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Gov’t caused inflation vs bank caused

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I have a sort of theoretical question. If the federal reserve tells congress to lead the way going forward on achieving 2% inflation by running much higher deficits, and the fed takes a back seat and raises interest rates to discourage bank lending how do things change? Is there really a difference in inflation caused by deficit spending vs inflation caused by banks making new loans? I am mostly wondering about how money will function in the new economy, when banks are eliminating money, but congress is creating vast sums of new money. Since the money supply has been essentially privatized, what happens if we move back towards gov’t control of the money supply?

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Posted by (Questions: 42, Responses: 4)
Posted on 11/10/2017 7:20 PM
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Really hard question to answer. I basically think of it this way:

1) We all can create money and money like instruments. These assets/liabilities expand with our needs. Taking out a loan expands the supply of financial assets, but so does the issuance of new stock.

2) The question of whether this is inflationary or not is really a question of whether there’s demand for real resources underlying the financial assets we make.

3) When competitive capitalist entities control the supply of money (for the most part) then they’re very likely to keep wages lower. In other words, capitalism puts downward pressure on prices and wages via competition and profit maximization while socialism does the exact opposite.

4) Conclusion: if we moved towards a more govt controlled money supply we would be moving towards a more socialist style of economy and it would almost certainly become more inflationary because there would be more upward pressure on wages and less competition putting downward pressure on prices.

My general theory is that a bank controlled money supply with competitive profit maximizing entities is inherently disinflationary while a more liberalized system like a govt controlled money supply is more likely to be inflationary.

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Cullen Roche Posted by (Questions: 10, Responses: 1771)
Answered on 11/10/2017 7:53 PM
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If the government were able to have it’s own National Bank, that could spend and loan into the public economy (lend to states, cities, counties, parks, education, healthcare), on projects that would make the private sector work more efficiently, then would that be inflationary? If the government instead spent borrowed billions and spent the funds on weapons that are built here in the USA with parts from all over the world, then blown up in somebody else’s country, would that be inflationary? I think there are a lot of moving parts here that are not being considered and thus our country is going in the wrong direction. These charts are current spending.

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Posted by (Questions: 26, Responses: 274)
Answered on 11/10/2017 8:32 PM
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Recently a good article is about what determines inflation.Janet in Wonderland. Dr. Ed. compares Yellen’s view with Boriso’s view on inflation in the article. Claudio Borio is the head of the Bank for International Settlements (BIS) Monetary and Economic Department.

Traditionally, Fed follows Milton Friedman’s famous saying that “inflation is always and everywhere a monetary phenomenon”. So Fed uses monetary policies to boost inflation with target at 2.0%.

Boriso starts off by challenging this position and think inflation is neither a monetary nor a Phillips curve phenomenon.

Inflation measurement PCE is comprised of wage-push inflation, production-pull inflation and push-pull effect. Accounting identity is: %PCE(inflation) = %ULC + %ULP + %ULC*%ULP

%ULC(YoY % change in Unit Labor Costs) = wage-push inflation
%ULP(YoY % change in Unit Labor Production) = production-pull inflation

Eventually, the inflation can be boiled down into two cause factors by using accounting data. Private sector marks up price levels of goods/services due to either labor cost increase or higher valuation of goods/services. This inflation analysis is more aligned with Boriso’s view: inflation is not a monetary phenomenon!

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Posted by (Questions: 17, Responses: 153)
Answered on 11/10/2017 9:22 PM