bryan v Maloney at 618 affirming Jaensch v Coffey [1984] HCA 52; (1984) 155 CLR 549; Sutherland Shire Council v Heyman [1985] HCA 41; (1985) 157 CLR 424 at 503. McHugh J has described this as individual autonomy : Hill v Van Erp (1997) 188 CLR 159 at 211; Perre v Apand at 114-117; Woolcock Street at [78] where he said:
    In Hill v Van Erp, I pointed out that “Anglo-Australian law has never accepted the proposition that a person owes a duty of care to another person merely because the first person knows that his or her careless act may cause economic loss to the latter person”. Speaking generally, a person owes no duty to prevent economic loss to another person even though the first person intends to cause economic loss to that other person.

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    1. ” . . . isn’t the interest it pays on those bonds nothing more than future taxes?”
      No, in a Monetarily Sovereign government, taxes do not fund government spending.

      ” . . . not everyone can have wealth . . . “
      Semantic problem, here. Not everyone can be “wealthy” because “wealthy” is a comparative term. For someone to be wealthy, someone else needs to be not wealthy.

      But everyone can have wealth, depending on what one considers to be “wealth.”

      If for instance, America offered Medicare for All plus Social Security for All, everyone would have wealth, but some still would be wealthy while others would not.

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    2. As Rodger said, the interest will be paid by future spending, just like any other government spending, by crediting the bank accounts of the bond holders. Bits in the computer.

      As QE has proven, there is no need ever to drain reserves. We can have massive amounts of reserves with no ill effect, in fact very little effect at all on the economy.

      What taxes are for is to prevent aggregate demand from overrunning our ability to produce at full employment.

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  10. I’m glad you made the point about how one defines wealth, because it is not universal. And your point is well made regarding things like medicare.

    And also on the point about QE. I was only thinking about that earlier that the recent GFC proved that excess reserves don’t have any impact.

    But on the issue of costs of money I still do not see how taxes are not a ‘cost’. If I earn $1000 and am then charged $200 in taxes, that is a cost to me that I must bear, and/or is a cost that gets passed on to the end consumer.

    When I perform a job in my truck, the end consumer pays over 50% more than what I end up receiving after all costs including taxes to deliver that service. If I ignore all other costs except taxes just for illustrative purposes, taxes (goods and services tax is 10%, and then income tax at 20%) are 30%. That means although I may end up with $700 net for a particular job, the end consumer has to pay over $1000 just to cover my taxes.

    Several things happen here.

    First, because of the taxes, I can’t even purchase that which I produced, because it costs over $1000 to the end consumer for something the provider only gets paid $700.

    Second, we are all paying for more than the good or service, we are paying a premium (in taxes) to be able to exchange money for the good or service.

    But thirdly, and ultimately, only the issuer of the money can forgive this cost. I can’t forgive this cost. I can’t say to the consumer, you know what, I’ll waive the taxes on this service for you as a kind gesture, or even as a business move to keep him loyal, because ultimately I will go out of business.

    Unfortunately, there is a push in our country to oust the small trucking operators. They are coming down hard on truckers and defecting their trucks for the most trivial and minor of issues (one case there was a tear in the passengers seat and the truck was defected!!). The move is designed to do two things. First, force the small trucks out of business because they wont be able to afford to maintain their trucks to this new higher and unprecedented standard, and, second, because the bigger companies will be able to absorb the cost, the government will be able to regulate it better because there will be fewer compaines operating trucking services.

    The same thing is happening in the child care industry where my wife works. She works for a lady who owns the one child care center (and she used to have two until the costs forced her to close it down). The government keeps putting in so many new regulations and such speeds that the costs are becoming unbearable for her. And it is obvious why they are doing it because the bigger child care centers such as the chains can absorb these costs, it will force the smaller ones out of business, allowing the government to only have to regulate fewer centers.

    So much for fair competition!

    I’m no Albert Einstein, but I am not stupid either, and there is no way past the fact that there is a cost in using money and doing business that can’t ever be truly met by the individual business owner or the consumer. These costs can only be forgiven by government. Earning money is a mugs game, especially if you want to be a small business owner.

    you said:

    “What taxes are for is to prevent aggregate demand from overrunning our ability to produce at full employment.”

    do you mean that taxes are necessary as an incentive for people not to consume too much? i think that is your point.

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    1. Yes, if the government only taxed and did not spend, the economy would spiral down into oblivion, because the people could not purchase what they produced.

      But it also spends, and purchases what people produce, and people don’t have to purchase that stuff. So if there were no savings (which also means people cannot, or do not, purchase what they produce) and no trade deficit, then the spending by the government in excess of taxes would be a net increase in money to the economy.

      I wouldn’t call taxes a “cost of money”, but if you do, then spending is a “benefit of money”, and on balance, the private sector gets more benefit than cost, because the government normally runs a deficit.

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