Inflation effectively taxes savers by reducing their long-term purchasing-power and spoils the amount of real interest that fixed-rate savings yield. It also cheapens the money that is already owed, so the Government, mortgagees and other creditors benefit after the inflation has caused the prices and wages to rise. (This applies to most forms of credit, unless the loan was linked to the cost of living or to a more stable currency.) The inflated prices also reduce trade with foreign countries making it harder to sell goods abroad, whilst the cheaper local money makes it easier to import them. This effect on international trade worsens the production situation at home, until the exchange rate of the local currency is eventually devalued and the amount of trading may return to its previous level.
The Government can use this income in the four direct ways for relieving the effects of the slump. These are for subsidizing pensions and/or production and keeping low the price of certain basic goods, for national projects by hiring building-constructional and other unemployed workers (their incomes minus taxes to exceed their previous doles), for keeping its ministries at full strength or for lending to the banks. The new money is injected at a steady rate and on a scale where it regularly covers the losses from some or all of the hardships listed above. Unless the effects of all four of the problems are restored in a uniform manner to their former conditions, the slump will not be fully relieved. Even so, the adverse and unstable effects of the inflation itself remain to be tackled. After the inflation has ceased, the additional money in circulation eventually causes the prices and wages to catch up. Consequently, this form of slump relief will not endure without it creating further distress.
3.2.5 Comments and Summary of the Direct Methods
By using of any of these four straight-forward techniques, the Keynesian School of economics claims that the resulting initial increase in demand causes more macro-economic activity to follow. There is supposed to be a multiplier-effect on growth, so that in the case of reduced taxation and greater personal income, it is thought that the consumers have more money to spend or invest and that consequently the total demand grows. But these claims do not consider the need to take money from one part of the system in order to supply it to another. The newly increased demand and its opportunities are balanced by the smaller number of jobs that the Government now continues to maintain. Reduced taxation of the productive process cannot affect the total numbers employed.
The producer/worker/consumer/saver model on which Keynesian Theory is based is over-simplified and limited in its scope. It fails to properly represent the whole social system and also (incidentally) the implied time interval of this model is uncertain. With the inclusion of the negative multiplier-effect of the lost Government jobs, the overall benefit is zero. The writer (and others) has built a more comprehensive simulation-model of the system, where the overall multiplier is a few percent per annum and not the few hundred that was originally reckoned. Thus the Keynesian Theory does not work in practice.
The same situation arises when the Government borrows money from the public. Some of the money that the investors lend would otherwise be available for use in industry. With the new bonds issue, the industrialists do not obtain the same encouragement for their activity as when the investor's choice was limited to the stock-market. The Government investment results in more employment there, but this advantage is in one place only and there is an equivalent reduction of investment and employment in the rest of industry.
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