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USA Real Estate Blog

Where is the Money? – Maxx Goad – Medium

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The Green New Deal outline was released last week. It’s ambitious goals have many questioning how we could afford such a plan. The plan admits funding must rely on MMT, or Modern Money Theory. This theory describes the function of money as being created out of thin air. Creating money out of thin air would increase the money supply, right? Increasing the money supply causes inflation, right? Wrong. The most common measure of inflation, the CPI, is the price of a “basket of goods”. When the prices of average products remain stable, then inflation is low. This HuffPo Opinion article describes the consensus view of inflation,

“Despite lawmakers’ stated fears, larger public deficits are not inherently inflationary. As long as government spending doesn’t cap out the full productive capacity of the economy ― what economists call “full employment” ― it won’t spin prices out of control. Inflation isn’t triggered by the amount of money the government creates but by the availability of biophysical resources that money tries to go out and buy ― like land, trees, water, minerals and human labor.”

If MMT holds true then new money is only constrained by its ability to be productive, or not cause inflation. Here’s a radical exercise: let’s assume the government raises no taxes. The government is completely funded through the creation of new money. Would this cause inflation? Or do we trust the government to spend the exact amount to be productive? Even by the current definition of inflation this would cause a rapid rise in prices. Take Rand Paul’s yearly Waste Report as a small example of government spending record.

Now, let us come back to reality. Although we may not see the effects of inflation in our basket of goods, we know it still exists. It’s easy to forget inflation is occurring because we are not directly affected by it. Some will say, “The prices don’t rise because the new money just sits in banks!” First, if the “just sits in banks”, as if it’s not doing anything, then why create it? Second, money sitting in banks is called reserves. These reserves allow for commercial banks to lend more money. At the same time, new money can be used for open market operations. This means the Federal Reserve can directly buy assets to keep their prices from falling.

Increasing lending and propping up asset prices stimulate the economy, in a Keynesian world. So, if new money is entering the economy and it is not resulting in a rise in CPI, then where is it going? Wages are stagnant, consumer savings are near-zero, and consumer debt is snowballing. Yet, corporate valuations are at an all-time high. Wealth is accumulating at the top and we will continue to feel the effects of this inflation through increasing wealth inequality.

Unfortunately, many top economists will continue to rely on CPI as their indication of productive deficit spending. And yet, ironically, these will be the same economists to deride wealth inequality while attributing it to the greed of corporations and billionaires.

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