Simple Example of Why Government Spending does not cause Crazy Inflation!!

I honestly think aside from debt, inflation is the most misunderstood concept in the entire country. People just do not like the word inflation.

But the problem is people do not understand what causes inflation. Inflation is simply "More money chasing the same amount of goods".

What people fail to understand is velocity. What creates inflation is demand, what creates demand is people spending money. So you get the equation

Money Supply = Money Stock (Quantity of money) * Money Velocity (How many times it is spent)

So this is a simple example of how Government spending would not necessarily cause inflation from year to year.

There is three people, me, you, and Person X. For simplicity, I'll leave taxation out of it.

Year 1: I get paid $1000 for services I provided. I then feel good and go out and buy a product from you for $1000. You go out and hire Person X for $1000 to build more products.

There is $3000 in income/productivity from just $1000. So that $1000 allowed for $3000 worth of demand.

Now, we get in a recession

Year 2: I get paid $1000 for services I provided. I realize my equity on my house is not real, and I do not feel good about spending my money. So I keep it for a rainy day.

Now, there is $1000 in income/productivity from $1000.

Now the Government realizes this, and they say... oh crap we are in a recession!!! So now you don't get the $1,000 from me, your employee doesn't get the $1,000 from you... it is a big ole mess.

So the Government says, hey we can pay you $1000 for a product. You then keep that $1000 instead of paying for an employee because you are scared.

Now we have $2000 in income.

The Government then says, he we can hire Person X to build a road. Here is $1000.

Person X goes, builds a road, has money to purchase food and normal goods, and that money filters through the system, etc.

Now we have $3000 in income and $3000 of productivity.

That is why the Government always spends during a recession...

Inflation in this sense = Quantity of Money * Money Velocity.

If you do not care about your country and only yourself, then what you would be advocating for is for GDP to fall and for us to be in a massive recessionary spiral. There is no other mathematical way to cut spending and increase economic growth. It is impossible!

 

You forgot that the Government spending either has to come from increased taxation, borrowing or the printing of dollars. You mentioned Inflation is "More money chasing the same amount of goods" that's not because the Price of Food went up in the Marketplace compared to other goods but, because the currency fell in Price in the Marketplace. The Government is never the answer because you mention road work... How does building a road work in the long term for that employee? How does it work if the Lower/Middle class are strained to now subsidize these new Government projects? How does creating an Artificial Marketplace better than just letting the Malinvestment disappear?

 

It doesn't matter about taxes in this scenario. Taxes essentially are a sunken cost, where that money is dead to the economy. The point is to get money to the people who need it/spend it. Not for any social humanitarian reasons, but for economic growth reasons.

It's a simple equation, and deficit spending is not financed from existing money, I mean sure if you want to purchase treasuries directly from the Treasury you can, but that would just be a wash. But 99% of treasuries auctioned off by the Govt are purchased by the non private sector.

This is why deficit spending is included in GDP, it adds income to individuals, it adds spending power to individuals, and it adds customers to the private sector. There is no mathematical way you can get out of a recession by reducing Government spending. None!

So you have to ask yourself, what is more important, the economy of America, or your hatred for the Government?

 

Ah so you believe it to be "Sunken cost" and you justify raising taxes because you and your team could do a better job that those being taxes? Pretty pompous and disgusting if you believe a few could possibly manage an entire Economy without mishaps coming from them or favoritism/corruption.

Why not simply call it the Public Sector? So the Taxpayer eventually has to buy the malinvestments of a few so the few can keep their jobs... That's theft and cronyism.

You prove absolutely nothing by the assuration what so ever... You're suggesting that digging hole further into the ground is better and if you stop it's worse. Of course it's worse for the moment because you realize you're in a ditch and you have to scramble out of it... or you can choose to be ignorant and bury yourself further. There hasn't been one case in History that has proven more spending equals a better Economy.

You mix me into Anti-Government types as if I'm not patriotic enough or don't deserve to live in the USA... why not call me an Anti-Semite?

Your choices come down to this truly... Either you support Cronyism/Corporatism/Centralized Economic Planning or Free Market. If you don't support the Free Market you're simply in league with the Elites and the Wealthy who from the authority of the Centralized Government can loot the assets of the Citizens.

 

I don't play this stupid social game where I get in to these class warfare arguments. Economics isn't about class warfare, it is about reaching maximum capacity and maximum employment and maintaining an adequate price level. Nothing in there has anything to do with socioeconomics.

Lol, you are implying two very false assumptions right here.

1) Taxpayers fund all public sector employees
2) The private sector does not benefit from the 22 million public sector employees at all.

