A conversation about inflation

[MrMon]

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Of course inflation benefits debtors. Duh. A huge part of the reason that governments favor inflationary monetary policy is that inflation favors debtors, and government is always the largest debtor in society.

This does not make it good, or magically make its deleterious effects vanish.

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This is not really true and slightly disingenuous. Sure, the government is the largest debtor, but it is not the majority debtor by any means. It's not even close, with the federal debt being only slightly larger than 1/6th the total.

According to the evil Federal Reserve, total domestic nonfinancial debt as of Q1 2007 breaks down this way:

Total: $29.26 trillion

Households: $12.94 trillion
Corporations: $5.85 trillion
Non-corporate businesses: $3.16 trillion
Farms: $0.22 trillion
State and local governments: $2.06 trillion
Federal government: $5.04 trillion

I promise to respond to your other post later, but it's going to take awhile and I have work to do.

[Borodog]

[ QUOTE ]
[ QUOTE ]
Of course inflation benefits debtors. Duh. A huge part of the reason that governments favor inflationary monetary policy is that inflation favors debtors, and government is always the largest debtor in society.

This does not make it good, or magically make its deleterious effects vanish.

[/ QUOTE ]

This is not really true and slightly disingenuous. Sure, the government is the largest debtor, but it is not the majority debtor by any means. It's not even close, with the federal debt being only slightly larger than 1/6th the total.

According to the evil Federal Reserve, total domestic nonfinancial debt as of Q1 2007 breaks down this way:

Total: $29.26 trillion

Households: $12.94 trillion
Corporations: $5.85 trillion
Non-corporate businesses: $3.16 trillion
Farms: $0.22 trillion
State and local governments: $2.06 trillion
Federal government: $5.04 trillion

I promise to respond to your other post later, but it's going to take awhile and I have work to do.

[/ QUOTE ]

Are you claiming holding 1/6 of the total debt does not make the federal government the largest debtor? Which debtor holds more than 1/6? Last time I checked "corporations" were not a single debtor, nor were households, farms, or any other thing on your list.

You should really stop the knee-jerk apologetics for government. Trying to claim that the largest debtor is not the largest debtor because some arbitrary binnings of large numbers of other smaller debtors ("corporations", "farms") hold more debt than it does is foolish at best and dishonest at worst.

Also, the government's accounting debt is nowhere near total government obligations, which are at least $60 trillion and may be closer to $100 trillion.

[MrMon]

I was just trying to point out that government is not the only interest group that would favor inflationary monetary policy because collectively, the entire country owes 5x as much. A lot of people would benefit from it. And who exactly is "the government"? You make it sound like some secret society, a small group that manipulates the rest of us for their gain. Identify them please.

I am quite aware of the government having future obligations, but that is beside the point. It's money not spent yet, and wouldn't inflation make future obligations worse, not better? If future obligations were the primary concern, especially ones of such huge magnitude, wouldn't the secret government policy be deflation, to make all those future obligations easier to afford?

[ianlippert]

Dont lenders just calculate the rate of inflation into the interest rate that they charge you?

[MrMon]

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Dont lenders just calculate the rate of inflation into the interest rate that they charge you?

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Yes, but predicting inflation over the long run can be a difficult thing to do, which I believe is one of the gold bugs arguments against soft money. Inflation can also conceivably be manipulated by those controlling the money supply in order to lessen past debts, but this starts to get into the conspiracy theory of government, and is one argument for an independent Fed.

In short, predictable inflation is not so bad, unpredictable inflation is very bad.

[Zygote]

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Inflation can also conceivably be manipulated by those controlling the money supply in order to lessen past debts, but this starts to get into the conspiracy theory of government

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http://www.federalreserve.gov/boardD...fault.htm#fn18 (read from 18.)

Ben Bernanke - Nov 21, 2002

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...In brief, the reason is that people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation. Hence they will believe the government's promise not to "take back" in future taxes the money distributed by means of the tax cut.

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[IsaacW]

This part of the speech is just priceless (emphasis mine):
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What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.


Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

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LOL

[iron81]

What's so funny? If the US government were printing money willy-nilly, we'd have Zimbabwe level inflation instead of 2%.

[The once and future king]

Economists and bankers have a conversation about inflation.

[Zygote]

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Economists and bankers have a conversation about inflation.

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peter was awesome.