Money creation only causes inflation if a) the money is spent and b) aggregate supply is constrained e.g. by full employment. QE doesn't cause inflation even though it increases the money supply.
To see why, let's suppose you have a $100 investment portfolio with $10 in cash and $90 in stocks+bonds, then the government comes along and does QE (swapping bonds for newly-printed cash), and now you have $20 in cash and $80 in stocks+bonds. BUT you still want that original 10/90 allocation because that's the portfolio structure you had decided was best, so you immediately buy more stocks+bonds with the $10 cash you just got. Now imagine the entire world is one giant investment portfolio with a specific target allocation to the various asset classes, and it's obvious how increasing the supply of cash must also increase the dollar prices of "everything but cash". In this manner QE sends asset prices into the stratosphere, and indirectly turbo-charges financial activities like private-equity buyouts, without creating inflation in "consumer prices".
The pandemic-era measures did cause inflation because the government sent cash stimmy checks to average people who were quite likely to spend it, at the same time as supply was constrained by a multitude of factors: a tight labor market, WFH inefficiencies, rolling lockdowns including occasional huge ones in China, restricted international travel, direct effects of workers out sick, etc.
You are correct that increasing taxes is a means of fighting inflation, but there are many practical issues. Tax rises in and of themselves are very unpopular (much more so than rising interest rates), and the tax rises would have to be very regressive and applied to consumption rather than to the wealthy or to capital etc. A nationwide VAT which can be raised and lowered directly by the Fed would be effective, but is politically a non-starter.
Thanks for that thorough explanation. The argument isn't that that checks can't cause inflation. It's that the supply shocks were the major factor in why they caused inflation, just as you noted. It's also that, as those issues resolve over time and as supply catches up with demand, inflation will moderate, and therefore the effects of interest rate hikes are negligible given these circumstances. It's also that there are a lot of additional things going on in the modern economy which are keeping prices elevated which interest rates cannot control. I wish these issues were discussed more openly and intelligently in the media but, sadly, they are not. Certainly, if you go online, "government money printing" is the all-purpose explanation that everyone seems to accept, despite a lack of evidence.
As for the taxes argument, yes, I am aware of that. But consider: If the optimal method to deal with inflation is simply impossible to accomplish due to political realities, then what does that say about our modern capitalist economies? I think the implications of this are profound and nobody is really thinking through the ramifications.
Am enjoying this dive into economics though it's something I've never been interested in. Again and again it's shown that economists are living in another world.
Money creation only causes inflation if a) the money is spent and b) aggregate supply is constrained e.g. by full employment. QE doesn't cause inflation even though it increases the money supply.
To see why, let's suppose you have a $100 investment portfolio with $10 in cash and $90 in stocks+bonds, then the government comes along and does QE (swapping bonds for newly-printed cash), and now you have $20 in cash and $80 in stocks+bonds. BUT you still want that original 10/90 allocation because that's the portfolio structure you had decided was best, so you immediately buy more stocks+bonds with the $10 cash you just got. Now imagine the entire world is one giant investment portfolio with a specific target allocation to the various asset classes, and it's obvious how increasing the supply of cash must also increase the dollar prices of "everything but cash". In this manner QE sends asset prices into the stratosphere, and indirectly turbo-charges financial activities like private-equity buyouts, without creating inflation in "consumer prices".
The pandemic-era measures did cause inflation because the government sent cash stimmy checks to average people who were quite likely to spend it, at the same time as supply was constrained by a multitude of factors: a tight labor market, WFH inefficiencies, rolling lockdowns including occasional huge ones in China, restricted international travel, direct effects of workers out sick, etc.
You are correct that increasing taxes is a means of fighting inflation, but there are many practical issues. Tax rises in and of themselves are very unpopular (much more so than rising interest rates), and the tax rises would have to be very regressive and applied to consumption rather than to the wealthy or to capital etc. A nationwide VAT which can be raised and lowered directly by the Fed would be effective, but is politically a non-starter.
Thanks for that thorough explanation. The argument isn't that that checks can't cause inflation. It's that the supply shocks were the major factor in why they caused inflation, just as you noted. It's also that, as those issues resolve over time and as supply catches up with demand, inflation will moderate, and therefore the effects of interest rate hikes are negligible given these circumstances. It's also that there are a lot of additional things going on in the modern economy which are keeping prices elevated which interest rates cannot control. I wish these issues were discussed more openly and intelligently in the media but, sadly, they are not. Certainly, if you go online, "government money printing" is the all-purpose explanation that everyone seems to accept, despite a lack of evidence.
As for the taxes argument, yes, I am aware of that. But consider: If the optimal method to deal with inflation is simply impossible to accomplish due to political realities, then what does that say about our modern capitalist economies? I think the implications of this are profound and nobody is really thinking through the ramifications.
Am enjoying this dive into economics though it's something I've never been interested in. Again and again it's shown that economists are living in another world.