Do government deficits necessarily cause inflation?

27 Apr, 2019 at 15:26 | Posted in Economics | 5 Comments

CBO deficitsIt may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour​, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services … It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.

Michal Kalecki

5 Comments

  1. And yet, there have been historical instances of inflation without booms.
    .
    In some other context, would we so readily accept “prices will rise so as to equilibrate the demand for and the supply of goods and service”? That sounds suspiciously like aggregate supply meeting aggregate demand at some price level, not a concept I think respectable.
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    The economy as a system driven by money finance is complex and it is no answer to the anxieties caused by its mysteries and surprises to claim its mechanisms are simple and its possible states few and uncomplicated. Uncertainty must plague the planners as much as it does the speculators and to fail to acknowledge as much is malpractice in economics.

    • I contend, supported by evidence gathered from listening in to trader conversations on twitter, that it is possible for matched-book agents to trade with each other while remaining fully hedged. Even if a single derivative is by definition zero-sum, you can combine several derivative positions in such a way that both sides book a profit. Thus fully-hedged entities can trade with each other, eliminating most uncertainty related to effects of inflation, recession, etc. Speculators make up a huge portion of trades of course but speculation is a choice, not a necessity, for trading. You can hedge anything and your counterparty can also …
      .
      My other comment was, as you point out, that Kalecki seems to be relying on the same type of logical underpinnings that Ambrose Bierce lampoons in the blog entry preceding this one.

  2. Maybe Magdalena Andersson could look at this chart and especially the period in the 1920s with recurrent budget surplus? And then wonder if it had had any correlation with what then followed in the 1930s.

  3. And now Democrats want a amendment to the constitution that mandate balanced budgets, outlaw budget deficits.
    https://thehill.com/homenews/438063-moderate-house-dems-back-balanced-budget-amendment

    Suppose they think that the 20th century was a disaster for US of America.

    • With “friends” like that who need enemies?


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