How does the budget deficit increase the money supply
The sharp increase in national debt in relation to GDP in the wake of the financial crisis has brought the connection between national debt or national deficit and monetary policy back to the center of public interest. Behind this is the fear that excessive national debt will create incentives for an inflationary policy - because surprising inflation can be used as a means of debt relief.
Dr. rer. pol., born 1955; Professor of Macroeconomics at the Ludwig Maximilians University Munich, Seminar for Macroeconomics, Ludwigstrasse 28, 80539 Munich. [email protected]
There are many episodes in history in which there was a sharp rise in national debt, which ultimately ended in hyperinflation (with inflation rates of 50 percent per month and more).  In order to exclude this possibility, the independence of the European Central Bank (ECB) was expressly guaranteed in the Maastricht Treaty when the European Monetary Union was founded and a ban on direct state financing by the ECB, i.e. the direct acquisition of government bonds on the primary market, was formulated. In addition, tight limits were set for the level of debt and new indebtedness: the nominal public deficit should not exceed three percent of GDP, the public debt ratio, i.e. the share of domestic public debt in nominal GDP, should not exceed 60 percent.
Since the beginning of the financial crisis, the national debt ratios have risen sharply worldwide. In the euro area, the ratio of public debt to the economic power of states rose from 72 to 106 percent between 2007 and 2013; in individual countries the increase was even more dramatic. During the same period, central banks around the world massively expanded their monetary base (illustration 1). The US Federal Reserve, for example, expanded the provision of central bank money to 500 percent from September 2008 to the end of 2015 and in return bought mostly long-term US government bonds. For a long time, the expansion of the central bank balance sheet in the euro area was significantly lower than in the USA, Great Britain and Switzerland. It was not until March 2015 that the ECB also began a quantitative easing program.
In view of the high government deficits in the wake of economic stimulus programs and the massive expansion of the monetary base by the central banks, many critics have long warned of an imminent danger of inflation. However, these fears were not confirmed by the end of 2015. So far, inflation rates have remained at a low level and are even falling sharply in many countries. The inflation rates expected for the next five to ten years - whether determined by surveys of financial experts or based on market data - were below two percent at the end of 2015.  This is also reflected in historically unusually low interest rates for long-term government bonds.
Why do we observe so completely different developments in historical comparison? Why does high national debt lead to excessive inflation in some cases, such as in Germany in 1922/23, while in other cases such as in Japan in the past two decades or in many industrialized countries a sharp rise in the debt ratio since the beginning of the financial crisis, neither hyperinflation nor long periods of time? follow high inflation rates? On which factors does it depend whether high national debt really leads to inflation?
- What is Venture Capital and Private Equity
- Why aren't more people doing estate planning
- What old superstitions were actually true
- What font style is Tahoma
- Who was the first DG of the NCC
- Yoga actually calms your mind
- What are the best practices for SugarCRM
- What is an electrical generator waste
- We have a brushless generator
- How do I find events
- How do I derive this physical equation
- What is LoRa
- Where can I find metallurgy and books
- Should I buy a GT 1030 2GB
- How do scientists study the universe
- Being too clean can actually cause disease
- What are some potentially life changing quotes
- What kind of website would make billions
- Prokaryotic cells have crystals
- What are some high quality brands of fishing reels
- Is Mysore an overrated city
- What English songs make you cry
- How do PPC and SEO work together
- What are some natural pain relievers
- Should religion influence environmental policy
- What is our methodology
- Which market to enter first
- Are luxury apartments worth it
- What is titanium oxide
- What is the facebook debugger
- How long will I be provided
- What is an Itinerary
- How do I do Mawa
- What is Calcutta University's RTI