Yes, price inflation reduces the value of debt. However, it also means there is a pretty big disincentive to save money. When you take away an easy avenue for the poor to save money, those people have one less easy way to save for their future.
But to the question of who gets the money, this is the concept of seigniorage. The people closest to the money creation get the most value from that money. That's because when that new money is spent, prices haven't accounted for that monetary inflation yet, so they have higher buying power than they should have. When that money trickles down to the rest of us, that money has already lead to devaluation of the money that results in price inflation. In practice, banks, financial institutions close to those banks, and governments get the most benefit from this created money.
But this is also a zero sum game. Creating more money doesn't create more wealth. The more currency you create, the lower the value of the currency. So where does the value gained in seigniorage come from? Well it comes from the people farthest away from the hose: the poor.
This is why the monetary inflation leads to price inflation means prices go up before wages go up.
There's even more to it than this. Its a complex topic. But I hope you see where the iceberg might be.
Well, of course. But what I was inquiring about was with regard to what would happen if such spending was not financed through deficits but was funded instead by direct money creation, while at the same time money creation by the central bank, etc., was proportionally diminished.
If all or most new money originated from entitlement spending (money printed for that purpose), how would that change the inflation dynamic?
Theoretically it would be better because you wouldn't need to pay a fee (interest) to middle men (banks). However, it would also be potentially a lot more abusable if congress could just create as much money as they want. Arguably the Fed now is abusing this ability anyway, so maybe it would be at least no worse if the government could do it directly.
> how would that change the inflation dynamic?
Well, devaluation would still happen, so the market distortion that incentivizes bad investments and removes an avenue for saving would still exist. If banks continue to lend out more money than they have, then we'd still have a debt cycle of booms and busts. However, the taxpayers would save money. The people gaining from Seigniorage wouldn't change much - whoever the government gives funding to would be gaining from seigniorage, with the same wealth sapping effects from the rest of the population. It might be a reasonable improvement.
AFAICT, experts have for years (even before the recent spat of foreign NIRP uses provided additional experience on the effects and raised new questions about whether the Fed would use them) long indicated that the Fed can set and pursue a negative target rate, but has never really shown interest in doing.
So we basically always need to print money.
"Fractional Reserve" banking is not a thing, as banks do not lend out reserves (except overnight to other banks). It does not and has never accurately described how banks lend, nor does it accurately define limits to bank lending. The limit to bank lending is capital. Bank capital consists of trusted assets (e.g. IOUs that central banks are willing to discount or which other banks accept as collateral for overnight loans) that are believed to be risk free. Generally this means government debt. Government debt is the sole constraint on bank lending as well as loan growth. Reserves have nothing to do with this in a modern system, and were only incidentally important in earlier systems.
> more money for interest can only come into existence by printing more.
Please define what you mean by "money". When most people think of money, they think of demand accounts, and these are not created by the government but by the private sector. Clarity in definitions can explain almost all of these misconceptions. A good rule of thumb is that someone who doesn't know what they are talking about mentions only "money". If you know what you are talking about, you specify the asset and matching liability, and so you distinguish between bank reserves, vault cash, deposit accounts, bank bonds, and different bank assets, knowing which meet capital adequacy requirements and which do not.
A good description of how the monetary system works is provided by the Bank of England report "Money Creation in a Modern Economy".
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
That article does a good job at dispelling myths of "fractional reserve banking", "money printing", and the like, and it accurately describes how modern banks work and what central banks actually do. It is required reading for anyone who goes off about "money printing" or whoever thinks that banks lend out reserves.
Are you saying that government debt is the primary asset that banks balance loan liabilities against? I don't quite follow this. Can't a bank simply loan someone money by creating deposits for that person, and balance that against the asset that is the loan instrument? Why does government debt have anything to do with it?
But most banks aren't the originator of that money. The Fed creates money, all other banks lend it out which causes a money multiplier effect. However, the money multiplier doesn't actually affect prices directly - beause most of that money are deposits, ie they're not being used. Money only leads to price inflation when its spent. Banks gain seigniorage by having first access to money lent out or spent by The Fed. If they need extra money to cover for too little deposits, The Fed is there to give those banks below-market-rate loans. If the government needs to borrow more money and banks don't have enough to buy the bonds, The Fed will buy bonds from banks at above market rates so those banks can buy more bonds with the money they get back from that. That's where the seigniorage happens.
There are also financial institutions that banks give benefits to (cheap loans for example). Those financial institutions also benefit from seigniorage by getting those cheap loans. Ordinary people aren't getting cheaper loans tho. If anything, the monetary inflation pushes loan rates up, even as nil resere requirements and a low discount rate have pushed them down.