Once you learn that public sector money becomes private sector money, then you can start understanding economists and why they believe the public sector plays an important role in the economy.

So if I were to tell you that this country would not be able to survive on a balance budget would you choose logic and country or would you just age old fallacies and party?

I'm saying that if there is something the Government can do to help the economy grow, why would you be against that?

You don't pay for increased spending. Your taxes have done nothing but gone down for the past couple decades. You pay the same taxes regardless of how much the Govt spends. I have shown you there is an equation and reason why Government deficit spending increases during recessions.

If you believe that the country should just let itself go in to a recession, scale back our productivity, make wages lower, etc... basically bringing us back in time... then that's fine. That's a wonderful argument for crazy people to make. There is logic that goes in to the decision making processes of economists. There is no logic in your approach. It is simply your mind trying to tell yourself what is right or wrong based off your skewed view of social worth in the economy. It's like you guys are jealous of people on welfare.

Wholly cow, I much rather have tons of homies going around with money than with out.

 

Here is how inflation works, companies give their employees a cost of living raise, everything goes up in price to get it. Just that simple. Elderly people get a raise in their SS, and the rent automatically goes up more than what they got for a raise.

They need to regulate and restrict how much can be charged for a product or service to get inflation under control.

 

Any substantial increase in the quantity of money will reduce the purchasing power of each individual monetary unit. This, in turn, causes the price of commodities to increase.
"Printing" money and government spending may have short term benefits for a chosen few, like Bernanke's Wall Street friends, but the consequences are disastrous in the long run... for everybody.

 

Price fixing... how's that working out in Venezuela?

 

No it doesn't. How can you still be this naive after I just showed you what causes inflation. The money supply is only one part of the equation for inflation. This is crazy, we learn this in high school!

 

You showed me nothing, if you're learning this in school you should demand your money back.

 

So you don't believe the equation

Money Supply = Money Stock * Money Velocity

Is this what you are telling me? Hahahaha

 

Doesn't it depend on what happens to the money that is increased?

If the Treasury prints a trillion dollars and gives it to me, and I dig a big hole in my back yard and put the trillion there, what effect doesn't that trillion have on the purchasing power of the other monetary units?

 

This is what they do not comprehend. They think that just saying that there is more dollars makes every dollar worth less. I'm trying to tell them that inflation requires actual supply and demand fundamentals.

 

The size of the money supply is not the only factor in inflation. In fact we could have a shrinking money supply and yet still have inflation.

 

That's pretty much what's happening now. The Fed distributed money to financial institutions and they're just sitting on it or investing overseas, instead of lending, that's why price inflation hasn't skyrocketed. Also keep in mind that many companies are hoarding money because of the economic uncertainty, just like they did at the beginning of the Great Depression, instead of investing. That's what's keeping prices down.

Whenever there's more of something, it's value decreases. Why is aluminum worth less than gold, when aluminum has significantly more practical uses?

 

OH MY GOD!!! How dense are you? You have three people here telling you that the quantity of money does not cause inflation, yet you continue to drill on it like you have some sort of proof that negates all economic theory. You must be a Tea Partier?

 

Which is why we've had very modest inflation over the past 3 years even though the money base more than doubled.

Had the Fed not expanded the base we'd have been seeing big time deflation, like in the Great Depression.

That's what conservatives tell us.

And then they turn around and intentionally pull the biggest uncertainty stunt they could possibly do with the debt ceiling stunt and the uncertainty that created over whether the US would default on its obligations.

Go figure.

With money, we just proved otherwise. It's not simply the quantity but what is being done with it.

Less demand.

 

Taking money from a group to give to another isn't Class Warfare... It's called theft. Nice Dodges though!

Through Cronyism of course... what else? Sure there are employees who spend money on goods outside of Government contracts but, where did the employees get their money? The tooth fairy? Who made out the loser in the scenario to pay for the jobs of Government employees to fix roads etc?

Telling me something will happen with no proof of the matter wouldn't change my position at all. Calling your position logic when it simply amounts to question dodging and Keynesian Iditoic Jargon like "Animal Spirits" at the attempt you're right when clearly it's been wrong since the day the country adopted the Philosophy.

It's one thing to help the Economy indirectly through less taxation, less regulation and less devaluation of the country but, to directly influence where funds go when they create the money out of thin air or tax people it only leads to cronyism/corporatism. You cannot trust a Few People to run millions... when they themselves aren't elected officials either.

So when the price of gas is extremely high it's simply the OPEC Nations gouging prices? It's not because of the devaluation of the Dollar at all? I guess when your lover boy Bernake prints 300,000,000,000,000,000,000,000 dollars in a single day it's simply the Commodity market is gouging prices when a loaf of bread goes for $850,000.

