Deficits Aren't Inflationary, Blah BLAH blah
So much win
Bob McTeer tells us why budget deficits are not inflationary:
Disclaimer: Bob used to be in charge of the Dallas Fed so take it or leave it. I'm sort of at "leaving it." Oh, Bob also serves on the Guaranty Bank Board of Directors, RIP Guaranty.
When I was in graduate school in the olden days (1960s), Professor Waller hired me as his grader in his money and banking and monetary policy classes. At first, he limited my chores to multiple-choice and true-false questions, but he gradually trusted me with essay questions-following his strict guidelines of course.
“Are budget deficits inflationary?” was one of his favorite questions on final exams, and he had a precise idea of the components of an “A” answer. Using T-Accounts (Remember the Chicago Fed’s Modern Money Mechanics booklet?), the students were supposed to show the alternate ways of financing government spending, including deficits. The answer to the question, you see, depended almost entirely on the method of financing. Another way of saying that is that the impact of fiscal policy depended almost entirely on the accompanying monetary policy.
I’ll spare you the T-Accounts and just summarize the conclusions: Government spending financed by taxes was not inflationary (or even expansionary) because the government’s new spending was offset by a reduction in private spending. There would be little or no net change in total spending. That did not mean the alternatives of government versus private spending had no other consequences. Professor Waller greatly preferred people spending their own money rather than having the government doing it for them.
Government spending financed by bond sales to private individuals and companies had expansionary/inflationary consequences very similar to a balanced budget. The money the government got to spend was money the bond purchasers no longer had to spend. There was no net change in bank deposits, bank reserves, or the money supply.
See picture above.
In related news, Mike Morgan has started a new 666 and this time it's Barack Obama. I'm sitting this one out, on account of still being up Bernanke's ass. What Barack Obama does is not really my concern now that he has made the decision I found most relevant.
Blah BLAH blah BLAH