The press in the UK is currently engulfed with the fear of deflation. One of the common justifications of this fear is that deflation increases the real value of debt, which makes perfect sense, but the typical conclusion is that the government should support inflationary policies to help ‘inflate away’ the debt burden from consumers and businesses alike.
Am I correct in thinking that an increase in the money supply primarily comes about through more money being ‘borrowed’ into existence, either by individuals, businesses or the government? Wouldn’t this just lead to an increase in overall debt? Whilst the people who borrowed their money a few years ago benefit, isn’t the overall effect an increase in aggregate debt, not a reduction?
Is this different if the central banks employ so called ‘Quantitative Easing’ ? Presumably then this money doesn’t have to be borrowed into existence?
Increases in money supply come about when money is lent into existence, and this implies a borrower. However if no borrower can be found it is also possible for the government to lend money into existence to itself, which is to say just print the money and spend it.
Or the central bank can print money and buy things from the economy. The seller receives the new money and can spend it on whatever. Thus the money supply increases (is inflated).
So is it correct that in option 1 - money creation through lending - it is not possible for debts (in aggregate) to be ‘inflated away’ as the inflation required to do this is brought about by a further increase in debt ?
I can see that for borrowed money. But when a central bank simply starts buying stuff with money it creates there’s no debt involved right? (I’m not at all arguing in favour of this - just trying to get my arguments straight [:)])
Is that still the case these days? The BOE appears to be attempting to shovel cash directly to the corporate sector. I’ve not read this stuff in detail yet, but it appears this is more than just buying existing private sector assets from banks in order to increase their reserves:
“16 The Fund will purchase CP issued by companies, including their finance subsidiaries, that make a material contribution to economic activity in the United Kingdom.”
Apparently, in the Maastricht treaty (which the UK has signed up to), there is a rule that prevents governments selling bonds directly to the central bank. This is supposed to act as a safeguard to prevent government’s simply inflating their way out of budgetary difficulties. Although the UK gets around this by selling to the public (by auction) and then after a few days, the BOE starts buying these from the public. The net effect is pretty much the same although it does rely on their being willing buyers of government bonds. Something which there was an apparent lack of yesterday.