Funny how distorted the discussion has become. The GP was talking about the size of the government, not the size of the national debt. You can have high deficit small government, and small deficit big government.

You have to understand that the government deficit is really just the mirror image of the private surplus plus the external surplus. Once you understand the sectoral balances (as explained in the linked article), you can chill out about the deficit and debt and start worrying about the things that really matter.

It's bizarre how perverted the discussion has become due to the focus on deficit and debt. There is a reasonable political debate to be had on the question of whether government should be small or large. Should the government be responsible for maintaining basic infrastructure? For education? And so on.

But these questions should not be confused with discussions about the deficit and debt, at least on the federal level. The deficit is mostly endogenous. That is economist-speak for saying that the deficit is not directly controlled by political decision. Instead, it is largely the result of what happens in the private sector. If the private sector produces a lot of activity, this automatically results in higher tax payments and therefore a lower government deficit. If the private sector is running idle, tax revenue drops while at the same time federal outlays in social programs increase, hence the government deficit increases. Therefore, it is best to just let the deficit be whatever it needs to be. That is the approach of Functional Finance, which greatly influenced Modern Monetary Theory.

Stop worrying about the deficit or the debt. They are meaningless, red herrings. Start worrying about real things instead, like crumbling infrastructure or high unemployment - both are things that can very easily be fixed simultaneously at the federal level, if the deficit terrorists are finally silenced.

Thank you for your comment. It's always nice to see a fellow MMT-aware human spreading some useful links. Keep it up and keep calm in the inevitable debates that erupt ;)

You're confusing the economic "strength" of a country with the value of its currency.

Also, you seem to be of the belief that there is a strict inverse relationship between the amount of dollars in circulation and the value of the dollar on currency markets. This is also incorrect. What's worth, it is not even a coherent statement. What do you mean by the "amount of dollars"? Well, literally you talked about "print(ing) more dollars". So perhaps you are setting "amount of dollars" = "amount of physical currency printed".

With that definition of amount, it is obvious that your belief cannot possibly be correct. After all, the Fed could decide to print trillions of new dollar bills without putting them into circulation. It is clear that there would be exactly zero effect on the exchange rate.

So what definition of amount of dollars do you want to use?

It turns out that there are many economists who share your belief. During their search for the proper definition of "amount of dollars", they were forced to reject many such definitions, and consequently they came up with many subtly different definitions. In the end, none of them "works". Unfortunately, economics is so dominated by ideology that those economists refuse to abandon their belief, preferring to continue to misinform the public.

Note that high frequency trading is a subset of algorithmic trading. Algorithmic trading per se doesn't necessarily have to be bad. It can help to facilitate market making, i.e. you get people who have both buy and sell orders standing by, which makes it easier to sell or buy stocks at any particular point in time.

On the other hand you have HFT, which is a subset of algorithmic trading, which basically asks questions like "Can we predict the value that company X will have in 30 seconds?". That is about the most ridiculously wasteful activity you could think of.

And even those supply/demand curves, as presented by typical introductions to microeconomics, are full of bullshit. Steve Keen (Aussie econ prof and author of Debunking Economics) has uploaded some of his lectures to YouTube, and the first few installments here deal with those issues. Well worth the time to watch IMHO.

Amazing how far selective quotations can get you, isn't it? You left out the sentence that immediately followed - that wasn't an accident.

(4) is not false - and I have not claimed it is. It is simply too weak to support the claim that you wanted to support, which is that a certain event necessarily leads to inflation. I have tried to make it increasingly obvious in the last few posts that my position is that it may or may not lead to inflation, and can in fact also lead to better real economic outcomes (via growth and increased employment) - it depends on the circumstances. But you have consistently ignored those subtleties.

It's funny, because I really don't think you're being thick on purpose. I originally had the impression that you are a very reasonable person, and your posting history supports that as well, but something seems to have gone seriously wrong and things have gone down-hill. Perhaps you're taking things too personal. Who knows. So I'm going to just disengage from the discussion now, no matter what you write next (if anything). That's probably better for both our sanity.

