Reply To: Monetary Inflation/Deflation


1. If Joe had a plausible investment project like the iPhone or a cure for cancer, he would have obtained funding in the capital markets. It’s capitalist who use economic calculation to weigh the different investment projects for which the entrepreneurs seek funding (of course an entrepreneur can be a capitalist by self-funding his projects). Outside of the market, we can’t tell whether or not a particular project generates a net gain to society. Furthermore, government bureaucrats can’t use economic calculation to select from among the investment projects that clamor for state funding.

2. The Fed uses its interest income (earned on securities that it buys via open market operations and then holds onto) to fund its own expenses. By law any surplus must be returned to the Treasury department.

3. Credit money is a claim to money itself that the government promises to make redeemable for money on demand at par but the claim is currently not so redeemable. It does not have to be a debt instrument. So, no substituting credit money for fiat money in your example wouldn’t change anything.

If by credit money you mean a money substitute (like a checking account), that too would not affect the analysis.

One element you have not mentioned in your scenario is money demand. Since each dollar of money can be spent over and over again during some period of time, the array of demands across the economy are not strictly limited by the amount of money. The $1,000 may generate tens of thousands of dollars of spending during a year’s time. The effect on the array of prices, then, depends upon both the money stock and the demand to hold money.