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A common macroeconomic confusion

Under the Dome:

Two major financial backers of conservative political causes, Art Pope and David Koch, were feted Thursday afternoon at a reception just blocks from the Republican National Convention.

Pope, a Raleigh retail executive, and Koch, a Kansas industrialist, were honored by Americans for Prosperity, an organization they started and which they both continue to serve as top officers – Pope as chairman and Koch as the foundation's chairman. …

Both Koch and Pope spoke briefly to the group. …

Koch said that he was very concerned that the deficit would cause runaway inflation and “this country will see a terrible collapse. I don't want to see this country to collapse like what Greece is doing.''

Actually, a deficit could cause interest rates to rise as the government borrows money. Higher interest rates are likely to decrease investment spending which is likely to lead to lower inflation as aggregate demand falls. While "crowding out" is a concern, current deficits have not yet raised interest rates. 

Mr. Koch is probably thinking that the U.S. government might start printing money to pay its bills. While this has a non-zero probability it is not likely. Countries don't start printing money until they are no longer able to borrow it by selling bonds and are unable to raise taxes (because people don't have incomes to tax). 

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  1. Alan Avatar
    Alan

    Koch also appears to be confused about the current trend: the deficit has declined over the past four years, so even if this were a major risk we’re moving further away from it, not closer.

    Reply
  2. Stendec Stendec Avatar
    Stendec Stendec

    “Mr. Koch is probably thinking that the U.S. government might start printing money to pay its bills.”
    John, you are an insane person:
    http://upload.wikimedia.org/wikipedia/commons/e/ef/U.S._Monetary_base.png
    Actually, a deficit could cause interest rates to rise as the government borrows money. Higher interest rates are likely to decrease investment spending which is likely to lead to lower inflation as aggregate demand falls
    A fall in aggregate demand cannot lower inflation. It can lower prices yes but that is not inflation (or deflation). Inflation is a monetary phenomena.
    In fact prices can drop while inflation is high. Current aggregate demand shows prices should be dropping…yet they are rising. That tells me true inflation is hidden and probably at 1980 levels.
    Alan,
    the deficit has declined over the past four years
    Going up and down between 1.2 and 1.4 trillion is not any sort of decline worth mentioning.
    The deficit is still monstrous and until it is drastically lowered national debt will continue to mount. With a debt greater then 100% of US GDP it will continue to erode our economy. Recent economic studies put that erosion at greater then 1% GDP per year.

    Reply
  3. John Whitehead Avatar
    John Whitehead

    Stendec Stendec,
    Insanity is a relative concept. Prices have not tripled since 2008.

    Reply
  4. Stendec Stendec Avatar
    Stendec Stendec

    Prices have not tripled since 2008.
    Gold, oil, commodities, food and the stock market have all gone up despite low demand.
    Where are you getting the “tripled” number?
    Anyway the confusion seems to be that you think increasing the monetary supply is not printing money. I guess technically it is not the same thing…but inflation does not care if you print actual bills or if you add numbers in a computer. Or am I wrong and you actually think the FED has not increased the money supply?
    Also sorry for calling you “insane” it was a term of endearment. I thought maybe you simply made a mistake in not knowing how much the monetary base has grown. Now I have no idea where you think the money supply is at.
    Irregardless from 2008 to now it has grown a whole bunch.

    Reply
  5. John Whitehead Avatar
    John Whitehead

    “Where are you getting the ‘tripled’ number?”
    The quantity theory of money, MV = PQ, says that prices grow proportionally to the money supply since velocity is constant and output is determined on the real side of the economy. It appears in your graph that the money supply has about tripled …
    Countries that have experienced hyperinflation have literally printed money because there is no demand for their bonds and government spending is greater than tax revenues (because the economy is in the toilet and there is no income left to tax).
    “Printing money” is a rhetorical device that is not close to the historical meaning of the phrase and misleading for those who aren’t hip to economics. Quantitative easing could lead to the same inflationary effects as printing money but there is scant evidence that this might be happening.

    Reply

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