Thursday 261015

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run

Chapter 29 of 36 Money Growth and Inflation

Section 13 of 29

…

Why do national governments choose to issue so much money certain to create hyperinflation?

The answer is governments use money creation as a way to pay for their spending.

When a government wants to build roads, pay salaries to its soldiers, give transfer payments to the poor or elderly it has to have the necessary funds to pay for these.

…

Government raises funds by

· increasing taxes, such as income and sales taxes

· borrow by selling government bonds to the public

· creating money

Creating money can be considered an inflation tax.

The inflation tax is not like other taxes, because no one directly pays a tax bill.

When the government creates money the price level rises and the dollars you have become less valuable.

…

During the 1770s the Continental Congress of the young United States

greatly relied on the inflation tax to pay for military spending.

Because the new U.S. government had a limited ability to raise funds through regular taxes or borrowing creating dollars was the easiest way to pay the American soldiers.

The government was paying the same amount in nominal dollars but less in real (after inflation) dollars.

As the quantity theory predicts the result was inflation, with prices measured in terms of the continental dollar rising more than a hundred times over a few years.

…

Almost all hyperinflations follow the same pattern.

Government has high spending needs and desires, inadequate tax revenue, and limited ability to borrow.

It resorts to creation of money to pay for the spending.

The huge increase in the quantity of money leads to huge inflation.

The inflation ends when government reduces spending, ending the need for creating money.

… …

hyperinflation

haipāinfurēshon

ハイパーインフレーション

… …

The U.S. federal government has huge annual deficits that have resulted in a huge accumulated debt, why aren’t we experiencing hyperinflation? ChatGPT:

Because large deficits and debt do not automatically cause hyperinflation.

The U.S. finances most deficits by selling Treasury securities to investors, not by having the Federal Reserve simply create enough new money to pay the government’s bills.

The U.S. has a large tax base, deep financial markets, a very large productive economy, and strong demand for dollar-denominated assets, so investors continue lending to the government.

The debt is nevertheless very large, as of October 13, 2026, the U.S. federal government’s total gross debt was about $40.34 trillion

The Congressional Budget Office projects debt held by the public at about 101% of GDP in 2026.

Persistent deficits can create other problems such as higher interest costs and inflationary pressure, but hyperinflation usually requires something more extreme: massive, continuing money creation to finance government spending after normal taxation and borrowing have effectively broken down.

… …

So, as long as investors keep buying Treasury securities there will be no hyperinflation in the U.S.? CGPT:

Broadly, yes, continued investor willingness to buy Treasury securities makes hyperinflation very unlikely, but it does not guarantee it cannot happen.

Hyperinflation would usually require a much deeper breakdown:

-investors losing confidence in government debt and the U.S. currency

-tax revenues failing to cover spending

-borrowing becoming extremely difficult or prohibitively expensive

-the government increasingly relying on money creation to finance its obligations

As long as the U.S. can fund deficits through normal taxation and borrowing, while the Federal Reserve keeps money creation from becoming the main source of government finance, the conditions that typically produce hyperinflation are not present.