What really causes inflation?

In My Humble Opinion
81

I just finished showing that this is wrong. The Fed buys government assets (bonds), makes an entry into their balance sheet, and transfers the money to the federal government. Money is created. Not literally printed, but an electronic transfer. The government then spends money that did not exist before they issued the bonds.

When a government is borrowing 2 trillion per year, where do you think the money is coming from? The U.S.'s biggest foreign bond holder, Japan, holds about 1.1 trillion in US securities. China’s around $800 billion. That’s cumulative, not what they buy per year.

What happens in a bond auction is that the government offers a bond at a certain interest rate. If there are no buyers, the yield has to increasse until the bond is attractive enough to sell. So if the fed doesn’t want to lose control of interest rates, it will buy the bonds if there are no other takers. This means the fed is buying the bonds that no one else wants at that price, and the taxpayers take the risk. And since the Fed doesn’t have its own money to spend, when it buys bonds it basically makes an accounting entry and then releases the money to the seller. When the bond matures, the fed pays back the money it owes with another electronic entry, or it rolls the bond over.

Between 2020 and 2022, the Fed’s balance sheet grew from 2.1 trillion to 5.8 trillion. The money supply grew by about 6 trillion over the same period.

The covid response was almost tailor-made to create inflation. First the government locked everyone down, shrinking supply, then they gave them printed money to pay their bills. We increassed demand while cratering supply, and ballooned the money supply to get away with it. We will be oaying the price for that for years.

This isn’t Democrat vs Republican. Trump did it, Biden did it, countries around the world of varying ideology did it. It was a global concensus, and it was wrong.

82

Actually, no, you did not. The funds are borrowed, and the Fed is not the Government.

What does that have to do with Inflation?

And US Households buy 73% of bonds. So most of the money is coming from- us.

83

Dr Deth said that everything the government spends is either from taxes or borrowed. Where is that wrong? Either the Fed is buying bonds directly from the government and giving the government the money (borrowing), or the Fed is buying bonds in the open market (quatitative easing) and giving money to the holders of those bonds, not the goverment. Quantitative easing can create money, but that money doesn’t go to the federal government.

84

To be fair, the Fed aka Central bank is rather confusing to many- even I who consulted with the Fed cant explain it well or simply in layman’s terms… or heck even in any terms.

But Sam is right about one thing- well, until the last part of the last line-

Because it is the only way global economies can work today.

There just aint enough gold, and moving around tonnes of gold for international payments and debts is more or less impossible today.

The Gold Standard died a well deserved death when the world went global. No nation uses the Gold standard.

85

How would it buy the bond if it has no money? Also if they buy the bond all long will they hold it and who will they sell it to if there is no buyers?

What do you mean by taxpayers will buy the bond?

86

The Fed buys the bond and puts X dollars into the sellers account. It’s “printing” money, but it’s not actually printing dollar dollar bills y’all.

87

I wasn’t making a criticism of fiat currency, I was talking about lockdowns and printing money to pay people to stay home.

The Fed does not have money to lend. When the government ‘borrows’ from the fed, the fed makes a credit into the government accounts, and the government spends the money. The fed basically makes an entry into its balance sheet saying that it now holds those bonds. The money the government is now spending did not exist before this was done. No individual or group has less money because the government borrowed it, so the aggregate money supply increases. The fed is figuratively printing money

If the Fed pushes money into the banking system (qualitative easing) instead of directly to the executive branch to spend, aggregate money supply goes up, but velocity may not, or may even go in the other direction, so the money supply may remain fixed. But if they give it to the government to helicopter drop on the people to stimulate demand, then it is going to be inflationary.

Quantitative easing is also generally inflationary - that’s the whole point. But in this case it’s maintaining liquidity in the banking system so that the money supply doesn’t shrink. In the caseof the 2007-2008 recession, , it was done to prevent deflation, so if you were heading for a CPI of -1% and you use QE to get inflation to a healthy 2% instead, you still inflated the economy. It’s intentional. But it doesn’t always work, for reasons mentioned. And as we are seeing, trying to unwind it is a bitch.

The actual bottom line is that fiscal policy is out of control, so the fed is forced to continue easing even when there is inflation. Inflation will not come back to historical levels until our balance sheets return to normal levels, and that means drastic cuts in spending. Two trillion dollar deficits are completely unsustainable, and having them during a period of good growth and low unemployment is madness. Keynes is spinning in his grave right alongside Friedman.

88

That has nothing to do with whether the government can only spend tax money or borrowed money, which is what you took issue with in the good Doctor’s post.

89

Are we not considering the Fed to be in ‘the government’? Because when the fed gives the executive branch a trillion dollars, it didn’t borrow it from anyone.

Certainly the Fed is supposed to be independent, but it’s only quasi-independent and is definitely part of ‘the government’.

