Can government print more money without causing inflation?

This is basically a continuation of another thread, MMT: overcoming the political divide , that got too long. In that thread there was a debate, about whether government can print more money without causing inflation.
I'd like to focus on that issue specifically.

The argument in favor of this notion seems to be that natural economic growth results in deflation (assuming money supply is fixed), and that therefore government can print money to counteract this natural deflation, resulting in no inflation at all.
For example, if a factory produced one widget before, and now due to economic improvements in efficiency that factory can produce two widgets in the place of one, for the same input cost, then the price of widgets in this hypothetical economy should go down by half. Which we would call deflation.
But by printing more money, the government can keep the price of widgets at the same level it was before, thus theoretically resulting in no change in inflation or deflation.

This is how I understand the argument of those who claim government can expand the money supply in proportion to economic growth without causing inflation. Please correct me if I am wrong here.

As additional supposed evidence, this side points out the fact that there was not really any noticeable inflation after the Fed embarked on a massive 'quantitative easing' policy (expanding the money supply) in the wake of the Housing Crisis in 2007.

I pointed out that there were several reasons the inflationary effect of this policy would not have been visible.

The housing bubble had led to inflation in the economy. Then, rather than let it collapse, the Fed propped it up and set that inflation (which had already happened) in concrete, printing more money to replace the housing equity that no longer existed. If the Fed hadn't implemented "quantitative easing" at that time, the economy would have simply deflated back down to the normal healthy level.

To put it one way, it resulted in big inflation that filled the hole of big housing deflation, right after the bubble popped.

That's what "propping up the economy" means. When you have lots of money that isn't there (overinflated housing values), and suddenly that is gone, then you print money to bail out the mortgage lenders.

The inflation it caused was neutralized by the housing deflation that was going on at the time, which was basically the whole intended point of the policy.
Thanks to their quantitative easing, housing prices did not come down (at least not in dollar price amounts, and at least not as much as they otherwise would have). If you think that's a good thing.

In one sense, the inflation that was caused could be seen leading up to the housing bubble.
Of course that bubble was not sustainable, but the Fed's policy set that inflation into stone.

Basically the inflation was hidden within the massive ebb and flow of the economy.
(It should also be pointed out that government policy very much contributed to this bubble in the first place, another topic)

As anyone familiar with economics knows, a lot of the "money" in the economy is just money in bank accounts and reflects the value of homes that there are loans on.
So when those home prices became inflated beyond what was sustainable, it led to bigger loans, and more "money" circulating around in the economy. (People thought there was more wealth than there actually was)

Once the housing market began to deflate, suddenly a lot of the money in those bank accounts wasn't actually there. The loans went bad.

This would have resulted in deflation back down to normal levels if the Fed had not intervened.

I will also point out there were some additional reasons you did not see inflation.
Wages went down as so many became unemployed in the wake of the housing crisis. This helped prevent prices from going up. Then of course housing prices went down, because the housing market collapsed.
And finally, the Saudis lowered oil prices at the request of the US to try to help at the time.

That does not mean there was not inflation, it just means you didn't see it.

Or rather to say, it prevented overall prices from going up at a time when the dollar became worth less.
So of course it would not show up in the inflation statistics. ​

The claim was basically that the Fed pumped out money during the housing crisis, and we didn't seem to see inflation. I suggested a very legitimate reason why that does not mean printing more money does not have an inflationary effect.

I also argued that even if the claims of those who say more money will not necessarily cause inflation are true, the effect would not be very big.

I believe the potential gains from harnessing the natural deflation rate, and trying to put it to work, are pretty minimal.
The rate of economic growth is actually smaller than people commonly think, and the figures are inflated due to monetary inflation.
Suppose a natural rate of deflation at 0.7%. That would mean the government could only get a free 0.7% of all the money in circulation that year.
There is $1.75 trillion US dollars in circulation. (And about 60% of that is abroad, by the way, so it isn't reflective of the US economy)
Let's assume 700 billion US dollars. 0.7% of that would be 4.9 billion.
That's not a lot of money. ​

So here, condensed into a single neat and tidy post, are all the claims and arguments laid out on the table.

This is a huge economic issue, and has a lot of implications for government monetary policy.
There actually are a lot of people and some economists who believe government can print more money and do not worry about it causing inflation.
Of course, it could turn out to be disastrous if they are wrong.

 

I think the confusing part of this issue is that the government isn't simply "printing more money." It's borrowing it by selling bonds. US Treasuries still have some demand in the world bond market. But I don't think going into debt is by itself inflationary.

 

Yes, of course. But I didn't want to go into that because it just makes it more complicated, and distracts from the main point I was trying to focus on here.

Going into debt is (potentially) inflationary when the Central Bank is the one buying up all that debt. (The same Central Bank that issues the country's currency)
And I think we should also point out that, to some extent, Treasury bonds and Treasury notes do fulfill a role as money, so you may not be right about that, Lil Mike. However, that is a whole other discussion we could have, and I really do not want to get derailed off topic here.

 

It doesn't matter if you abuse the board and repeat guff in a new thread. It is still guff.

Any stimulus can be inflationary? Shock, horror! Let's state the bleedin obvious. The problem, however, is that this encourages conservatism amongst the policy makers. The fear of creating inflation encourages inaction which then engineers aggregate demand problems and therefore economic downturn.