Throughout the century Government spending increases throughout recessions because of the Elected Officials knee jerking to keep their positions and to "do something". I've yet to see their knee jerking work in favor of the Middle Class...

We wouldn't be in a recession if the Low interest rates along with the Federal Government propping up an Artificial Marketplace were there. How is it that Austrian Economics predicted the Housing Bubble but, all of the Keynesian Geniuses never saw it coming? Obviously the Austrian thinking is doing their job.

You blatantly put words into my Emouth as if I expect everyone to start living in caves and to start dragging women by their hair... You have no common sense as to how the World works because you believe you know everything there is to know. You believe that all of those in Power know the best solutions when History has proven Centralized Economic Planning and FIAT money have always created a less free society.

Homies? Where did they get their money??? Bernake's Printing Shop on Main Street?

 

Three people of the same beliefs... Same Philosophy that didn't predict the Housing Bubble or any Bubble.

 

Taxes are not theft, nice dodges though! And especially with marginal tax rates every pays the same for the same amount of money they make.

Banks

You have not said a single thing based on any facts whatsoever this entire argument. I at least provide logic and reason with my explanations. You simply hate the Govt... that's cool and all but that doesn't dismiss fact.

We are taxed less than almost any time in the past 100 years. Taxes are the least of our problems. Having people with taxable income is a much bigger problem. Just more conspiracy theory bull crap from you.

Supply and demand. Bernanke prints bank money, none of which goes to purchasing oil from OPEC. But we won't get in to Fed policy since it's obvious you won't be able to comprehend it.

Or maybe they do it to help out the country? I don't know, I think it would be worse to be in a depression right now, don't you?

Lol, more bull crap conspiracies from the anti-Government establishment. Low interest rates and GSE's did not cause the housing meltdown. Stop blaming those who don't have control of others actions and blame those that do. Wall Street has almost 90% of the blame for the reason why they destroyed themselves. Not the Government.

You are simply an armadillo wearing anti-Government conservative. You guys don't believe in facts or logic. You simply believe in fairy tales. The real world is ran by people who use science, math, logic, reason, etc, etc. Thank goodness the world is not controlled by people like you!

 

You were doing good up to this point. Fact is, the reason that libs don't fear inflation is because it's a really slick way to redistribute wealth. See... the more assets someone has the more inflation robs them of their wealth in relative terms. And the so-called "poor" who are sucking off the gubment teat are not impacted much at all. They still find a way to buy their generic cigarettes, MD 20/20 wine and have food stamps left over to eat. No biggie to them, they don't have any money in the bank, they haven't scrimped and saved and made sacrifices to put back money for their children's college, none of that. So... really to the lib who believes that the "poor" are being exploited in this country inflation is The Great Equalizer.

Yes, indeed it is truly a misunderstood word. The rest of your post though, wasn't worth reposting.

 

When a Bandit/Thug attempts to rob you they threaten you with force... If the Government attempts to collect money from you and you refuse... they use force. The only difference is that the Government is the main thug in charge currently.

Right back into the hands of those who made the mistakes and/or created the mess on purpose? Really sound logic giving funds back to the same Organizations that made it happen. You would have arsonists as fire fighters and Serial Killers as Policemen with that logic.

Do I really need to give you a History lesson or will you open a book for the past 6,000yrs of Human Development instead so I don't have to teach you?

"Having people with taxable income is a much bigger problem." So with those words you're suggesting the little people who have money and can use it are the problem... Not the ones living paycheck to paycheck? Serious your Philosophy is Medieval Serfdom.

Supply has stayed the same... I don't see a lack of cars on the road I just see a lack of wealth in the pockets of individuals. Maybe if your God Bernanke wasn't debasing the currency or creating malinvestments in the Marketplace we wouldn't be in these situations.

I'd much rather have those who commited bad business practices and fraud to not be in positions of power anymore. You'd rather keep the Status Quo going...

Where are your Economic Masterminds who can predict every move in the Marketplace and steer us away from Recessions? Obviously the failed... Numerous times. You're asking a bunch of cats to drive a car when they clearly cannot fathom how to operate such a device.

Personal Attack... Personal Attack... Personal Attack... Am I doing it right? Obviously you fail to attack the message and simply attack the Messenger. Your logic falls face first onto the ground.

 

Keynesian apologists really haven't a clue as to how the economy works, that's why government has made such a mess of it.

 

You actually never say a single thing that makes sense. Just random drivel. You're boring me.

 

Hahahaha, now this is one for the record. "The more assets someone has the more inflation robs them of their wealth?"

WHAT??????????? Now that is funny!!