Inwould consider ‘borrowing’ to mean there was existing money doing something, and someone borrowed it to do something else. In the case of such borrowing, the money supply doesn’t change much. It might go up a bit if the money starts moving instead of sitting in a long term investment or something, but the aggregate money supply stays fixed.

If one arm of government ‘borrows’ from an entity that makes the money up by fiat, and that entity is part of the government, the government is not borrowing anything - it is stealing from everyone by watering down their wealth through inflation by printing money it didn’t earn. Taxation would be more honest.

90

By figuratively printing it! A bank transaction moves the money to the executive branch’s accounts, and an offsetting transaction at the fed says that they now own the bond. No physical money was printed, but the executive branch now has money to spend that did not exist before.

If they want to shrink the balance shert (quantitative tightening), they’ll let the bond expire, remove the entry, etc. Or, they can roll the bond over at a new interest rate.

I’m not an expert on the Fed, and some of this stuff is pretty arcane. But I think I’ve got the basic details correct.

I didn’t say they’d buy the bond, I said they’d assume the risk of buying bonds at a lower yield than the market is demanding, indicating that it’s a bad investment. And in fact, the fed is now losing money hand over fist because of its balance sheet full of crappy low yield bonds it has been forced to take on. As I said, the Federal Reserve lost $100 billion last year, for the first time in its history. Who do you think ultimately pays for that?

91

The Fed won’t give the government a trillion unless it issues new debt (or, if that weird coin thing was done).

The Federal Government can only spend what it taxes or borrows. That’s why there are debt limit fights and shutdowns.

92

It’s not borrowing existing money. Bookkeeping entries are made, and the government starts spending. Yes, it’s ‘borrowed’ in one sense, but the money that is ‘borrowed’ did not exist.

When someone says, "The government can’t create new money - it can only spend what it taxes or borrows’, that is wrong. It’s suggesting that borrowing means taking money from one use and putting it to another use. But if the money ‘borrowed’ has to be created, then it’s fundamentally different in terms of its effects on the economy, money supply, and inflation.

93

But in the case of Germany in WW1 and WW2 they printed money when the government needed money.

Also Argentine they printed money when the government had no money but this caused massive inflation.

94

Venezuela also recently tried it, and triggered massive inflation. And Zimbabwe.

Politicians who can spend money today and leave the bill for the next person will never learn this lesson, because they have every incentive not to. The same goes for borrowing and spending generally.

And special interests who want that sweet money will come up with endless reasons to justify it.

.

95

I’m sorry, but you’re just wrong about this. This thread has a lot of statements by a lot of people that are sort of right, sort of wrong, yes but, no except, etc., but this statement is just wrong.

The federal government can only spend what it borrows and taxes. The Federal Reserve is not part of the federal government. It can create and destroy money. If it creates money by lowering banking reserve requirements or by buying treasury securities in the open market, that can be inflationary. However, it may not lead to inflation if money is being destroyed elsewhere – in the aftermath of the financial crisis, the Fed poured tons of money into the system, but banks were pulling back lending and so there wasn’t inflation.

If the Federal Reserve creates money by buying securities in the open market, it isn’t “spending money” and the federal government gets zero additional dollars to spend. It’s adding to the money supply, for sure, but that does nothing for the government’s balance sheet.

If the Treasury Department (which is part of the federal government) issues new debt, then the federal government can spend the money it raised, but that’s borrowed. If the Treasury Department sells that debt to the Federal Reserve, yes, the government can spend that money.

On the government balance sheet, if it issues treasury bonds (or bills or notes), there’s additional cash and additional debt. It all has to balance.

Here, DrDeth was talking about the Feds as in the federal government. No one calls the Fed “the Feds”. This was correct.

Nothing here contradicts what he wrote, except where you say “this is wrong”. This is “sky is green wrong”. The federal government can only spend what it raises through taxes and borrowing. The Fed can print and destroy money, but that has nothing to do with what the federal government can spend. Any time the Treasury (federal government) issues debt, money is created (balanced out by debt that must be repaid), regardless of whether it sells those bonds to the Fed or to Japan or to the general public.

This is my last post in this thread.

96

Great post.

Please dont leave.

97

Good post I understand every thing you say here but the part in bold I’m confused. Can you elaborate on it.

98

I feel like we’ve gone down a definitional rabbit hole. Call the Fed outside government if you want. The point is that when the government borrows from the markets, money is just moved from one use to the other. When the government ‘borrows’ from the Fed, money is created that did not exist before. Hence aggregate money supply grows.

99

The difference of course (Don’t try this at home, kids) the Venezuelan and Zimbabwe governments do not enjoy reserve currency status.

100

But inflation *is* back to historical levels, in fact it’s basically at the ideal level of ~3%.

So, it would appear that the data completely refutes your logic.
It’s not like you’d just handwave the data and persist in wrong beliefs, right?