A more pertinent question is: can we understand inflation over the long term armed only with an Econ 101 textbook rambling on about dead monetarism? The answer is no. Take a phenomena such as stagflation. That textbook would have to make claim over supply side shock. Other than oil prices, it is lost in understanding reality. And what about the breakdown of the make believe Phillips Curve? That textbook is forced into constructing a made up natural rate of unemployment, itself based on an unrealistic understanding of labour.

So what is needed to understand inflation? The focus has to be on economic agents and not mystical right wing macro that doesn't even understand Keynes. The problem is market concentration and how that ensures mark up pricing. Its that pricing strategy which generates inflationary pressures. It can explain the impact of oil price shocks, but it also can explain the consequences of capital-labour conflict. It also demonstrates how, in the current crisis, there is no room for stimuli conservatism. Mark ups, for example, can be expected to fall. Even private hospitals showed the good grace of accepting cost pricing as health systems struggle after years of right wing austere-stupidity.

 

So are you conceding that I have not misexplained the argument on the side of those who believe more money does not cause inflation?
I just want to be sure my understanding of your side's argument is not a strawman.

 

First you have to get clear on what kind of inflation you are talking about. When new money goes into increased demand for goods and services, raising consumer prices and workers' wages, that's called, "cost-push inflation." But when new money (like QE money) goes into asset markets, raising the rich's asset prices, that's called, "a booming market."

 

You haven't got an argument. All stimuli can be inflationary. But of course, without such stimuli, we will suffer the consequences of capitalism's instability and the destruction of human capital. And, as I said, you're not going to be able to explain trends without reference to the post-Keynesian context.

 

Can't speak for you, but I would FAR prefer Capitalism's instability while bathed in surplus and wealth, vs Socialism's poverty ie Venezuela.....for example.

 

False comparison. Compare, say, Venezuela prior to US aggression and developing countries suffering through the Washington Consensus.

 

Okay, can I ask why you don't believe putting new money into the economy would result in "cost-push" inflation?

 

It hasn't yet. The QE money is all going into asset price inflation.

 

Why would that be a good thing?

Edit: My mistake, I see from past threads you are against inflation and this MMT stuff.

 

It prolly can if it wants. But it isn't.

20% inflation since 2008.

https://www.in2013dollars.com/us/inflation/2008

 

Good to see right wing attempt at using data, but you could up your analysis. Can you, for example, recognise the silly abuse of monetarism (which ignores how monetarism is just an offshoot of the fiscal versus monetary policy games offered by the orthodox perspective) adopted in the OP?

 

Not sure what you mean... but so long as currency is a represenation of resource as opposed to a resource in and of itself, creating more currency without creating more resource will lower how much resource the currency is worth.

Are you suggesting currency is a resource in and of itself?

 

What do you mean against inflation?

If there isn't inflation, there is deflation. We don't want to live in a world of deflation. Things get really bad and really painful for all who need to eat and shelter.

 

I'm asking you to critique the OP. That takes monetarist use of the identity MV=PT to bogusly claim that any increase in the money supply is necessarily inflationary. It ignores how the analysis is really quite mundane. It actually indicates how a government should sit on its hands and only use monetary policy to support the financial elite. Perhaps you favour an uneducated application of Econ 101 to coerce financial capitalism, or perhaps you don't?

 

after all this money dumped into the economy, inflation will happen, the question is will pay also increase, the min wage, social security, ect....

 

Based on what? Which school of thought argues that monetary and/or fiscal policy, in a time of economic disaster, must be inflationary. Some corrupted use of the New Classicals and their half-arsed reference to rational expectations?

 

Inflation of what? Asset prices? Maybe. The money is mostly being dumped into asset markets, paying the super-duper uber-rich inflated bubble prices (prices they inflated by borrowing to buy) for their assets. But remember: debt money is also being destroyed by bank loan principal repayments, so if firms and households aren't borrowing (and who is foolish enough to take out a loan in this environment?), the net addition to the money supply might not be that big, if anything. Consumer prices? Probably: production of many things has fallen off a cliff, while consumption of most items is virtually unchanged. I have already noticed a definite increase in prices at the supermarket. The oil price crash might cancel out a lot of that, though.

 

Inflation of everything, trillions are being dumped into the economy, it's only a matter of time

deflation would also be an issue, as that make the US debt even bigger

 

That isn't inflation. Crikey, aren't you people able to understand basic definitions?

 

Cretinous on two levels. First, you have no economic defence of your "only a matter of time" nonsense. Second, talking then about deflation indicates rational comment is out the door!

 

There are a number of definitions of inflation, that's why I asked. The idea that the QE money supply increases of the last decade, which went into asset prices rather than consumer prices, were not inflationary is dubious. Like I said: when newly issued money goes into asset prices, increasing the wealth of the rich, that's "a booming market"; but when newly issued money goes into consumer demand, increasing working people's wages, that's "cost-push inflation."

 

Inflation is a notoriously difficult concept to pin down objectively and quantitatively.
We all know the phenomena exists, but the reality is it's very difficult to exactly and indisputably measure.
The reason is that prices of specific items can change both due to money being worth less, and due to other factors in the economy.
And it is in dispute whether, if prices go down due to other causes, whether that should really be seen as constituting "inflation".
We all understand what inflation is, but it's very difficult to precisely define it, in a way that everyone can agree on. There are many different ways to measure it, and those different ways can yield different results.

It is however a safe bet that if the price of virtually everything in the economy goes up by 10%, that there has been 10% inflation.