This comment was made on this blog by someone whom I presume is a right-wing troll in response to my suggestion that we should not worry about £3 trillion in national debt. There were many fairly similar comments. They felt coordinated. That happens:
Yes of course the Govt can technically print money to replay its debt but the more sterling that is printed the more the effect is felt in inflation and weakness in Sterling. Both are akin to a “default in kind” as purchasing power is reduced. So yes you are technically correct but disingenuous also as there are significant negative effects which you fail to highlight.
I asked the person making the comment to supply evidence to support their claim. So far, they have not.
And this is a reply to that comment, also posted on the blog:
I think this is an important statement, because it's what the majority of people, especially on the right, argue with “printing” money is bad and will lead to negative XYZ.
I think if a clear explanation of why it wouldn't, then it would be easier to counter the ingrained belief of, just “printing” more money will make the situation worse not better. Now, can you suggest the appropriate response the second statement say is needed.
I put some time into a reply to that comment and posted a slightly shorter version of this, which some have suggested I should turn into this post:
Thank you for your comment.
You highlight one of the most important misunderstandings to address.
Creating money does not, by itself, cause inflation. If it did, every act of government spending would be inflationary because all government spending creates new money.
Bank lending would also necessarily cause inflation because commercial banks create new money when they lend.
Neither claim is true.
Inflation of the sort money creation can induce occurs when the ruling attempts at additional spending create demand that the economy cannot meet at existing prices.
That might happen because the economy is already operating at full capacity, because essential resources are scarce, or because supply cannot expand sufficiently quickly.
In those circumstances, creating still more demand can certainly be inflationary.
But suppose the government creates money to employ people who would otherwise be unemployed, build houses when construction capacity is available, invest in renewable energy, improve transport or increase productive capacity. The additional spending is matched by additional economic activity. In those cases, there is no reason why that spending, which creates new money, should produce inflation.
In fact, investment that increases productive capacity can reduce inflationary pressure in the longer term.
The same applies to sterling. There is no mechanical relationship whereby creating another £1 billion causes sterling to fall by some corresponding amount. Exchange rates reflect productivity, trade performance, relative inflation, interest rates, expectations, political stability and international demand for currencies and assets.
So the constraint on government spending is real, but it is not money. It is the availability of people, skills, energy, materials, technology and productive capacity.
That is the crucial distinction. “Printing money causes inflation” is the wrong rule. Spending beyond the economy's capacity to respond can cause inflation. Those are very different propositions.
SimonW then posted this comment in response to the second one noted above, and that too is worth sharing:
Imagine the uk economy consists of an apple seller. He has 10 apples to sell (resources available). There are 10 potential consumers. The government provides £8 to 8 of them to work at apple collection. The Apple seller sells them for £1 each to 8 of them leaving him with 2 spare with 2 consumer unable to buy them because they lack currency.
the government spends an additional £2 on putting these 2 to work. Now the seller sells all 10 at £1 each. Money supply expanded and prices remain stable.
If the Apple supply fell to 9 available because of a poor harvest, the price would likely rise as the consumers bid against each other for the limited supply. If the government tried to correct this supply problem by putting more money into the system all it would do is drive prices higher, unless the money was aimed at increasing Apple supply.
Increasing money supply when there are adequate resources is not inherently inflationary. The inflation issues faced by us now are supply issues around food and energy. Investing in green tech is like investing in apple production. Not inflationary, and likely to insulate us against future supply disruptions. There are plenty of other ways for us to spend as well which would expand the economy without adding to inflation.
I hope my simple example is generally accurate!
I think it is.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Surely the whole point of modern monetary theory (MMT) that you vociferously support, is that in order to avoid the inflation that inevitable arises from printing money, taxes have to be implemented to remove the money from circulation.
This is basic MMT. Are you disputing that this is the case?
As a currency trader, I can tell you that exchange rates are primarily linked to interest rate differentials (which may themselves be driven by other factors).
However, printing money, as you favour will increase interest rates and inevitably lead to a devaluation of the currency – it is basic currency arbitrage mathematics.
Do you really think I can write a textbook to answer every question?
And you are no more a currency trader than I am French.
Another troll hits the blocked list.
No serious economist would agree with your claims.
A simplistic example of a closed economy does nothing to explain how currencies move in a global context – do you seriously think this example provides evidence to support your claims? LOL
I have addressed this point endlessly, including today. But as a troll, you would not know, as you clearly do not know about the economy.
I think we can do a simple mind experiment to demonstrate that printing money in itself does not cause inflation.
