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Paul Krugman losing his mind..."Deficits Matter Again"

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    Schmidt Wrote: My point in bringing up the Venezuela example was not to suggest that we should have any fear of hyper inflation happening in the USA, but rather to argue the point that rampant spending without a responsible fiscal policy on revenue generation does have it's limits. Venezuela's currency decline is not a result of an attack by an outside group of speculators like Soros, but rather an incompetent understanding of monetary theory and fiscal spending by Socialist president Nicolás Maduro. It started with Hugo Chavez and his Bolivarian Revolution, but Maduro is digging that hole even faster and deeper. We can expect a complete collapse of the Venezuelan economy soon.

    Krugman is not arguing that Trump's deficits will cause inflation. He's saying it will raise interest rates that will slow down the economy, not hyperinflate it. He thinks higher rates are deflationary. That's also incorrect. So he's just wrong all over the place.

    Now, it's just wrong to say that government deficits/surpluses cause uniform increase/decrease inflation. Government deficits do not necessarily correspond to total spending increases. Inflation is driven by the prices paid and/or offered by government (directly and indirectly) at the margins. You can't say that increases in government deficits corresponds to inflation rate increases, because government deficits do not correspond with total spending levels. Most obviously, GDP could fall and government deficits could go up, and the price problem at that time would be deflation, not inflation. Conversely, GDP could go up and government deficits could fall, and the price problem would be inflation. Government deficits probably do correspond with inequality levels given the higher marginal propensities present in the income distribution; so in all long-term irony, the people probably actually fighting for lower deficits in the U.S. are the progressive MMT'ers.

    Venezuela operates a highly regulated fixed exchange regime. They import a lot of basic stuff that they purchase with U.S. dollars, which they get from selling oil. Their fixed exchange regime is not normal, and its coupled with capital controls and other direct government interference and price controls, etc. All of this is poorly managed and has the effect of reducing the value of the Venezuelan bolivar in terms of US dollars. Meanwhile, with the depressed oil prices, they are receiving less US dollar revenues to buy and import stuff; and the shortages of the stuff they import is hyperinflating domestic prices.