If they spend it, poor people would still benefit because the spending is creating jobs in the process. Really, the only problem is land ownership (renting out buildings is fine) and that has nothing to do with inflation, rent seeking is a fundamental problem that drains productivity from the economy.
Sure, some rich people take out loans (but have to pay it back, which often they do by spending the loan on stuff that creates jobs) and some benefit very indirectly from asset prices rising. But as a general rule the poorest demographic borrows more than they own and lends absolutely nothing, and the richest demographic borrows less than it lends, and sees returns to its lending fall
>> My intuition is the opposite of what you're saying. Inflation devalues debt and savings while increasing the nominal value of wages.
Both statements are true.
Inflation increases the nominal value of wages while simultaneously decreasing the real value of wages, because wages have to chase inflation instead of the other way around. Sustained latency causes this difference to increase against time.
So our Senior Sales associate at Home Depot doesn't see any real increase because he doesn't have any assest to take advantage of it.
Meanwhile those that have access to cheap money are able to move it to others sources that are inflation resistant, stocks, companies, real estate, etc, meaning that overtime he is still getting paid $80,000 and his house may have increased in value but everything he needs to live is outpacing his ability to buy. Meanwhile those involved in finance are now substantially richer because they got more of the new money being created by having easy accless to captial.
EDIT: If I am wrong in something here somebody tell me why, because that basically seems to be what is happening with the feds inflationary money policies is that everyone that can is borrowing at low interest rates then plowing that into real estate and the stock market because those are increasing in value so much, precisely because interest rates are so low and inflation so high.
https://www.adamsmith.org/blog/the-cantillion-effect
Between fractional reserve banking with no reserve requirements,
https://www.federalreserve.gov/newsevents/pressreleases/mone...
and unfettered government spending, it's practically irresponsible to not be in debt.
Either way, your average peasant can never keep up with the wealthy asset class under this system.
There probably was a trickle down Cantillion effect in his time since in the 1730s rich people would one way or another buy other people with their money.
These days it is trickling down to Google SWEs who the rich people can use to build machines to put the grocery checkers out of work. I don't think its trickling down to the grocery checkers.
So the Gini coefficient keeps increasing, rather than leading to broad inflation.
Eventually the bottom half of the economy should be effectively priced out of it, at which point we should see a deflationary collapse in the top half.
It seems to me that, currently, entry-level wages are rising faster than inflation. It isn't uncommon to see retail or fast food hiring signs advertising starting wages 2x as much as what I earned in those jobs 20 years ago -- over which time cumulative inflation has been 52.1%.
Do you think the reduced labor participation rate due to COVID-19 has made the entry-level labor market more responsive than the Cantillion Effect presumes?
Let's get real. Every statistic has a tracking error. The CPI will always be wrong because that is the nature of measurements. However, it's not so crappy that it is off by more than 1%.
Inflation usually happens with full employment. One problem is that inflation can also drive full employment, therefore the interest rate has to act as a moderator to prevent the economy from overheating as people constantly switch jobs for better pay. Lowering the interest rate is only possible because there is slack in the economy and we haven't reached full employment. If there was full employment the Fed would have to raise the interest rate because the market demands a higher interest rate but that is not the case right now.
For example, if I have a debt of $250k for a house worth $250k and inflation is causing a net benefit on my asset of 1%, then sure I'm gaining from the inflationary regime.
But what of the wealthy that have billions in assets and maybe even billions in debts?
The two situations belie a completely regressive tax. The billionaire gains net 1% on their billions and I as a peasant gain net 1% on $250k.
How can you argue this doesn't generate wealth for the wealthy?
Consider further that 1% is a modest number for the net benefit of asset backed debt.
It's a regressive tax in that the person with $250k gains less in absolute terms than the billionaire. But that's just capitalism. But so what? Everyone's still better off than they were yesterday.
This also ignores the spending effects and money velocity increases inflation brings. This is why the Phillips curve is a thing. People are encouraged to spend money. Higher inflation->lower unemployment. Lower unemployment, more bargaining power, more wages, the marginal person is better off.
There's a reason why low inflation is correlated with the Regan era of corporate takeover. The wealthy today don't actually own physical assets, by and large. They own financial instruments. They'd like to be able to sit on them. They don't want to have powerful labor. Stagflation is what happens when there's an exogenous shock to the labor supply by the opening of the world combined with the oil crisis. Now you don't need more people to produce more stuff.
Why doesn't the Fed want 0% inflation?
Because wages rise with inflation too. A very simplistic explanation is that inflation hurts those that save/lend cash and helps those the own assets & borrow cash. It tends to be the poor that suffer because they save in cash & it's easier to suffer as a poor person.
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...