Ang, there are three main causes of inflation, so when Friedman said “inflation is always and everywhere a monetary phenomena” he was wrong.
If we look at the Quantity Theory of Money QTM, we see:
M*V = Q *P
P = (M*V)/Q
That means P price increases when:
1. The supply of money M increases
2. The Velocity if money V increases, like irrational exuberance
3. Q the quantity if goods and services is reduced, like a supply shock.
That happens in industries and ecosystems geographically, so the sum of all price changes is often not that insightful, looking at each of these variables helps build a clearer picture.
At its core, shortages are always the cause of inflation, but shortages can have various causes: natural disasters, man- made disasters (war), monopolies, corruption, political incompetence.
Unless an economy is at full capacity, inflation is temporary because capitalism is pretty good at meeting demand if there is competition and money to be made. If it is at full capacity, then taxation can help reduce demand and cool inflation that way. Austerity solves inflation only once bank credit (which grows in an attempt to fill the hole) gets too big to maintain and asset sales lead to job loss and recession. Better to increase spending on productive infrastructure. Austerity ( and raising rates) is almost cruelly inefficient.
I find it interesting that Milton walked back his “inflation is a monetary issue” statement, but mainstream economics continues to think that way.
Yes that $5T fund would get the job done…paying $1T/year in risk-free income (for no work) to the already-rich sure won’t fix anything. There are other ways though. One way is to permanently lower the interest rate to near-zero like Japan had until recently, and we had for over a decade after the GFC…with no inflation.
The $36T is not debt. It is the stock of Treasuries that are an accounting of the money that was spent into existence and left in private hands (I.e. not taxed back). It is not debt like household debt that must be paid back. Congress is the currency-creator: it is where all permanent US dollars come from (bank-credit dollars MUST be paid back and cancelled), all others are counterfeit. To eliminate the $36T, the private sector would have to give back to Congress $36T…leaving nothing in “We the people’s” hands. All we would have is bank credit (loans) to transact with since a balanced budget means that every dollar Congress spends into existence would be taxed back and cancelled, leaving nothing in We the people’s hands.
Government “debt” does not fund government spending. It is the other way around; government spending funds bond purchases by the private sector.
Same goes for taxes. Taxes don’t fund spending…spending provides the dollars for you to pay taxes. Taxes are an inducement to use the currency. The US dollar is a transferable tax-credit.
A simpler settlement system would be welcomed, but not if it is on a blockchain. Too energy intensive andconvoluted (for no real benefit).
You have made a series of arguments that are built one on top of the other, and all fall apart if you start with the truth that the U.S. Gov does not currently issue money. In 2024, the USG issued a grand total of $0.
The Treasury General Account MUST have a positive balance by law prior to spending, no overdraft, no wiggle room, so if the the U.S. Treasury does not have enough tax revenue on deposit to spend, they MUST sell bonds, and only after they have bond proceeds can they spend. This is what the debt ceiling is about, and any idea that the Gov issues money to spend is observably false, it’s factually incorrect.
Bonds in private hands MUST be repaid, so not sure why or how you believe we don’t or won’t repay what we borrowed.
Yes, we should lower interest rates to 2% or lower, so I strongly agree with that, and when we see inflation we should be increasing tax revenue to withdraw excess money. But part of the reason they are so high is we need to attract investors to buy bonds. Yesterday’s auction was strong, but rates should be much lower, and the difference is wealth transfer.
Where did the $36T required to purchase the stock of Treasuries come from? First you need the US$ to exist, then you can buy a Treasury. US$ are created by Congressional spending laws. All else would be counterfeit.
A monetary sovereign is a currency-creator, not a currency-user like households are.
Matching deficits with bond sales is a vestigial leftover from the fixed-exchange monetary system (1917). It continues because it provides risk-free income for the already-rich. Not because it is required.
I don’t quite get this bit: “When the central bank sells government securities (i.e., government securities it previously purchased on the secondary market),”.
Has this been explained elsewhere? Are there other ways to buy government securities, if so can the central bank not use them too?
The central bank is not allowed to purchase bonds diretly from the treasury (except under exceptional circumstances). It's a long-standing convention aimed at maintaining the appearance that the central bank is independent of government. So, it purchases them from the secondary market, i.e. banks, pension funds etc.
Inflation is always a supply of real-resources issue, not a monetary issue…like Milton said (and retracted, somewhat, later in life).
Thanks for your comment Ang.
