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The Swede's avatar

"the other side has Senators, too" is a great line

Mike Alexander's avatar

The author writes "that assumes that voters will just accept higher inflation - which they won’t."

It seems the author is making a connection between deficit spending (money creation) and inflation. This strikes me as a form of quantity theory reasoning. The idea expressed by Milton Friedmann that inflation results from too much money chasing a fixed amount of goods.

I did analyses based on this notion to detrend price cycles in periods with secular inflation, and to characterize inflation in the postwar era up until the mid-1990's. Since that time it no longer works like it used to. Somethings changed.

Now I think we could still get some insight into what would happen in the event of a fiscal crisis, that is, when investors become unwilling to buy all the US debt being issued at prices the US wants to get. An obvious solution to this problem is simply have the Fed buy it. Let's keep this simple and have the Fed by all the debt, the bonds that are maturing and newly issued ones to finance the deficit.

The immediate response is aha, inflation will ensue. But how does this happen physically? How are dollars that used to be used to buy government bonds find its way into the goods and services economy. I can think of various flows, but one can tax some of these flow (e,g, dividends) to discourage such flows. Others can be banned (e.g. SEC Rule 10-18b). You don't HAVE to let the inflation dragon in. That is a choice. Policymakers can choose otherwise. And if they are up against a wall, I predict they will.

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