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Tuesday, April 18, 2023

Inflation from Printing Money Pays Debts

When the government prints money, inflation results 6 mos later as the figure shows and that inflation pays down government debt due to spending in excess of taxes. However, when you spend more than you make, inflation also helps you pay your debts to purchase things that benefit your future. A mortgage for a house or a loan for a car are both examples of debt financed purchases that benefit your future as long as your income less expenses is enough to make the loan payments. When your debt payments exceed income less expenses, you then become bankrupt and need to sell your house and car in order to survive. If you take on even more debt to remain solvent, that can only be a temporary solution since you would increasing total debt by using the new debt to repay the old debt.

A government collects taxes and other revenues to pay for its spending and borrows money to pay for its big projects. A government prints money and loans that money to banks for a small interest payment that then pays for printing and distributing the money. Banks then use that money for loans that the Banks charge interest and withdrawals that the banks pay interest. When a government spends more than its revenues, it must borrow money just to pay for  that excessive spending. The government prints money called bonds with a promise to pay interest in the future despite the extra cost of debt interest payments, which the government pays for with taxes and inflation. Roads, bridges, dams, and government buildings are all examples of debt purchases that benefit the future as long as taxes less expenses represents tolerable inflation. When government debt payments exceed taxation, government can then raise taxes or take on new debt to repay the old debt. A government takes on debt by simply printing money because the government bond debt is actually equivalent to printing money.

Banks need government printed money as cash to support consumer buying and selling and so banks must take on government debt just to support a producer-consumer economy. The cost of that government debt is in the interest payments for its bonds as well as in the inflation of consumer goods and services. In other words, in the absence of government taxation, inflation is how the producer consumer pays for government spending.

Both government taxes and inflation pay for government spending and so money is just the same promise to pay as are government bonds. While an investor must hold a bond until it matures before reclaiming it as cash, cash is then simply a government bond as money that a consumer can immediately reclaim as goods and services less inflation. The government withholds taxes on every paycheck and so holds that cash for the year.

When debt is inexpensive, producers and consumers borrow more and are therefore willing to pay more for goods and services and that increases inflation. However, producer borrowing more also increases economic growth just as consumer spending more also increases economic growth.

When debt cost is expensive, producers and consumers borrow less and so have less to spend for goods and services and that decreases inflation.

When the government prints money for spending in excess of revenues, inflation occurs as a government tax on producers and consumers to pay for that excessive government spending. A government printing more money than its economic growth will cause excess inflation until the government prints just enough money to sustain growth with acceptable inflation.

Acceptable inflation occurs when the economy is growing and producers and consumers believe the government is not printing money in excess of economic growth.

When the government spends more than its revenues, the government prints more money to pay for that excessive spending and that increases inflation, which then pays for that excessive spending.

When the government spends less than revenues, the government prints less money and that decreases inflation.

When government increases its interest rate, that makes consumer debt more expensive and so decreases inflation.

When government lowers its overnight interest rate, that makes producer and consumer debt less expensive and so increases inflation, but also growth.

Acceptable inflation occurs when the economy is growing and consumers believe the government can repay its debt. Inflation then is just enough to pay for the cost of money and to allow enough excess money for economic growth.

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