Imagine Jersey and Guernsey have their own independent currency (that was not linked to Sterling), and the same rate of inflation.
The countries decide to merge and use one currency.
New currency is printed, and nothing else changes; so inflation must remain the same.
Of course, if one of the islands had a complete lack of resources, then there may be inflation as two populations compete for the same existing resources.
This is all very helpful. Just thinking of the potential response to this, and in particular the example given, which I realise is very simplistic and deliberately so… but might a counter-argument run along the lines of the apple seller sees the increasing demand and increases prices as a result? I guess we’re just saying this is the principle and the world is much more nuanced, etc. but it shows that prices don’t *need* to increase for everyone to be “happy”.
(I’m trying to improve my armoury against such “yeah but” responses in conversation.)
Do you really think apple sellers follow macroeconomic data flows? No, me neither.
I think if the apple seller increases the price it’s still not the money creation itself that increased it.
It was the apple seller’s deliberate choice.
Problem is that the apple seller, if he knows the government will supply new money to those who buy the apples, will probably be greedy and increase the price.
Sadly, this is what capitalism is all about.
.
If you want to comment here, follow the rules. They say you should add value. You did not. That’s your final warning.
You’re over thinking a very basic illustration. But if we must, increasing prices won’t help since the maximum wage in our simple economy is £1. If the seller charges £1.10 he won’t sell any apples… he needs more buyers, not higher prices to improve his position.
if you want to really take the example off the rails though, the Apple seller now has all the money in the economy, decides to invest in rockets and right wing politics, funds a government that refuses to tax his wealth or supply more money into the economy and commands them to do as he says if they want any further currency, available only though him.
of course, this is mere fantasy….
I am beginning to get the awful feeling that there is no actual reality in ‘money’ as such? Reality lies in real stuff-people, land, etc and the things made when these are combined by effort, energy and ‘entrepreneurship’. All the trappings of the modern financial systems are just sponging off real doings and draining the rest of us.
Money is literally no thing. Join those words together, and you get ” money is literally nothing.” And that is it. It is a promise to pay whih we record in various ways – usually in a ledger, sometimes in notes and coins. But they are all records. Thay are not money. You cannot see promises. That is what money is. Nothing, but very real nonetheless.
I think I just need convey what I think I have seen over the years – from Thatcherism’s first outings to the crude and cruel austerity we’ve had since 2010.
What I observe is forms of inflation being caused by a lack of government money not by just producing it all as some here seem obsessed with. The symptoms can be anything from the growth in payday loans, to enabling the banks to create more money with interest to not investing in infrastructure and relying on private resources that are actually extractive (example: water/the railways). Even Thatcher’s economist Alan Budd admitted that the ‘extra resources’ meant to have been provided by privatization had not actually worked. Prices have not been kept down, quality has not gone up.
With less government money creating activity, you are in the hands of the market anyway who will manipulate supply and demand as they see fit – including money itself. My view is that all this does is create perceived scarcity and that to me is an inflationary force. This view that all government activity does is distort prices is now so old and discredited that its got hairs on it.
The real situation we need to arrive at is government and markets working together but sovereign money is better than private loans that strangle what has been created and insisting that all debts are paid with compound interest. All it does is choke off money that could be used elsewhere. Money paying down money – what sort of useful phenomenon is that to anyone but a usurer? When there are mouths to feed, people to keep warm, talent to put to good use, problems that threaten life itself to solve? Rant over.
Thank you. The consequences of inadequate government spending, privatisation and dependence on private credit are too often ignored when discussing inflation. Artificial scarcity and extraction can themselves drive prices upwards. Government and markets must work together, but government must ultimately set the rules. A good rant….
Thank you for the feed back.
I’m glad you thought the example worthy of use, Richard, I’m sorry that some of these responses seem to miss the point.
I had hoped that a simplified example would illustrate the much more complex principle, and trust that some do find it useful. In my own personal experience, explaining it this way has helped to differentiate between the real impact of increasing money supply according to MMT principles and the visions people have of wheelbarrow money in the Weimar Republic, which is about as far away from what is happening as it is possible to get.
I do hope that simple examples such as mine can be used as I think they do help communicate the principle to people not steeped in economic theory, which is really most of us. Some of these comments make me wonder though, ah well, we keep trying!
I thought it was good.
But we have to remember that we are up against those who deliberately do not want to understand.
See a post I will publish soon.
“Spending beyond the economy’s capacity to respond can cause inflation.”
A very succinct and yet very general statement of the reality.