What of Deficits and Inflation?

A brief note here to answer a question about inflation. All spending carries the risk of inflation. The question is whether or not deficits automatically translate into inflation. The answer is no.

The government could at this moment issue $40 trillion. If that $40 trillion merely sat in an account somewhere unspent, it is not a problem. The problem occurs when the $40 trillion is then spent on goods and services. In doing so, aggregate demand increases. If the economy is unable to meet that demand, then the price level will rise.

We must begin thinking correctly in terms of real resources and not “money”. Real resources are finite. Currency in the US, UK, Canada, Japan, Australia et al., is not finite; it is infinite. However, once you begin spending that which is infinite to buy that which is finite, inflation will be a possibility, whether that spending is public or private.

If you want to create demand-pull accelerating inflation with budget deficits, then you must spend persistently more than the economy is capable of producing. If there remains the ability to increase output, then that budget deficit is not a problem. How do we know whether or not we can increase output?

Unemployment. If it remains, then the deficit is too low.