[WalterBright]

Sorry, that's incorrect. Banks loan out money that is backed by collateral. This money is indeed created. But when the loan is paid back, the money is destroyed. The money tracks the value in the economy, so the inflation is zero.

What the fed does is create money that is backed solely by the fed promising to pay it back in the future. But the money is paid back by issuing more debt! Hence, inflation.

[yxhuvud]

This

> The money tracks the value in the economy,

Does not imply this

> so the inflation is zero.

I do agree that the assertion holds true in most cases, but it break down during extreme environments - widespread bank collapses or when the productive ability of the economy is sharply reduced. Loans that cannot be repaid break the equation at some point.

As for government spending, it greatly depends on what it does with the money, and also on taxation. The government promises to pay back money based on future taxation, and if the taxation grow faster than the debt then there won't be any inflation.

[WalterBright]

Yes, it does imply this, because inflation is a supply & demand thing. More money representing the value of goods and services means each dollar is worth less == inflation.

Borrowing using assets as collateral means the money created matches the value of the collateral.

[csomar]

Theoretically, yes. Technically, however, these people are getting bailed out. That makes inflation. The government still have to pay for the debt, but it seems like it’s not happening anytime soon (the debt ceiling just keep getting higher and higher).

US government debt is around 31.5 Trillion $$ at the moment. If the US government were to pay its debt today, all that liquidity will be removed from the market and this will have enormous deflationary pressures.

In the same way for private individuals, if you can always keep renewing your debt and pricing your assets higher (a bubble would help), you’d create inflation.