Deficit Owls | "Printing Money" Doesn't Necessarily Raise Prices @deficitowls5296 | Uploaded October 2016 | Updated October 2024, 4 minutes ago.
Professor John Harvey discussing one reason why predictions about the collapse of the dollar have got it wrong. (Though Harvey doesn't use the language of Modern Money Theory in this video, you could easily translate it.) A lot of people think that "printing money" leads to rising prices, but actually it might not. The argument goes like this:
Prices are not determined by the size of the money supply. Nobody calls up the central bank to check the size of the money supply before they set the price on the stuff they sell. Prices for goods and services are set by supply and demand for those goods and services. The idea from the hysterians is usually that printing money and giving it to people leads to increased demand, but supply is the same, so prices go up.
But the question is, why would supply stay the same? If you're a business owner selling something, what's the first thing you'd do if suddenly you had extra customers? It would be to produce more stuff to sell to them, to make more money! Hire more workers, start up factory equipment that had previously been siting idle. Eat into your unused capacity. It's only when we start to get to the end of the idle capacity that we start to face price increases and inflation.
Think of a restaurant that's only 1/4 full. If the government prints money, gives it to people, and they come to your restaurant, making it 1/2 full, do you raise prices? No! Because you'd lose out to your competition. On the other hand, if your restaurant started out 3/4 full, and then became totally swamped with customers, and the line is out the door and around the block, then raising your prices makes total sense, because you've run out of spare capacity to produce more.
Ok, the hysterians reply, that might be true. But what if the government continues printing money past that point????? Then we'll have massive inflation!!!!! And that's true: if the government continued to run huge deficits past the point of capacity in the economy, then there would be inflation.
But consider what happens before we get there: because businesses needed to hire more people to supply more stuff, unemployment has fallen. Incomes have risen with the new spending. This means that tax collections automatically go up (as the new income gets taxed) and government spending automatically goes down (as people stop using government services and safety nets because they have more income from working); the government budget moves automatically towards balance! So as we start to get to the point where a government deficit might cause inflation, the government deficit automatically shrinks, or even disappears!
The hysterians have got it totally wrong. Just plain wrong.
Now, if we were at full capacity (full employment) AND THEN tried to increase the government spending without increasing taxes by at least some, would we get inflation? Yes. If we're already at full employment, then the government asking the economy to produce more (by spending more without also taxing more) will only bid up prices, causing inflation. But only rarely do governments find themselves in this situation.
Watch the whole video here: youtube.com/watch?v=X39M9MXRNyg
Follow Deficit Owls on Facebook and Twitter:
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Professor John Harvey discussing one reason why predictions about the collapse of the dollar have got it wrong. (Though Harvey doesn't use the language of Modern Money Theory in this video, you could easily translate it.) A lot of people think that "printing money" leads to rising prices, but actually it might not. The argument goes like this:
Prices are not determined by the size of the money supply. Nobody calls up the central bank to check the size of the money supply before they set the price on the stuff they sell. Prices for goods and services are set by supply and demand for those goods and services. The idea from the hysterians is usually that printing money and giving it to people leads to increased demand, but supply is the same, so prices go up.
But the question is, why would supply stay the same? If you're a business owner selling something, what's the first thing you'd do if suddenly you had extra customers? It would be to produce more stuff to sell to them, to make more money! Hire more workers, start up factory equipment that had previously been siting idle. Eat into your unused capacity. It's only when we start to get to the end of the idle capacity that we start to face price increases and inflation.
Think of a restaurant that's only 1/4 full. If the government prints money, gives it to people, and they come to your restaurant, making it 1/2 full, do you raise prices? No! Because you'd lose out to your competition. On the other hand, if your restaurant started out 3/4 full, and then became totally swamped with customers, and the line is out the door and around the block, then raising your prices makes total sense, because you've run out of spare capacity to produce more.
Ok, the hysterians reply, that might be true. But what if the government continues printing money past that point????? Then we'll have massive inflation!!!!! And that's true: if the government continued to run huge deficits past the point of capacity in the economy, then there would be inflation.
But consider what happens before we get there: because businesses needed to hire more people to supply more stuff, unemployment has fallen. Incomes have risen with the new spending. This means that tax collections automatically go up (as the new income gets taxed) and government spending automatically goes down (as people stop using government services and safety nets because they have more income from working); the government budget moves automatically towards balance! So as we start to get to the point where a government deficit might cause inflation, the government deficit automatically shrinks, or even disappears!
The hysterians have got it totally wrong. Just plain wrong.
Now, if we were at full capacity (full employment) AND THEN tried to increase the government spending without increasing taxes by at least some, would we get inflation? Yes. If we're already at full employment, then the government asking the economy to produce more (by spending more without also taxing more) will only bid up prices, causing inflation. But only rarely do governments find themselves in this situation.
Watch the whole video here: youtube.com/watch?v=X39M9MXRNyg
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