Talk about the pot calling the kettle black. Where the hell did you even get the idea that I claim that "increased demand does not increase prices, everything else being equal" (*)? You claimed that I make that claim in your earlier post, and I have addressed that in my previous post - pointing out what I actually said instead. Yet you do not address that, and continue with your straw men. If you truly believe that I made the claim (*), you should at least have the intellectual decency to explain where you got that idea from.

Or perhaps the problem is that you have a radically different interpretation of the quantifiers that are involved in those statements, or are not considering quantifiers at all? Perhaps you think that I am arguing that "increasing demand never raises prices", while you claim that "increasing demand always raises prices"? There's a middle ground, you know.

What I have tried to make increasingly explicit in the last three posts (admittedly I should have done that sooner, I just thought that it was obvious) is the statement that whether an increase in demand leads to increased prices (and if so, by how much) depends on additional factors. Sometimes you will get an increase in prices, and sometimes the prices will stay the same. (There is no force at work that would prevent suppliers from lowering their prices in reaction, but it's fairly safe to say that that would be extremely unusual.)

Do you agree with the preceding paragraph or not?

Here's a hint to help yourself against embarrassing yourself: I have yet to read an economist who seriously argues against the statement made there - it's perfectly in line with "basic economic theory". A second hint: perhaps you should consider the difference between monotonically increasing functions and strictly monotonically increasing functions.

(Yes, I have also made some tentative statements about how the link between demand and prices works based on additional factors, but I'd be happy if we could at least reach an agreement on the above. One step at a time ;))

I am quoting the key points on this topic from my last comment (with some emphasis added):

If you read those statements as "increased demand does not increase prices, everything else being equal", then I feel that reasonable communication with you is no longer possible.

My hope is that this is simply you lashing out one last time because you fail to defend a point that is too much part of your identify. It's a shame, because I already told you that I would agree to a weaker form of the claim you originally made, and this could perhaps have led to a synthesis we could both agree on. Oh well.

I care. Because bringing up the valid point that there is no direct impact forced you to explain your chain of thinking, which allows us to look at where the weaknesses are.

The stock of money is not a priori equal to inflation. So if you account for the inflation numbers published by whatever institution in your price-setting considerations, then you are still not using the stock of money as one of your inputs in the considerations.

You may be falling into a trap of circular logic here, where you assume that inflation is tied to the stock of money to support your argument that inflation is tied to the stock of money.

Pretty much all micro-economic textbooks say so, for example (what do you think is behind supply and demand curves?). And so what is that, to understand inflation, it may be better to look at flows of money than stocks.

This is the weak link of your argument. Because if your claim is that "$X can lead to a devaluation of the currency", I would actually agree with you.

But again, I remind you that you dismissed a policy tool that is available to the government by saying that "$X would just devaluate the currency", which is a much stronger claim, and your toned down version of point 4 above no longer supports it.

After all, increased demand tends first to increase production. Firms can also react by increasing prices - this is what you write - but then they risk losing market share to the competition. So whether increasing prices is feasible for them depends on a lot of factors.

So the most intellectually honest statement is something along the lines of "$X can lead to a devaluation the currency, but it can also cause real economic growth, and it may of course also cause a mix of those two things".

I'm not sure whether you understood me correctly. The first quote is something that you wrote here.

The second quote is not something you wrote explicitly, but I never intended to claim that - sorry if it came across that way. Instead, it is related to your example where you go from the situation M=V=P=Q=1 to the situation M=V=P=Q=2 as a reaction of an increase to M=2. If I interpreted you correctly as saying that this can actually happen in the economy, then it means you're saying the economy can react with real growth when M is increased.

The equation as written is pretty much true by definition, because in fact it would be much more honest to write it as a definition: V := PQ/M (the velocity of money cannot be observed except by computing this quotient), but for some reason economists avoid such kind of honesty.

Anyway, the dispute is then about how the different parts of the equation react in reality to outside changes. So the equation is just a way to clarify what we are talking about and bring something concrete to the argument.

Your initial claim was that when M increased, the economy reacts by "just" increasing P, the price level (though perhaps you would also say that it can react via V, the velocity of money, going down). This is what it means to just devaluate the currency: P goes up, with no change in Q.

