I had a really great discussion with someone in Meteor Blades’ diary on the current recession about the relationship of money supply, borrowing, recession, and inflation.
The poster asked about where all this money for stimulus was actually going to come from:
Seriously though where is that money going to come FROM. They pissed away a HUGE chunk with lowering the taxes for businesses who used all that “largesse” to do stock buybacks and give themselves raises and bonuses and now they’re coming back crying for more because “they’re poor” BECAUSE THEY MISMANAGED.
How fucked up is that and back to my question. WHERE is all of this going to come from -the mythical money tree?
I attempted this answer:
We’re going to borrow from the future, which will be richer than the present, because of productivity gains.
Unless, of course, we implement austerity and suffer permanent losses to productivity due to our failure in the present to create productive capital. In that case, the future will be poorer than the present.
Apparently this was not convincing!
2 Issues:
1) How do you borrow from the future when there is no one to lend now? ALL of the "lenders" are in the same -or worse- shape as the US. And printing money runs the risk of serious inflation issues.
2 )Even if #1 is/becomes possible, unless those productivity gains are allocated/structured a whole lot differently then they have been the last 40-50 years the future goes from possible to a much deeper hole then we are currently in.
So I tried again:
But we are always borrowing against the future. The whole money creation process originates with loans from the government that are to be repaid in the future. The loaned money is then redeposited in bank accounts throughout the economy, creating a multiplier effect. Using that money we build a more productive economy that is capable of repaying the original loans via taxation. That’s how money works in the current system, the virus hasn’t changed that.
I don’t argue with you about the need to allocate both consumption and the rewards of production and investment very differently than they are now. I disagree that our current economy is so structured that borrowing to stave off a recession is a wasted effort that will make us worse off in the long run. The same argument was made against the Obama stimulus, and it was as wrong then as it is now.
I followed up with:
It’s an interesting question whether even hyperinflation is as big a problem as economic depression. Under hyperinflation production continues because there are dollars to be chased; there are just a ton of additional costs throughout the economy as people try to keep caught up with new denomination and the rapid pace of change.
But contrast, in a market economy in depression, production simply does not take place as there is not money to chase and profit is impossible. That leaves productive resources idle, causes a collapse in production, and leaves real needs unmet — think starvation — rather than simply rather severe inefficiency and inconvenience.
The reason people favor depression over inflation is that rich people favor depression over inflation. Under depression and a contracting money supply, the rich get relatively richer, and their consumption doesn’t decrease as they outbid the poor for resources, while the poor go to the wall. Under inflation, the assets of the rich become less valuable, and they hate that. They’d rather we starve.
I thought these were bot good questions and good answers (if I say so myself) so I decided to diary it.