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Comment by anu7df | Hacker News Reader

I really do not understand why most people seem to think deficit spending is not the cause of inflation. Print a bunch of money and make a lot of people millionaires either on paper or realized gains. Why would their attempt to acquire anything scarce, like desirable houses, not cause the price of said asset to go up? Sure, it may take a while due to different kinds of inertia in the system and un equal rise in different asset classes and goods. But surely it should at some point rise prices. Why is this a surprise? If I am wrong, why am I wrong?

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It's not the only cause. Money is (pretty much) created whenever anyone borrows.

It just so happens that the government is a very, very large borrower. But people taking out mortgages, student loans, car loans also increase the money supply.

It's like matter and antimatter. When a loan is made, a combination of debt and money is created. When the loan is repaid, the debt and money delete each other. (With fees, interest, and defaults causing a transfer one way or the other). I think bankruptcy deletes the debt but keeps the money, too (not sure about that).

More debt in the system == More money in the system.

> I really do not understand why most people seem to think deficit spending is not the cause of inflation.

I really don’t understand why some people can’t recognize the empirical evidence that it’s clearly more complex than that.

So fluctuations in currency value definitely are more complex, but money supply increase is the only thing I know of that would lead to a basically monotonic decrease in the value of the currency, which is what we observe. Can you provide any other examples?

I was wondering why you were conflating deficit spending with increasing the money supply, then realized it was the comment that I had replied to that did that. I was focusing on the assertion that there’s some clear, simple link between deficit spending and inflation even though the empirical evidence suggests otherwise.

A monotonical decrease on the supply of stuff, like what we've had with oil.

The supply of stuff (per capita) has monotonically decreased since the early 1900s? That doesn't seem to align with reality...

>> I really do not understand why most people seem to think deficit spending is not the cause of inflation. Print a bunch of money and make a lot of people millionaires either on paper or realized gains

If the government finances deficit spending through printing money, the link to inflation is clear. Printing money to finance a deficit doesn't cause inflation, it IS inflation.

But you can also finance a deficit by borrowing money rather than printing money. The link between borrowing to finance a deficit and inflation is less clear. Milton Friedman said that:

"One effect is upward pressure on interest rates, and hence, given the Federal Reserve’s unfortunate propensity to operate through interest rates, higher monetary growth. In addition, by reducing private incentives to work, save and engage in productive ventures and by crowding out private investment, high government spending inhibits economic growth so that any given rate of monetary growth produces a higher rate of inflation."

But other economists disagree, as economists tend to do, and as others have pointed out, there have been periods in the US of huge increases in borrowing during periods of decreasing inflation.

Money is created from fractional reserve lending. Deficit spending is just one example.

It's a cause, but not the cause. Monetary policy also matters.

> I really do not understand why most people seem to think deficit spending is not the cause of inflation.

For one, because Japan has been deficit spending for over two decades and not only is its inflation rate extremely low, it has gone negative on multiple occasions:

* https://fred.stlouisfed.org/graph/?g=1680i

In the 1980s there was huge deficit spending during the Reagan years, and yet inflation tanked (thanks Volcker). There was deficit spending during the Bush43 years, and yet inflation was flat.

> Why would their attempt to acquire anything scarce, like desirable houses, not cause the price of said asset to go up?

Because most of the time, especially in recent years/decades, money is just sitting around doing nothing:

* https://fred.stlouisfed.org/series/M2V

* https://en.wikipedia.org/wiki/Velocity_of_money

What most money-supply-inflation people get wrong is outlined in this good analogy by Cullen Roche:

> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.

* https://www.pragcap.com/three-things-i-think-i-think-i-see-d...

So there's deficit spending, so there's a money supply increase: so what? What is the money doing? It turns out mostly nothing (notwithstanding people going a bit crazy post-pandemic recently—though there's geopolitical effects too (thank Russia)).

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