All I'm really saying at that level is that it is in fact much more likely that the economy reacts by increasing Q, especially in the current situation where there is high unemployment and a large output gap. Therefore, it is wrong to dismiss the full range of government policy options as useless. When the circumstances are right, a sovereign government can use all the tools at its disposal to bring real growth to the economy.

Oh come on, now you're just being ridiculous. How is the government selling more bonds than it deficit spends impossible? It happens all the time: sometimes they sell less, sometimes they sell more, within a given period of time (which is what matters, because we were talking about short-term manipulation of the interest rate). But perhaps we should just drop this. You misinterpreted what I was trying to say. It happens, no need to spill blood over it.

I don't understand what you're trying to say there.

In the following, you butchered my reply in a way that allows you to miss the point, so I rearranged things a bit.

More like a rhetorical question. Perhaps my rearranging of the quotes and the added emphasis already helps you to see my point, but let me reiterate in a different way just to be sure.

Think of the price-setting process of an individual supermarket (or other firm) as an algorithm. It has inputs (such as the cost of production, the effective demand seen by the firm, profit motive, behavior of competition, whatever), and it has an output (the price that is ultimately set). My point was that the stock of money is not one of those inputs. However, at least one of those inputs is a flow of money, i.e. the effective demand that has been seen previously.

You have not argued against that, just continued to claim some causality from an increase of stocks to an increase of flows as I predicted. I've cut out the majority of the rest, because I think the really important point is the following (and yes, I'm also a mathematician - but it's kind of lame of you to bring that up, considering that you really only need high-school arithmetic for these things; I on the other hand apologize for exaggerating about V, I got carried away).

Hey! Seems like you're conceding that the economy can quantity-adjust. I think we're getting somewhere :)

Remember that this part of the discussion was started because of your claim that "$X will just devaluate the currency". Well, turns out that apparently you agree that "$X can also grow the real size of the economy" (perhaps, I think we still haven't really settled on what you mean by X). Once you have realized that, one can obviously start discussions about whether the economy tends to adjust more by increasing production or whether it adjusts more by raising prices.

For that question, I find it helpful to look at the behavior on the micro level, and again, micro agents do not base their decisions on the size of the stock of money. They react to the flows they're seeing. And since the relationship between stocks and flows is not very reliable, why not just concentrate on what the flows are doing? Then we can talk about whether a firm that sees an increase of effective demand will react by increasing its production or by raising its prices.

There are two problems with your argumentation here. First of all, you are making a logical mistake yourself by assuming that I meant "the government attempts to sell more bonds" when I really meant "the government sells more bonds". I was describing what happens when the government sells more bonds than it deficit spends, without considering the events that led up to the sale. That makes it seem as if you were never genuinely interested in an explanation in the first place.

Second, you are clearly unaware of the role that banks play in the bonds market. I really don't care about private buyers of bonds in this discussion, since this was about the interplay of bond sales, the level of reserves, and the interbank interest rate anyway. Think about it from the perspective of banks. Will they buy bonds as long as they have excess reserves?

Of course, once the level of reserves is too low, banks will simply be unable to buy bonds since they no longer have the reserves to do so (although perhaps they could borrow them from the central bank). That only reinforces another point that MMT emphasizes: bond sales are really about the government borrowing back the money that it has created itself in the first place. In that light, it is not a financing operation, but a monetary operation.

Besides, the interplay of bond sales and the interest rate is not an MMT-specific point either. The majority of economists apparently try to ignore the facts surrounding it so they can safely stay within their dream world where government deficits push up interest rates - I don't know how they live with the cognitive dissonance, but I have yet to see an academic economist state outright that the MMT illustration of the relationship between bond sales and the interest rate is incorrect. The same holds for the central banks. Playing the bonds market to manipulate the interest rate is their daily business, after all.

Thank you, thank you, thank you. You are a voice of reason in a sea of inflation insanity.

I know. Who knows, two years ago I might have reacted in the same way that you do. Telling apart the fringe theories that have merit from those that don't is a difficult problem. I appreciate you checking out the Wikipedia Criticism section. You'll note that the points mentioned there have been addressed by MMT academics. I'm really not trying to sound paternalistic or something, but try putting yourself in my shoes. What if MMT really had some merits? What could possibly convince you?

