Deficit Spending and Inflation

February 26, 2023 by Dan Mitchell

In this segment from a December interview, I explain that budget deficits are most likely to produce inflation in countries with untrustworthy governments.*

The simple message is that budget deficits are not necessarily inflationary. It depends how budget deficits are financed. If a government finances its budget deficits by selling bonds to private savers and investors, there is no reason to expect inflation.  But if a government finances its budget deficits by having its central bank create money, there is every reason to expect inflation. So why would politicians ever choose the second option? 

For the simple reason that private savers and investors are reluctant to buy bonds from some governments. And if those politicians can’t get more money by borrowing, and they also have trouble collecting more tax revenue, then printing money (figuratively speaking) is their only option (they could restrain government spending, but that’s the least-preferred option for most politicians). Let’s look at two real-world examples............To Read More....

Democrats and Republicans Are Both Deluded About the Nation’s Fiscal Outlook, By James C. Capretta February 24, 2023 - The competing budgetary myths of Democrats and Republicans are two sides of the same coin. Both want to be seen as defenders of the middle class, and so they pledge to restrain deficits and debt without imposing any costs on families of average means. To hit spending and revenue targets, they contend that sacrifice is only required by less favored constituencies, although they differ on who should be on the receiving end of this concentrated fiscal pain. The problem for both is that, with the budget outlook deteriorating rapidly, their tales are becoming more implausible by the day. Voters may not mind in the short run, but eventually, reality will catch up. At that point, it will become clear that both parties have been peddling wishful thinking instead of serious plans because a sustainable fiscal course correction will require new policies that affect large numbers of Americans...............