Wednesday, 11 February 2015

One reason for inequality and austrian/neoliberal inspired fear in the public

So in the ars-regendi forum, I posted this vid... and people didn't get it.
One person asked,
Let's say that a public body, National Bank of Romania for instance, starts to "print" money in huge amounts and then transfers it somehow (by giving it out as social help or buying services from private sector, whatever) to the citizens. What would be the consequences?
I answered,
Well, the majority of that "huge" amount of money would be in electronic form, as bank accounts in the economy are credited when the government spends, and they are debited when the government taxes.The consequences would be a revival of sales, which would bring income and production up and unemployment down. As the multiplier effect kicks in as well, other sectors will benefit from the increased aggregate demand in the economy, aggregate demand being not just income but income + the change in private debt.As economic activity would pick up, the fiscal deficit would be reduced because of the automatic fiscal stabilizers which work counter cyclically.Fiscal deficits and unemployment rates being endogenous between themselves.So instead of the government paying interest to bankers *the government paying to rent its own money*, the government simply deficit spends without interest attached to its present and past debits.

Another person intervened saying,
... and you would have hyperinflation.

Of course, I had to call in for arguments as to why they believed what they believed. Arguments didn't come, only sheer faith in zombie a priori logic - debunked time and time again by history.
Here's a link to the thread.

My broad post on the matter...

Untrue, hyperinflation has been a carefully studied phenomenon by many economists and historians. And all the cases of history show that the overproduction of money is always the result and not the consequence of a crisis of hyperinflation.
Baring implacable supply side reasons, it's impossible to have hyperinflation when you've social and political stability and when the government is able to properly tax its own currency.
To claim that that would apply only for the US is to claim ignorance on history, recent and old. There have been many countries throughout the centuries which have practiced fiscal stimulus in order to achieve their various ends, either for peaceful/civilian purposes or for war purposes.
Here's a list of countries which engaged in fiscal stimulus and maintained growth and price stability:
Japan, France, Italy, Germany, China, Romania, the UK, Russia, Paraguay, Iran, South Korea, Ancient Rome (and it worked when they were able to maintain political stability and properly defend their boarders), Thailand, and there are many others.

The fact of the matter remains that the automatic fiscal stabilizers work counter cyclically to correct the economy. So when there's a shortage of AD, it works to enlarge the deficit, when there's a surplus of AD, it works to shrink the deficit. Private debt to GDP is always higher than government debt to GDP and fiscal deficit to GDP. Why don't you see hyperinflation when there's a private expansion? Because there's adequate spare capacity to be used. But you guys argue that when the government does it, in order to cover the private sector spending shortfall (because saving desire is so much higher as a result of the high cost of serving the private sector bank debt), that's going to be automatically and a priori inflationary.
And I explained, it can't be so long as the automatic stabilizers are there. Obviously, sound governments would want to target the GDP output gap and nothing more than that. If you reduce the marginal tax rate from where it is to 5% or 1% and keep spending as it is or increase it, you bet your ass you're going to have hyperinflation. But that's not what antiausterity people are talking about.

A crisis of insufficient or excess demand will ALWAYS be solved via fiscal policy, in the former case via increased fiscal deficit, the latter via lower fiscal deficit, balanced budget, or surplus. And in the times we're living in, we're living in a crisis of inadequate aggregate demand, not lack of resources, not lack of spare production capacity, not lack of labor.

Please reevaluate your stances; you're basically arguing that endogenous money creation at interest by the bankers is noniflationary, but exogenous money creation at interest or 0 interest by the government is inflationary. Please detail the reasoning for this outside of ideological beliefs. Why is it noninflationary when government pays billions and billions in interest on its debt to bankers? And why would it be inflationary if government where to pay those billions to households instead of bankers? Why is it noninflationary when a new loan creates a new deposit? And why is it inflationary when the government fiscal deficit spends? The vast majority of money is created by the private banking system, not by the government. The CB targets a specific price range and allows the quantity of money to fluctuate in order to maintain that price objective. All the money that goes to paying taxes and buying government securities (government debt) all of it comes from government spending.

Why didn't Poland have hyperinflation when it ran 7%+ deficit in '10 and '11?

Why didn't Romania have hyperinflation when it ran 9% fiscal deficit in '10?

So sometimes the relationship and money looks like this, from the best economics principles textbook: This is more about ‘inflation’ causing ‘money’ as defined.

But sometimes it looks like this: This is more about partially defining ‘money’ as reserve account balances at the Fed but not securities account balances (tsy secs) at the Fed.

More so, during the sovereign debt crisis in the EZ when the Periphery had higher fiscal deficits as % of GDP because of private spending shortfall caused by private debt deflation, why wasn't the euro devaluing or devaluing hyper-actively (hyperinflation)? Why is deflation (not inflation) threatening the Eurozone?

More so, why did 5 years of massive fiscal deficit spending and low interest rates in Nazi Germany between '33 and '38 saw the eradication of unemployment, real wage growth above 10%, economic activity, and all of this in a climate of price stability? Why wasn't there hyperinflation?

No comments:

Post a Comment