No, it doesn't, at least not in the way that you think. Here's why: in regular goods markets, both demand and supply are essentially flows. Producers produce a certain amount of goods per time unit, whence the supply. Consumers demand a certain amount of good per time unit, whence the demand - both can be functions of price or whatever, but the point about flows is important. Prices change on the margin.

The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly? Inflation is a measure of average price increases, so e.g. increase of prices set by supermarket bureaucrats. But the people who make decisions about how to set prices in supermarkets only see the flow of customer demand. They do not see the size of the stock of money. So how can their decision possibly depend on the latter?

You could argue that there is some relationship between the stock of money and the flows of money, i.e. that increasing the stock of money will also increase the flow of money. In terms of Quantity Theory of Money, this is the claim that V (the "velocity" of money) is constant. Empirically, this claim is false, and V varies all over the place. So now you have two choices: one is to insist on using the stock of money to explain inflation, in which case you have to complicate your models to account for changes of the velocity of money. Or you cut through the bullshit, forget about the stocks, and just concentrate on the flow of money. The latter is why I put an emphasis on aggregate demand, because that's one way to look at such flows.

The interbank interest rate is most directly affected. When the government issues more bonds than it deficit spends, this means that the total amount of reserves held by banks shrinks. This increases the demand for reserves for refinancing purposes, which means that those banks who hold excess reserves can lend them out at higher interest rates. Of course, the lending rate (or discount rate in the US) of the central bank is an upper bound to how high this interest rate can rise.

This is why the central bank, as an arm of government, acts to sell and buy bonds on the open market to control the interest rate. Note how the interest rate is a policy target of the central bank, whereas the total amount of reserves is a policy tool: by buying and selling bonds (or doing repo agreements or whatever), the central bank holds the level of reserves at a level that is compatible with its interest rate target. In particular, the central bank cannot target both interest rate and level of reserves.

Yes. It tells me that the Greek government is not a monetary sovereign government. But that's about it.

You conveniently ignore the part where I wrote that inflation can also be different actors in the economy fighting for shares of real income by raising their prices.

Also, your mention of the 1970s makes it likely that there was imported inflation via rising energy prices. I don't know what country you're talking about, so that's just an educated guess.

I'm sorry, but you are simply contradicting yourself here. Earlier you write something like "$X causes inflation", and since you have yet to really spell out what your X is, I assume you mean X = "increase of the money supply, i.e. M in the equation MV = PQ". If this assumption is wrong, I gladly stand corrected and we can discuss what you really mean. But given the assumption, the claim that "increase of M implies increase of P" denies the possibility that the adjustment in the equation happens via a change in V or Q.

Another note: You have always been talking about a causality from M to P. How do you know there isn't actually a causality from P to M? After all, when the price level rises, businesses and people both apply for, and can justify, larger loans. That in turn increases the money supply M1 (remember that M1 is essentially sum of deposits, and an increase in the volume of loans implies an increase in the volume of deposits). Just more food for thought...

I know this is hard to stomach, but the fact that the central bank will always lend to banks that have their balance sheet in order according to capital regulations is not a contested claim in economics. In fact, this "lender of last resort" purpose was historically a big reason for why central banks were created in the first place. Yes, you can read about it on Wikipedia.

The motivation for that setup is to draw a clearer distinction between insolvency and illiquidity. For non-financial firms, those two are usually quite closely related, but financial firms can easily become illiquid even while being solvent, because solvency of financial firms is very hard to judge for market participants - in the end, that's what bank runs are all about. So the original idea was that regulators make sure banks stay solvent, and then supply all the liquidity that may be needed. Of course, this theory is kind of subverted by regulatory capture, but that's a different topic.

They have to pay the discount window interest rate which is higher than the usual interbank interest rate. Whether you consider that "pretty stiff" is up to you, the setting of those interest rates is public data, you can take a look for yourself.

