[darjen]

"But for a confidence-building public-works program to be effective in arresting an economic collapse, the government must be able to finance its increased spending by means that do not reduce private spending commensurately. If it finances the program by taxation, it will be draining cash from the economy at the same time that it is injecting cash into it. But if it borrows to finance the program (deficit spending), or finances it with new money created by the Federal Reserve, the costs may be deferred until the economy is well on the way to recovery and can afford to pay them without endangering economic stability."

Doesn't new money creation have the same effect as directly taking cash from the economy? After all, it does cheapen all available money. How, then, can he say that these costs are deferred?

[frig]

Doesn't new money creation have the same effect as directly taking cash from the economy? After all, it does cheapen all available money. How, then, can he say that these costs are deferred?

Time-delay effect. In theory if everyone knows how much new money is being pumped into the economy (and exactly when it arrives, etc.) then the adjustment to reduced value of money happens instantly and you haven't accomplished much.

If instead the new money is injected stealthily into the economy (or at least: knowledge about it doesn't spread everywhere instantaneously) then the cost (in inflation) will be deferred (until "everyone figures it out" / prices re-adjust).

Thus in the short-term private sector spending would be mostly unaffected (b/c people have about the same nominal amounts of money as before and prices are still at about their previous nominal amounts) and over the longer term the inflationary effect kicks in and you pay for it.

In Keynes's time it would be pretty likely you could stealthily inject money and also it would be pretty likely that readjustment to the increased money supply would happen slowly; no internet, for one, and generally nowhere near as tightly integrated an economy as we have today.

That's not as clear today (information moves faster), but on the other hand information still takes time to work its way through the economy.

[padmanabhan01]

That is what makes it even worse. Those benefiting from that would be those who get to spend the extra money first and those affected are those that save. That would defeat the whole point of money as a store of value, since it would be losing its value.

[sethg]

That's a feature, not a bug. Keynes's whole point is that recessions are caused when too many people want to save and too few people want to consume. Putting more money into circulation puts weight on the other side of that scale.

[zargon]

The numbers tell a different story.

http://research.stlouisfed.org/fred2/graph/?chart_type=line&...

[frig]

Probably so; he was asking how money-printing defers costs and I explained it.

[darjen]

Thanks for the response. How stealthy can they really be about it, though? If it's common knowledge that this is how the government will respond, would this time-delay effect be negated? Wouldn't everyone know that dollars are being pumped, and start raising their prices to compensate? Just trying to wrap my head around this stuff...

[frig]

The stealthiness is debatable.

Suppose that it is pretty easy to look at money printing and figure out how much devaluation results (eg: prices will wind up 10% later).

Even if that's true deciding when to raise your prices (and how much to raise them) has a lot more to do with supply (of your inputs) and demand (for your products) and also what your competitors are up to.

EG:

- you raise your price now, but your competitors raise it less; they take a lot of your business pretty easily

- your customers haven't gotten "their share" of the printed money yet (eg: wages haven't caught up with the devaluation, or they haven't raised prices proportionately yet, etc.) so you lose more by raising prices than you lose by leaving them as-is

...that kind of thing.

[pkulak]

In a recession, there's sometimes a bit of deflation, or at least much-slowed inflation, so you have some more leeway to just start pumping money into the economy (by actually printing money, or by lowering interest rates).

[biohacker42]

Right, but deflation rewards the savers. By creating inflation in essence you are putting a gun to the heads of savers and saying spend now or lose value.

[anamax]

Putting guns to people's heads is what govts do.