Posts Tagged ‘Government Money’
Monday, April 4th, 2011
Excess demand is not merely the result of people wanting more: they must also have more money with which to buy, thus driving prices up. For society in general (consumers, businesses and governments) to be spending more money, there must be more money in circulation – the money supply must rise. Any period of rapid inflation is accompanied by rapid increases in the money supply. And, as we have seen, the growth of the money supply is controlled by the Bank of Canada, which is ultimately responsible to the federal government. Thus, the key factor underlying the rate of inflation – the money supply – is in the final analysis determined by the federal government. In determining its monetary policy, however, the Bank of Canada is not concerned solely with combating inflation. In particular, we have seen that increases in the money supply (easy money) can be used during recessions, to reduce unemployment. While easy money policies can help to lift the economy out of recession, there is a danger that the government will boost the money supply too quickly and/or for too long a time. Of course, this will result in a new surge of inflation, but only after a time lag.
Experts in the monetary aspects of economics say that if the money supply is increased excessively rapidly, inflation will probably begin to increase after about a year and will continue to work its way through the economy for another two years more. Thus, while rapid increases in the money supply may look like a good idea to a government faced with a recession and high unemployment, they are all too likely to cause a much worse inflation problem in the future. An excellent example of this was in Canada, where rapid increases in the money supply in 1972, 1973, and 1974 led to a very serious wave of inflation in 1973 and beyond. Following this experience, the Bank of Canada undertook to keep the rate of increase of the money supply within specified limits.
Generally then, the level of aggregate demand for goods and services is the key factor underlying the rate of inflation. Generally, inflation tends to be most severe during economic booms, when demand is high, and less severe during recessions, when demand is sluggish.
The growth rate of the money supply is, over time, the single most important determinant of the inflation rate.
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Tags: Aggregate Demand, Aspects Of Economics, Bank Of Canada, Circulation, Consumers, Easy Money, Excess Demand, Federal Government, Government Money, Governments, Inflation Problem, Monetary Aspects, Monetary Policy, Money Supply, Rapid Increases, Rate Of Inflation, Recession, Recessions, Time Lag, Unemployment
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Sunday, March 7th, 2010
Another way to raise the funds for federal budget deficits is to create new money (the popular term is print money) for the government to spend. While a growing economy requires a larger volume of money in circulation (called the “money supply” by economists), it is dangerous to increase the money supply too quickly. The inevitable result of such a policy would be severe inflation, as the excessive amount of money in circulation forces prices up rapidly. Thus, while it may be tempting for the government to simply “print money” to finance its budget deficits, this should be done only within limits, so as to avoid increasing the money supply by more than the economy can absorb without rapid inflation.
*The government does not actually physically print new money for itself to spend. The process is more subtle than that, and will be examined in detail. However, the economic effects of such a policy are such that it can reasonably be described as “printing money.”
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Tags: Amount Of Money, Auto Finance, Circulation, Economic Effects, Economists, Economy, Federal Budget Deficits, finance, forex, Government Money, Inevitable Result, Inflation, Money Supply, New Money, Print Money, Printing Money
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Thursday, March 4th, 2010
The government can raise the necessary funds by borrowing them – by selling government bonds to the public, banks, insurance companies, pension funds, investment funds and other financial institutions. By doing this, the government can, in effect, “mop up” savings that are not being used for capital investment and inject them back into the spending stream as government spending.
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Tags: Banks, Borrow Money, Capital Investment, Financial Institutions, forex, Government Bonds, Government Funds, Government Insurance, Government Money, Government Spending, Insurance, Insurance Companies, Investment Funds, Mop Up, Necessary Funds, Pension Funds
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Wednesday, February 10th, 2010
One reason for government borrowing is to finance the purchases of “social assets,” such as roads, hospitals, schools, public buildings and airports. Since these assets are too expensive to be paid out of the current year’s tax revenues, the government borrows the money to pay for them – just as households borrow to buy cars and houses, and businesses go into debt to purchase capital equipment or build facilities that are too costly to pay for out of current income. In each of these examples, the benefits of the asset purchased will be received over a period of years in the future.
It is important to remember that the national debt does not include the debt load of provincial or municipal governments nor should the national debt be confused with the federal deficit, which reflects only the annual increase in the national debt and not the accumulated total.
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Tags: Airports, Auto Finance, Borrow Money, Buy Cars, Current, Debt Load, Federal Deficit, Federal Government, Federal Money, finance, forex, Government Money, Hospitals, Households, Municipal Governments, National Debt, Public Buildings, Reason, Social Assets, Tax Revenues, Winnipeg
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Thursday, February 4th, 2010
While it is true that the net federal government debt rose from about $3 billion in 1939 to over $22 billion by 1975. In practice, it is common for budget deficits to be financed by a combination of borrowing and “printing,” a practice that can be economically beneficial as long as the “printing” of money is kept within reasonable limits.
Part B: The National Debt
We have seen that the use of government fiscal policy to stimulate the economy during recessions requires that the government borrow money (mostly through bond issues) in order to finance its budget deficits. The total amount of federal government debt thus incurred – the amount of money owed by the federal government – is called the “National Debt.” By 1983 the National Debt will amount to over $100 billion, or nearly $4000 for every man, woman, and child in Canada.
The National Debt has, over the years, been the subject of a great deal of misunderstandings, fears, myths and political hypocrisy. Many Canadians believe, for instance, that the National Debt is owed to other countries and that Canada may go bankrupt because of it. Both of these are myths. On the other hand, few Canadians appreciate the real dangers concerning the National Debt. We will examine first the myths, then the real dangers.
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Tags: Amount Of Money, Auto Finance, Bond Issues, Borrow Money, Budget Deficits, Canadians, Economy, Edmonton, Fears, Federal Government Debt, Fiscal Policy, Government Money, Hypocrisy, Keynesian Policies, Man Woman And Child, Misunderstandings, Money Owed, Myths, National Debt, Printing Money, Recessions, Woman And Child
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Wednesday, September 23rd, 2009
One reason for government borrowing is to finance the purchases of “social assets,” such as roads, hospitals, schools, public buildings and airports. Since these assets are too expensive to be paid out of the current year’s tax revenues, the government borrows the money to pay for them – just as households borrow to buy cars and houses, and businesses go into debt to purchase capital equipment or build facilities that are too costly to pay for out of current income. In each of these examples, the benefits of the asset purchased will be received over a period of years in the future, so it is considered appropriate to borrow to buy them and repay the loan in the future.
Another reason for federal government borrowing is to finance budget deficits to combat recessions. Thus, the federal government’s responsibility for minimizing the effects of recessions sometimes requires it to go into debt. Historically, another major reason for government borrowing and increases in the National Debt has been the financing of wartime expenditures. For example, the Second World War added over $10,000,000,000 to Canada’s National Debt.
Each of the above is generally considered to be a legitimate reason for borrowing by the government. However, ordinary operating expenses of the government,such as its payroll, should be paid for by tax revenues. It is not considered to be good financial practice to borrow (or even worse, print) money to cover operating expenses, or to avoid a necessary increase in taxes for political reasons, any more than it is considered appropriate for households to go into debt to pay their telephone or food bills.
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