I need help with ECON 101, why does government spending cause inflation?

none | 6/15/22 | self

[Hootowl]

Briefly, if you have a million dollars in circulation and you print another million dollars then each dollar becomes worth 50 cents.

[mewzilla]

Meanwhile, speaking of economics, get a load of this...

European Central Bank to create new tool to address fragmentation risk after bond yields surge

[God luvs America]

gov’t handouts doesn’t just cause inflation...

it causes a major rise in college tuition (colleges increase tuition because the gov’t is paying for it)

an increase in housing costs (why charge someone $1000 a month rent when section 8 will pay $1500 a month)

medical costs (kung flu tests cost about $0.38 but since the gov’t pays for much of it, they charge $150)

[frogjerk]

He was an incredible person, great thinker and student of history. If more people would just watch his Free to Choose documentary series we would all be a lot better off.

[RoadieFan]

More money in the hands of the public, the more they are willing to spend on a good. Competition for that good raises the price. Simple supply and demand.

[Cats1]

The only way ‘more money chasing fewer goods’ causes inflation is if the person selling the item raises the price.

If it was an auction it would be a bidding war, and that’s easier to understand. This is (I guess) someone just saying I can sell it for more.

[RaceBannon]

okay, but who raised prices so that your 1/1000 could not buy as much?

the individual assessment of your fiat money may be 1/1000 of the ‘gold bar’, yet unless something else happens there is nothing that would cause prices to rise.

I can’t get past the idea of scarcity and demand being the cause of rising prices other than government interference in supply through bad policy or war.

the simple presence of more cash being printed, that me and you have no access to, doesn’t make me or you spend it, we don’t have it, yet according to thoughts here, that makes it value fall while it’s unavailability to us should make it rise.

It is not clear to me, there has to be other connections to the printing of money and I am sick of hearing the cliches about how it causes inflation, it is missing a step

[Blood of Tyrants]

Deficit spending. In the “old days” when the government wanted to spend more money than it collected in taxes, it sold treasury bonds to raise the money. Now they literally just create the digits on a computer and spend it on everything from rockets to welfare. With a $38 trillion debt, abut half of which is from made-up money, I’m surprised it has taken this long for inflation to kick in.

And money doesn’t go away when you spend it, the company you spent it on pays their workers and staff and it gets spent again. Who in turn spend it on gas for their car and clothes and so on.

Now, as the others said, we have more money chasing the same goods.

[mewzilla]

On a related note, did the Russians cut the flow going to Italy cuz they’re meanies...or because Italy’s check bounced?

[logi_cal869]

You refer to ‘chaos’, aka ‘crises’.

You are correct, but that was not the question I interpreted from the OP.

But they are both created by government policies, with tangential effect if there is any truth to the theories on this laundry list of ‘fires’...yet still borne of government.

I bet there would be an investigation if 2500-gallon propane tanks spontaneously exploded...

[Repealthe17thAmendment]

The government printing doesn't put money in my pocket nor does it put money in the pockets of the gas companies, the grocer, the manufacturer

This is exactly what happened with the COVID stimulus money. Prior to that, deficit spending by the government took a longer path to get into the economy, and inflation was generally low enough to hardly be noticeable. But with the stimulus programs, there was a flood of money into virtually every wallet in America. Taken individually, the amounts did not seem large, but with just about everyone getting a check, and most companies getting money, the supply of cash went up dramatically in a very short time.

[Mr. K]

"Who is receiving this money? Where can I get this money they are printing so I can buy these goods that will affect the economy?"

YOU don't get any of it, you're not in the elite.

But it's out there, given to many government agencies, who pay their employees, who then buy goods.

What part of that are you unsure about?

[Nifster]

Too many dollars chasing too few goods. That is what in flatiron is

Govt pumping dollars into an economy ALWAYS causes inflation

[RaceBannon]

name the govt company that manufactures goods, ships raw materials or finished product and operates a brick and mortar store to receive profits.

that does not exist

[JackFromTexas]

You’ve got the basic supply and demand down, I think.
Now apply that to dollars - what happens when dollars are printed w/ out limit? The supply quickly out runs the natural demand, and they become less desirable. It may sound odd, but that is another way of saying ‘too much money chasing not enough goods.’
The same would be true of gold, platinum, jewels, or any other measure of wealth. If stones in every gravel driveway in my neighborhood were replaced by 8 inches of gold nuggets, would that be a measure of wealth, or the worthlessness of gold? It would be the latter.

[Cboldt]

The printed money is used to buy services and goods. It isn’t printed then put into a savings account!

Stable value of money happens when money supply matches production. More people, more produciton, need more money to represent the productive activity.

Money is pretty much an efficiency-convenience over barter.

[whitney69]

“Do they absorb it into the government’s funds, and feed it into the economy by spending it?”

You’ve identified one way to siphon off money. If we give it to foreign nations for “aide” whether food or weapons, and get nothing out of it except the politicians slapping themselves on the back, then that’s “worth” that is tossed down the toilet. And that worth is not the diluted stuff we have domestically but arrives at a worth they recognize with their economy. So our dollar at the amount we’ve inflated it is further inflating it locally as our economy has nothing to do with their domestic spending. So if we give them $1.25, that is actually worth 50 cents, to them it’s worth a dollar in their economy. We lose twice with the waste and the further inflation of worth not being recovered by covering only their loss prior to their getting it.

wy69

[RaceBannon]

the additional money is comparable to an overstock then, no?
What do you do to get rid of overstock?

You have a sale, not a restriction on it’s use.

raising prices lower the circulation of paper money because we already spent too much to live or to purchase that extra something, an over circulation of cash is not a reality to the average consumer, and a bank that is not lending, has more than they need.

It would seem that the only way to use up that surplus is to purchase something for investment, such as houses or land because of the return. Not increase the cost of beans.

[nathanbedford]

"Government gets the money to spend either from raising taxes (thus taking money that would otherwise be going to the private sector) or by issuing debt." Good point.

With respect to the money spent by government which it does not borrow but raises in taxes, the effect is normally deflationary. because: It does not make sense to take the job of capital allocation away from people who have demonstrated great skill in capital allocation, and give it to an entity that has demonstrated very poor skill in capital allocation, which is the government

Economist described this as "opportunity cost" that occurs when capital is misallocated. Government officials, whether elected or appointed, are not in the business of allocating capital to increase return but to increase vote tallies or turf.

Beware the politician that wants to make "investments" and the regulator who wants to enforce "protection."

With respect to government spending done by borrowing rather than taxing, the effect is inflation but the impact or recognition of that inflation may be delayed thus affording the politician opportunity to play Santa Claus and escape the consequences, at least for a season.

Heretofore inflation in America has been under control (at least by modern rather than traditional standards of reckoning) because America has been the world's largest economy, the world's reserve currency, a superpower, energy rich, internally stable, under the rule of law, with open markets and growing. One need not review every element to immediately react and say, Biden has impaired everyone of these vital elements! Anyway, by 1970s standard of reckoning in real dollars, our present rate of inflation is approximately 17%!

Our ability to further consequences of profligate borrowing is ending and America is about to enter an era of pain.

[RaceBannon]

what printed money is given to people who buy services and goods and who are the people receiving this printed money?

Me? No.
You? Are they giving you money?
Any friends?