Imagine the following two similar casesCase 1:
Imagine that gold is found on US government land equal to all the gold currently held in the world and that it is easy to recover at minimal cost. The Treasury will soon be selling off rights to this gold and spending the money it makes from the sale.
The Treasury finds a vault with $2 bills that were printed under the Carter administration equal to the total current US base money supply. After legal challenges, the supreme court determines that the Treasury is free to spend this money. Since they are spending more than they get in taxes, they start spending it right away.
We should expect that if there is twice the gold in the world the value of each unit will go down relative to other goods. We should expect that if there is twice the US dollar base money supply that the value of each unit will go down relative to other goods.
Now it could take some time to get to these results but in the end this is what we should expect.
Using common sense we can see the two situations are similar and should have similar results. After years of training, many economists no longer have common sense.
Economists who think that the central bank can make money without causing inflation think that the central bank can take the money back out of circulation. Sometimes this is true, but not always when it is buying government debt and the total government debt is growing fast. The central bank can sometimes find there are no buyers for government bonds. Forcing a government that was spending twice what it gets in taxes to tighten its budget so much that it can start paying down its debt is not really within the power of a central bank. The people running the central bank are appointed by the government and can be changed. The laws the central bank operates under are made by the government and can be changed. In practice, the central bank will often not be able to withdraw the money it has created. When this happens, instead of admitting their error, the economists say the people in government or the central bank were corrupt or incompetent. They ignore all the data that contradicts their theory. That is not how real science works.
You can also look at it as the Treasury spends money it gets from bonds it makes out of thin air and the central bank buys bonds with money made out of thin air. Together this lets the government spend money out of thin air.
This post is due to questions by Tom Brown here and here. Thanks Tom for good questions.