Originally Posted by rpcas
Government deficits that are offset by the issue of government securities are NO LESS inflationary than deficits not offset by anything - or "money printing" if thats what you like to call it. This is a very important point.
Consider this:
Scenario A - Issue of Securities
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then securities are issued: Deposits 100, Securities 100, Equity 200
- then government deficit spends: Deposits 200, Securities 100, Equity 300
Net result: 100 increase in net financial assets
Scenario B - "Money Printing"
Private Sector Financial Balance Sheet Before: Deposits 200, Equity 200
- then government deficit spends by printing: Deposits 300, Equity 300
Net Result: 100 increase in net financial assets
Difference: In Scenario A, the private sector has 100 additional net financial assets in the form of Treasury securities. In Scenario B, the private sector has 100 additional net financial assets in the form of cash. What's the difference between cash and Treasury securities?
Answer: Treasury securities are the most liquid financial investment on the planet. The owners of Treasury securities are always savers (whether that be banks or pension funds etc), therefore it is not important whether they hold cash or Treasury's. They will be saving either way - not issuing securities and forcing them to hold cash will NOT suddenly make these savers go out and spend. Furthermore, if these savers did want to spend, they could trade their very liquid asset for cash quickly and easily. Therefore the difference between Treasury securities and cash (when considering inflation) is negligible.