[fauigerzigerk]

According to monetarist theory these two things are one and the same.

The main source of "money printing" is banks making loans. And this is what the Fed targets when it raises interest rates.

I'm not quite sure whether tariffs really do lead to inflation. It depends on how consumers and companies respond to higher prices of imported goods and to the general sense of uncertainty.

[davejohnclark]

> The main source of "money printing" is banks making loan

Sounds like a similar mechanism as the UK. I'm not aware if the system is exactly the same or not.

It was apparently so poorly understood in the UK that the bank of England wrote a paper (Money creation the Modern Economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...) in 2014 to clarify where new money comes from. There's a good summary here https://positivemoney.org/uk-global/archive/proof-that-banks....

It's not something I was aware of until recently, but I was surprised that it was not more under the control of the government and central bank (in the UK, anyway, if it turns out it's different in the US).

[fauigerzigerk]

>Sounds like a similar mechanism as the UK. I'm not aware if the system is exactly the same or not.

Yes, this mechanism is called fractional reserve banking. It's in use basically everywhere.

[davejohnclark]

Interestingly that paper from the Bank of England makes no mention of "fractional reserve" anywhere, but they do say:

>Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach

>While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.

>In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available

Anyway, I think I'm digressing from the topic a bit here - but I _think_ what I've learned recently is that in the UK it isn't actually fractional reserve banking, which I was surprised by.

[fauigerzigerk]

>but I _think_ what I've learned recently is that in the UK it isn't actually fractional reserve banking, which I was surprised by.

The BoE doesn't currently impose a mandatory reserve requirement. They do have more general liquidity requirements though (central bank reserves being one possible source of liquidity). I would still see it as a fractional reserve banking system, especially as these minor differences don't matter for the question of how money is created.

[davejohnclark]

Yeah I think that's a fair shout, the main element being that private banks create the money via loans. Thanks for engaging, I appreciate the discussion. One day I might grok how modern economies hang together, but I've a way to go yet.

[no_wizard]

>I'm not quite sure whether tariffs really do lead to inflation. It depends on how consumers and companies respond to higher prices of imported goods and to the general sense of uncertainty.

They won't absorb the new costs. That has not happened in the history of capitalism as far as I am aware. Higher costs will inevitably equate to higher prices without an offset somewhere.

Investors don't like unpredictability, which Trump has already shown to be very unpredictable in regards to tariffs (the whole on again off again stance changes for example).

Higher prices also lead to less buying activity. History has proven this out too.

[fauigerzigerk]

>They won't absorb the new costs.

If you mean that importers will not absorb costs then I agree. They will pass on most of the costs, if not immediately (to avoid sticker shock) then over a period of time.

But the question is what happens to demand for imported goods and demand for everything else. At constant money supply, prices of some goods going up could put pressure on the price of other goods and services, although this seems less likely as the tariffs are so extremely broad.

A lot depends on how people respond. Will they reduce saving to pay higher prices? Will they take out loans to maintain living standards (creating new money in the process)? Or will they cut back on spending causing a recession?

And what will companies do? Will projects be put on hold because the return on investment is too unpredictable? What happens to the dollar? Will Trump cut other taxes to offset his tax hikes on imports? What about the massive budget deficit?

I think this is all highly uncertain.

[no_wizard]

Consumers will pull back, if not right away it will show up with 18 months, though early indications suggest they already are to brace for the price increases as most were already trying to simply get ahead of the last few years of inflation to begin with.

Businesses are already cutting back. My employer has already talked about the impact, I know other people who are saying the same thing. Lots of things going into freeze or slowing down. It will take a minute for this to get through the economy but it absolutely will.

I don’t think this is highly uncertain territory, history has clear examples of what will happen if in doubt. Generally, it’s not good for most, especially consumers or those who have any reliance on foreign material or goods, which nowadays is most businesses and consumers, and the US won’t be able to magically fill that in.

This will result in a recession