>Instead of expanding the amount of credit, why shouldn't we just expand the amount of actual money?
So just print more money? I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power. The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy (if you control the money printer - Greece is out of luck).
>there would be an accompanying increase in production.
Easier said than done. The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).
> I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power.
Yes. But then you went on to say:
> The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).
If we hand real money to consumers instead of handing them credit and plunging them into debt, why wouldn't that address the lack of consumption problem?
> The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy
I'm skeptical that printing money and handing it to consumers would cause any amount of inflation. If we assume a downward-sloping long-term aggregate supply curve -- and the long term gets shorter the more scalable our businesses are -- then the more stuff we produce, the cheaper that stuff gets. Right?
Besides, if we do see inflation rates that are higher than what we want, the government has other levers it can use to address that.
1. Open market operations. The fed sells treasury securities back to the open market thereby removing dollars from the supply.
2. Increase bank reserve requirements to discourage bank lending. This reduces the amount of credit (and therefore debt) and can help reduce future credit crises.
3. Tax consumption/spending. Taxation is fine as a means to reduce the money supply and influence consumer behavior. But I'm not sure how useful it is to view taxation as a way to fund the government. Why not spend as needed and tax as needed without worrying about balancing the two?
>I'm skeptical that printing money and handing it to >consumers would cause any amount of inflation.
Printing money and giving it to consumers IS inflation (it is the very definition of inflation).
Example: if you have two oranges and $10 in money supply, they will each cost $5. If you print additional $10, you will have $20 sloshing around and the price of an orange will automatically jump to $10 each. The consumer will still be able to only buy the same amount of oranges as before.
Okay. Let's say we have two oranges and $10 in the money supply. Let's also say that one guy has all of the $10 and he's only ever going to want one orange. What's the price of an orange? $10. One orange gets sold and the other gets wasted.
If you print an additional $10 and hand it to a different guy, what's the price of oranges? Still $10, but both oranges get bought.
Your scenario is too simplistic to use. The premise that "if you print additional $10 and hand it to a different guy, the price is still $10" is false.
A better example of your idea is - college education. By giving out free money to people, the government increases supply of buyers (students) - and the sellers (colleges) keep rising prices (cost of college is through the roof - quadrupled/quintupled over 20 years). Because they have a stream of buyers they otherwise would not have.
Yes, I said "giving free money to people", because even though they are formally student loans, many of them will never be repaid. It is really a transfer of wealth from US taxpayers to the higher education complex, who can charge tuition multiple times what it was years ago (accounting for inflation included).
Yes. Both of our scenarios were simplistic. You came up with a simplistic scenario in which adding money to the supply did cause price inflation and I came up with a simplistic scenario in which adding money to the supply did not cause price inflation.
Printing money and handing it to consumers is not "the very definition of inflation." There's more to it than that. Price inflation happens when the rate of spending outstrips the rate at which real value is being traded. Money supply is a factor, to be sure, but so is monetary velocity, and productive capacity.
> A better example of your idea is - college education. By giving out free money to people, the government increases supply of buyers (students) - and the sellers (colleges) keep rising prices (cost of college is through the roof - quadrupled/quintupled over 20 years). Because they have a stream of buyers they otherwise would not have.
Agreed. It's free money in the sense that much of it won't be paid back. But it's not free in the sense that those students have to spend it on college, which leads to market distortions. People will pay whatever it takes to get the best college education possible even if they have to spend money they don't have, especially if the only way to access that money is to spend it on college.
> Yes, I said "giving free money to people", because even though they are formally student loans, many of them will never be repaid.
Yes.
> It is really a transfer of wealth from US taxpayers to the higher education complex, who can charge tuition multiple times what it was years ago (accounting for inflation included).
Yes.
Traditional college doesn't scale well. The market is saturated and we're flooding it with consumers who have access to more and more money.
But education can scale. MOOCs scale. You can get a really good education without paying very much. Such an education might not lead to a job, but is that necessarily a problem?
In my mind, it's a waste of money for the government to pay for students to go to school (either through loans or grants).
So just print more money? I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power. The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy (if you control the money printer - Greece is out of luck).
>there would be an accompanying increase in production.
Easier said than done. The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).