From what I know, the government can make cash out of thin air, but this causes inflation levels to rise. Or is everything they’re giving out just their surplus?
In: Economics
The money is coming from previous years’ taxes and debt to other countries. There are times where the government will print more money, know that inflation will increase, but not for the sake of the recent checks.
Leakage to foreign products and to non- consumable things like buying GME stonks instead of buying food or other goods.
Mostly because what the government is measuring doesn’t give an accurate depiction of the total amount of inflation.
Savings rates are way up, which means people aren’t spending as much as they were.
This means there is latent inflation in peoples savings.
So now there’s multiple paths that can be taken:
1 – People keep or increase their savings rates (likely until the pandemic is over) – This results on no inflation or even deflation
2 – People start spending fast, bringing their savings rates back to what they were – This results in high inflation until those savings run out
3 – People slowly start spending again bringing their savings rates to what they were – This results in low inflation over the next few years
Deflation is the greatest threat. The Federal Reserve rate is nearly zero percent, that and the direct payments are in an effort to bring inflation up to the target of 2 percent.
My oil change place used to charge $40, now it’s $45. A Big Mac meal used to cost $8, now it’s $10. There’s tons of other examples. I see rising prices all around me. I’m not smart enough to know how to precisely calculate inflation like the ‘experts’, but I can see with my own eyes that my dollars are worth less than they used to be.
Inflation is typically caused by more money in circulation, not more money in existence. People don’t have money to spend, so businesses don’t raise their prices. the stimulus checks are mostly being spent on bills rather than goods. I’ve read that the US dollar gained value when the market crashed in March last year, because everyone was selling their stocks to try to get cash. Since then, we’ve had some pretty rapid inflation but it has evened out to follow the usual trend.
Government spending is supposed to cause inflation, but the mechanism for how this happens is different depending on how the government is spending the money.
The usual way that we talk about the government spending money is for it to buy things. For simplicity let’s say the government is buying boats (for, like, the Navy). So, the government rolls in and says we are buying 10,000 extra boats this year! All of the stuff that goes into making boats (factories, raw materials, dry docks, and all the workers) are like “huzzah! Let’s build these boats!”
Now you come in to the boat store and want to buy that $100,000 boat you have been dreaming about…but the boat makers are booked for months with building all these govt boats. If you want your boat built, it’s gonna cost you $120,000. Bam! Inflation!
This is the government “crowding out” private sector spending, forcing prices to go up.
With the pandemic stimulus, tons of people are out of work or working fewer hours. These people used to be spending money, but suddenly had to cut back drastically. All the shops that depended on their spending are seeing huge drops in sales. The stimulus is allowing people to restore their spending to pre-pandemic levels while we wait to get vaccinated. In this case, there’s not a ton of spending that’s being displaced, or “crowded out” like in the first example.
The money was borrowed in the form of bonds, so dollars from investors were taken out of circulation to then distribute as stimulus money. Eventually the bonds will get repaid with interest.
A lot of posters here are ignoring your biggest error. The money was not printed out of thin air. It already existed and belonged to the government, ie, already belonged to the taxpayers. New money did not enter the system at all, so your supposition about inflation is inherently false.
Additionally, other countries are giving out way more money. Canada, for example. We have received a total of $3200 over the past year, and not everyone even received that much. It’s pocket change.
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