I first refrained from this because I didn't want to be overly pedantic, but it gnawed at me, since it's a pet peeve of mine. You mentioned "printing money" in your comment. Clearly, you cannot actually have meant printing money, in the sense of putting ink on carrier substance. So what is it that you really meant?

In the sentence "$X would just devalue the currency", X = "Printing money" does not make sense in the literal meaning. So what should X really be?

This may seem overly pedantic on the one hand - after all, we both know it's a metaphor. But on the other hand: a metaphor for what, exactly? I'm convinced that if you truly, genuinely try to answer this question for yourself, it will help you significantly in understanding the MMT-based analysis of inflation and other macroeconomic phenomena.

You really should read up on MMT, since all of your points are addressed there. Let me reply with some pointers anyway even though I don't have much time, since you do sound like a reasonable person - but please excuse the fact that some of the following may become a bit badly-edited stream-of-consciousness:

Please read up on how bond sales and open market operations by the government interact to set the interest rate. The fact is that if the government deficit spends without issuing bonds, the interest rate goes down. Conversely, when the government issues more bonds than it deficit spends, the interest rate goes up. So the government can just give itself a better rate for the bonds if it wants to. This clearly contradicts your understanding of how inflation works.

In fact, inflation is a mixture of different actors in the economy fighting for shares of real income, and a result of the interplay of supply and demand: if aggregate demand is too high for the productive capacity of the economy, this conflict will be resolved via increasing prices. If aggregate demand is too low for productive capacity, the conflict will typically be resolved via unemployment, and factories being idle.

So when private spending collapses and the government props up aggregate demand with its deficit, this is not inflationary. Whether the government issues bonds or not is irrelevant as far as inflation is concerned, it only affects the interest rate (yes, yes, monetarists claim that the interest rate is super important for inflation, and yes, there probably is some linkage there; but it's very indirect, and much weaker than the obvious link between aggregate demand and inflation).

Believe me, you're not the first person to engage me or the MMT academics on this topic. Suffice to say, what it eventually ends up being is that you concede all points, but declare them irrelevant by clinging to an extreme interpretation of the Quantity Theory of Money. The latter doesn't hold up to empirical evidence and not even to common sense, but if you refuse to even consider the possibility that you're wrong about it, I can't help you.

Note that you have already taken the first step of this type: First you said, people will buy more bonds, which allows the government to spend more. Then I said, that's false, because the capacity of (sovereign) government to spend is independent of bond issue. You conceded that point (at least I assume so) but evaded by claiming that it would necessarily be inflationary, irrespective of what else is going on in the economy. That's Quantity Theory of Money, and it's nonsense because it implicitly assumes that the size of the real economy is constant (i.e. the Q in MV = PQ cannot change) -- but that is so obviously false, it's not even funny anymore.

You're right about the withdrawal, but it doesn't change the fact that deposits are just created at will by banks. Yes, they ultimately end up somewhere else, typically at a different bank.

Anyway, fun fact about the fractional reserve system: Did you know that there are a number of countries where the reserve requirement is zero? If the traditional textbook view of fractional banking were true, then those countries would have an infinite amount of deposits somewhere. Funny how the real world contradicts the economics textbooks.

The truth is that the reserve requirement is an after-the-fact thing. The banks create as much deposits via loans as they like - though they are constrained by capital requirements - and if, after all balances have been exchanged, they happen to not have enough reserves available, then they borrow them from somewhere. Most importantly, they can always borrow from the Fed, and this view also applies to the entire banking system as a whole.

So even if there were only a single commercial bank, this bank would still be able to make loans exceeding their current level of reserves, so long as they satisfy the capital requirements (i.e. Basel accords). They can always get more reserves by borrowing from the Fed.

This is true when it comes to mortgages, because at least some lessons were learned. However, it is not true for lending to private businesses. Generally, banks would be more than happy to lend to private businesses. It's just that there are fewer private businesses with good prospects left standing, because sales are poor, because aggregate demand is poor. And so the cycle closes again :)

As far as "bumps on the road" are concerned, I am extremely skeptical about that concept. We have had mass unemployment in Europe for more than 30 years now. It's funny how those bumps on the road can turn into problems that last a generation.