Prior to 1980, the world was simple and it made sense.  When the government ran deficits, the Federal Reserve then would print money to pay for them.  This money printing would cause inflation, and inflation would push up interest rates.  The whole process was captured in the simple equation below.
  Deficits = Money Printing = INFLATION = HIGHER INTEREST RATES
  In the graphs below, you can clearly see the link between Federal deficits, money supply growth, inflation, and higher interest rates.  Deficits = Money Printing
Money Printing = INFLATION
INFLATION = HIGHER INTEREST RATES Deficits = INFLATION This final graph shows the link between government deficits and inflation pre1980.  The surge in inflation after each major deficit is crystal clear.
The relationship between deficits was well understood
  Below are just a couple of the pre1980 articles stating the common sense link between deficits and inflation. You And The Economy Dollar’s Convertibility Into Gold Could Be 

Dollar’s Convertibility into Gold Could Be Restored, But…

Evening Independent – Google News Archive - Mar 12, 1980 DR. RONALD CAIROLL
President Franklin Roosevelt started the uncontrolled expansion of your money supply in March 1933 when he ended the convertibility of your dollars into gold. Seven presidents, Democrats and Republicans, continued this policy with minor modifications. They and a succession of Congresses gave you the present inflation.
An ounce of gold cost $20 in 1933. Its price recently fluctuated between $888 and $620 and averaged about $700.Before 1933, our government was trying to run A SOLVENT OPERATION. Its aim was a balanced budget. Deficit financing was not its standard operating procedure. It did not print money to cover deficits. Its loans were repaid from surpluses of subsequent budgets. Between 1921 and 1930, these surpluses averaged $800-million annually. The government’s debt, which in 1920, after World War I, was $14.1 billion, in 1930 had been reduced to $16.2 billion. You had no reason to doubt the prudence of our government or the soundness of the dollar. Few of you ever went to the Fed to exchange your currency into gold. But, during the 47 years since 1933, our government’s budgets had surpluses during only seven years. During 40 years, its budgets were in the red. During the last 10 years alone, the federal budget deficits totaled $354-billion.
  The federal debt, which in 1930 was $16-billion, is approaching $900-billion. GROWTH OF THE MONEY SUPPLY PARALLELED THE RISE IN THE DEBT. About a year ago, our government found itself in the embarrassing position that its checks would have bounced, if Congress had not quickly raised its debt ceiling — then to $830-billion. … The Free World’s gold supply is stable — about 32-million ounces annually. When the amount of dollars RISES EVERY YEAR, the consequence is INEVITABLE. The dollar’s value must fall against the price of gold. 


Shifting Policies Have Sometimes Deepened Unemployment, Heightened inflation 


Shifting Policies Have Sometimes Deepened Unemployment, Heightened inflation
Lakeland Ledger – Google News Archive - May 11, 1980
In the view entertained by Jimmy Carter, Ronald Reagan, many other politicians, and many voters, EVERY DEFICIT IS INFLATIONARY.
… In the 1970’s, … inflation has been driven largely by THE PERSISTENCE OF FEDERAL DEFICITS. … 

The Old Politics Of Inflation
  The connection between deficits and inflation is what shaped the debate about deficits in the pre1980.  On one hand you hand pressures from every direction for government spending, and on the other you hand you had the serious danger of inflation forcing restraint.  Below are two of many articles demonstrating this painful political balancing act.
Pressures for government spending VS the serious danger of inflation
  Spenders All 

Spenders AllMontreal Gazette – Google News Archive – Nov 10, 1958
President  Eisenhower’s main declaration after the defeat of his party in the mid-term elections was that he would fight THE INFLATION THAT COMES THROUGH TOO MUCH GOVERNMENT SPENDING. He will take his stand against the spenders. “The Lord sparing me,” he said, “I am going to fight this as hard as I know.”
  It is, in every way, a worthy declaration. But the difficulty is that his own record in office is one of big spending and heavy deficits
THE SORT OF FINANCING THAT HAS MADE FOR INFLATION. The current fiscal year will likely end with a deficit not less than $13 billion.
Nobody questions the sincerity of the President’s declarations regarding economy. He is convinced that HEAVY GOVERNMENT SPENDING IS HELPING TO RUIN EVERYBODY’S DOLLARS. But the very fact that a man with such convictions has been able to do so little to curtail spending and deficits gives cause for wondering President  Eisenhower, like the heads of so many nations in the world, finds that the pressures for spending come from so many peoples and groups that it is politically impossible to refuse them. If too many people find the government cutting down on their requests for this or for that, they may always turn to other parties that offer be more obliging. Not even the free spending of the Eisenhower regime satisfied the feeling of many voters that they might get even more from the Democrats It is not only that President Eisenhower is bewildered by such pressures. The Canadian Minister of National Revenue, Hon George Nowlan, said not long ago that he feels the pressures from every direction for government spending, but does not find many people who are eager to ask for less. The same remark, in almost the same words, was macic by Rt. Hon J. L Jisley. at the time when he was Minister Finance. He once said that he thought was the only person interested in economy. Every plea he ever heard was more and more spending. Why is it, then, that people keep making these demands upon governments, WHEN THEY KNOW THAT THEY ARE WEAKEN THE BUYING POWER OF THEIR DOLLARS WHEN THEY DO SO?

