Myth #7: We’ll end up just like Weimar Germany or Zimbabwe.
Reality: Hyperinflation in both countries was caused by circumstances far different than ours.The minute you challenge the assumption that the government should not spend when it has a large deficit, out comes the charge that we’ll get some horrible hyperinflationary outcome like Weimar Germany or Zimbabwe.
Yes, once the economy gets to full employment, then extra government deficit spending can start driving up prices. But what happened in Weimar Germany was very different. During that time, the government was forced to pay extremely large war reparations in foreign currencies which it didn’t have. So it had to aggressively sell its own currency and buy the foreign currency in the financial markets. This relentless selling continuously drove down the value of its currency, causing prices of goods and services to go ever higher in what became one of the most famous inflations of all time. By 1919, the German budget deficit was equal to half of GDP, and by 1921, war reparation payments represented one third of government spending. And guess what? On the very day that government stopped paying the war reparations and selling its own currency to buy foreign currency, the hyperinflation stopped.
In Zimbabwe, the situation is also very different from ours. There, the conditions for hyperinflation were caused by the destruction of nearly half of the country’s domestic food production via misguided land reforms, plus a civil war which eliminated much of the economy’s productive manufacturing capacity. In response to food shortages, the Bank of Zimbabwe used valuable foreign exchange reserves to buy imported food, leading to a lack of foreign currency to purchase essential raw materials. Manufacturing output collapsed, but the government used much of the remaining foreign exchange to dole out political favors, rather than adding to the country’s productive capacity. The end result was inflation and then hyperinflation.
In the US, hyperinflation will not be an issue if the government spends while it has a large deficit because with high unemployment and unused yet functioning factories all across the country, there is plenty of room to cut taxes and/or increase spending to get us to full employment. This is true no matter what the size of the federal deficit. Ultimately, inflation (and then hyperinflation) is about competing distributive claims over real resources, such as oil, gas, water, etc. A “sustainable” fiscal policy, especially with respect to hyperinflationary risks, then, is really about both the establishment of full employment and the implementation of well-crafted policies which deal with the constraints created by, for example, depleting natural resources.
~Marshall Auerback, Senior Fellow at the Roosevelt Institute and Rob Parenteau, sole proprietor of MacroStrategy Edge
MYTH #8: Government spending increases interest rates and ‘crowds out’ valuable private sector investment.
Reality: Banks can lend essentially without limit, and the Fed can hit any interest rate target it chooses.
Ask an economist what determines the interest rate, and she’ll probably mutter something about supply and demand or “market forces.” Ask the same economist what determines the level of saving and investment, and the answer probably won’t change very much. This is because most economists were trained using textbooks that have not been rewritten since the United States went off the gold standard after WWII.
Back then, we had a monetary system that really did limit the growth of the money supply, and too much government spending really could force rates higher and crowd out other forms of spending. It is all based on something economists know as Loanable Funds Theory, which describes a market in which there is some limited pool of savings available to satisfy the demand for credit. Thus, deficit spending required the government to compete (with private borrowers) for a portion of these limited resources. Because the capacity to lend was constrained under the gold standard, the added competition could drive borrowing costs (i.e. the interest rate) higher.
Decades later, the monetary system looks completely different. But economists continue to treat governments as if they are the users of the currency (as opposed to the issuers) and to treat banks as passive money lenders — there simply to broker deals between savers and borrowers. In truth, banks can lend essentially without limit, regardless of what the federal government is doing, and the Federal Reserve can hit any interest rate target it chooses.
~Stephanie Kelton, Associate Professor, University of Missouri-Kansas City, Missouri
Here is more about the subject:
http://my.firedoglake.com/selise/tag/stephanie-kelton/Here interesting video in short if you don't have time to read much:
https://www.youtube.com/watch?v=zGen5o6vAmw
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