Ang, there are three main causes of inflation, so when Friedman said “inflation is always and everywhere a monetary phenomena” he was wrong.
If we look at the Quantity Theory of Money QTM, we see:
M*V = Q *P
P = (M*V)/Q
That means P price increases when:
1. The supply of money M increases
2. The Velocity if money V increases, like irrational exuberance
3. Q the quantity if goods and services is reduced, like a supply shock.
That happens in industries and ecosystems geographically, so the sum of all price changes is often not that insightful, looking at each of these variables helps build a clearer picture.
At its core, shortages are always the cause of inflation, but shortages can have various causes: natural disasters, man- made disasters (war), monopolies, corruption, political incompetence.
Unless an economy is at full capacity, inflation is temporary because capitalism is pretty good at meeting demand if there is competition and money to be made. If it is at full capacity, then taxation can help reduce demand and cool inflation that way. Austerity solves inflation only once bank credit (which grows in an attempt to fill the hole) gets too big to maintain and asset sales lead to job loss and recession. Better to increase spending on productive infrastructure. Austerity ( and raising rates) is almost cruelly inefficient.
I find it interesting that Milton walked back his “inflation is a monetary issue” statement, but mainstream economics continues to think that way.
I agree. I tried to model that here…
https://medium.com/@wunderwood11/trumps-rare-and-short-lived-opportunity-for-a-5t-grand-bargain-69921b8fc7c6
Yes that $5T fund would get the job done…paying $1T/year in risk-free income (for no work) to the already-rich sure won’t fix anything. There are other ways though. One way is to permanently lower the interest rate to near-zero like Japan had until recently, and we had for over a decade after the GFC…with no inflation.
The $36T is not debt. It is the stock of Treasuries that are an accounting of the money that was spent into existence and left in private hands (I.e. not taxed back). It is not debt like household debt that must be paid back. Congress is the currency-creator: it is where all permanent US dollars come from (bank-credit dollars MUST be paid back and cancelled), all others are counterfeit. To eliminate the $36T, the private sector would have to give back to Congress $36T…leaving nothing in “We the people’s” hands. All we would have is bank credit (loans) to transact with since a balanced budget means that every dollar Congress spends into existence would be taxed back and cancelled, leaving nothing in We the people’s hands.
Government “debt” does not fund government spending. It is the other way around; government spending funds bond purchases by the private sector.
Same goes for taxes. Taxes don’t fund spending…spending provides the dollars for you to pay taxes. Taxes are an inducement to use the currency. The US dollar is a transferable tax-credit.
A simpler settlement system would be welcomed, but not if it is on a blockchain. Too energy intensive andconvoluted (for no real benefit).
You have made a series of arguments that are built one on top of the other, and all fall apart if you start with the truth that the U.S. Gov does not currently issue money. In 2024, the USG issued a grand total of $0.
The Treasury General Account MUST have a positive balance by law prior to spending, no overdraft, no wiggle room, so if the the U.S. Treasury does not have enough tax revenue on deposit to spend, they MUST sell bonds, and only after they have bond proceeds can they spend. This is what the debt ceiling is about, and any idea that the Gov issues money to spend is observably false, it’s factually incorrect.
Bonds in private hands MUST be repaid, so not sure why or how you believe we don’t or won’t repay what we borrowed.
Yes, we should lower interest rates to 2% or lower, so I strongly agree with that, and when we see inflation we should be increasing tax revenue to withdraw excess money. But part of the reason they are so high is we need to attract investors to buy bonds. Yesterday’s auction was strong, but rates should be much lower, and the difference is wealth transfer.
Where did the $36T required to purchase the stock of Treasuries come from? First you need the US$ to exist, then you can buy a Treasury. US$ are created by Congressional spending laws. All else would be counterfeit.
A monetary sovereign is a currency-creator, not a currency-user like households are.
Matching deficits with bond sales is a vestigial leftover from the fixed-exchange monetary system (1917). It continues because it provides risk-free income for the already-rich. Not because it is required.
I don’t quite get this bit: “When the central bank sells government securities (i.e., government securities it previously purchased on the secondary market),”.
Has this been explained elsewhere? Are there other ways to buy government securities, if so can the central bank not use them too?
The central bank is not allowed to purchase bonds diretly from the treasury (except under exceptional circumstances). It's a long-standing convention aimed at maintaining the appearance that the central bank is independent of government. So, it purchases them from the secondary market, i.e. banks, pension funds etc.