The Politics Of Inflation 

The Politics Of Inflation

Spokesman-Review – Google News Archive – Oct 8, 1967 JOSEPH KRAFF WASHINGTON —
Watching the last inning of the first game of the World Series, President Johnson pulled from his pocket a slip of paper showing the steady rise of interest rates over the last year.
That slip of paper expresses THE TRUE MEANING OF THE FIGHT IN THE CONGRESS OVER THE PRESIDENT’S PROPOSED TAX INCREASE. Basically, the Republicans are trying to delay action on the program to the point that assures a stiff dose of inflation certain to be blamed on the Democrats.
  To understand what this is all about, it is first necessary to develop a sense of the way the country lines up around the proposal for a tax increase. The overwhelming evidence is that most of the country is bitterly against the tax rise. The one big exception is the business community. Having been won over to the new economics in the last few years,
business leaders have declared themselves almost UNANIMOUS FOR HIGHER TAXES AS AN ANTI-INFLATIONARY MEASURE.
  In this situation, the tax increase proposal presented a real danger to the Republicans. … … the Republican leadership in the House developed the strategy of linking support for the tax increase with action by the administration to cut back spending on a massive scale. Thus the Dartmouth College wing of the party could come out for the tax increase provided the administration agreed to pare down spending by from $5 to $7 billion.
In the long run, the administration is likely to get a tax increase without drastic cuts in expenditures. The SERIOUS DANGER OF INFLATION MAKES A COMPELLING CASE. … They [Republicans] are beginning to tick of more in sorrow than in anger the numerous warnings they have issued to the administration on the matter of inflation. In a major floor speech late Tuesday, John Byrnes of Wisconsin, the minority spokesman on taxes in the House, listed laborious detail five such occasions running from February 1966 through June 1667. Behind this emphasis is an obvious tactic. The Republicans believe they can now head off a tax increase until next year. By that time it will probably be TOO LATE TO DAMP DOWN INFLATIONARY FORCES. And so Republicans are getting ready to tag the Democrats with blame for THE HEAVY DOSE OF INFLATION that is on the way. 

Notice how everyone back in 1967 knew that deficits had an immediate, real cost.  There was none of this nonsense of “passing the cost to future generation”.  The price of excessive federal spending was pay by the dollar’s loss of purchasing power over the subsequent 2 to 3 years.

  After 1980, the old, common sense formula underwent a drastic change:
Deficits = Money Printing = NO INFLATION? = LOWER INTEREST RATES?
Deficits = Money Printing
Although the inflation and interest rates came down, the first part of the formula remained the same.  The government never stopped printing money to finance its massive deficits. 
Money Printing = NO INFLATION? 
What did change was that this money printing started producing much, much less inflation, as seen below.
The NEW Politics Of Inflation
Once the one restraining force on budget deficits was removed, the threat of inflation, the results were predictable.  Budget deficits exploded beyond imagination…  
Pressures for government spending VS no cost whatsoever
  These massive deficits, combined with an apparent lack of consequences, slowly gave rise to the idea that, “deficits don’t matter.” The Matter Is: Do Deficits Matter?

The matter is: Do deficits matter?

It’s a question that affects interest rates, taxes and budgets, and isn’t easily answered Milwaukee Journal – Google News Archive - Aug 28, 1983 By Jane Seaberry WASHINGTON, D.C — … DO DEFICITS MATTER?
… It is a problem because if deficits do matter,it could lead to higher interest rates
compelling Congress and the administration to do something about it.
IF DEFICITS DON’T MATTER and don’t necessarily raise interest rates, as some in the administration maintain, then there is NO PRESSURE FOR TAX INCREASES.

Deficits Don‘t Matter? Nonsense 

Deficits don’t matter? NonsenseMilwaukee Journal – Google News Archive - Jan 28, 1989
Can it be that federal budget deficits aren’t very harmful after all? Some unorthodox economists, along with certain leaders of the financial community, are starting to suggest that possibility. They note that
the economy has experienced six straight years of growth even as the government has piled up one large deficit after another.
Deficits obviously will not always lead to a recession. Experience has established that red-ink spending — up to a point, at least — can stimulate economic growth. And
it is widely conceded that a certain level of public debt can be tolerated indefinitely.
  Moreover, it is even proper to pass along some of the costs of governmentTO THE NEXT GENERATION through deficit financing. 

Wow, isn’t that amazing?  After 1980, politicians no longer had to agonize over painful budget decisions: the US could now just print money all the money it wanted without consequences!  Our dollar would stay levitating in the air, defying the laws of supply and demand, while the consequence of massive federal spending were passed on to some distant unnamed “next generation.” 



Ask any good magician how he makes his assistant levitate in the air, and he will tell you there is explanation to it.  It simply is.  If point out he is defying the laws of gravity and there has to be a trick behind it, he will tell you “it’s magic”.  Well, it is the same here too.


There is no official explanation to why deficits and money printing stopped causing inflation.  The treasury’s position on the matter is simply that “deficits don’t matter.” They used to cause inflation, and now they don’t.  Never mind that this defies all laws of economics and common sense.  IT’S MAGIC.

Now, maybe this is acceptable to some people.  Perhaps it is possible an educated adult to believe “everything magically got better” and still have some self-respect. I meant really, if someone thinks Santa Clause is real and that UFOs are “out there”, who am I to judge?

As for me, I DON’T believe in magic.  There ain’t no such thing as a free lunch.  When someone like Madoff promises us something that seems too good to be true, it probably is.  So rather than accepting the treasury’s “deficits don’t matter”, my reaction is to suspect fraud.  MASSIVE, MULTI-DECADE MADOFF-STYLE FRAUD.

… Schools of Thought on inflation

The more money these deficits created, the lower was its value. The less it was worth, the more severe was the inflation.
The law of supply and demand made this inevitable.
  End Of Dollar’s Convertibility Started inflation
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