Hypothetical on the role of money, inflation and the zero-sum aspect

[Terxpahseyton]

Let's suppose the following: There is a national lottery. However, it is not the usual kind, but one where one doesn't pay anything to take part and where every citizen mandatorily takes part. The national lottery will determiner one citizen out of every 100 as a winner and the winners will receive 20k dollars or Euros or some rough equivalent in whatever national currency. The catch is that this money will not as usual be created by debt, but will literally simply be printed and then handed out to the winners. No strings attached, just created out of nothing and handed over.
Let's further suppose that the financial market, Dagobert Duck and everyone else will not mind this unorthodox way to distribute currency.

What would be the effect? Would material wealth be somehow stimulated by this hand-out? Would it just mean that due to inflation the winners simply get a larger piece of the national cake? Or something entirely different?

 

[Borachio]

But why not give everyone $200 and save on the lottery overheads?

That would certainly stimulate demand as most people would spend it.

Would it kick start the economy; is that what you're asking? And would it cause inflation?

I simply don't know.

 

[Terxpahseyton]

I thought about your proposal, but for two reasons I prefer my version:
(1) 20k can cover a far wider range of products and services than 200. Hence, I suggest that the focused distribution of 20k would benefit a more wider range of the economy than 200 bucks for everyone.
(2) It makes the hypothetical more interesting, because more questions come into play

 

[Borachio]

That's interesting. But then some of that $20000 I'd save for a rainy day.

 

[strijder20]

I'm pretty sure that printing money and thus rising the offer of money creates inflation.

 

[WindFish]

I'm pretty sure that printing money and thus rising the offer of money creates inflation.

Depends really on whether or not money is being taken out of the economy

 

[Cutlass]

This happens once? Then it is so far below what could actually rate the name of trivial that no one other than the recipient will ever notice it.

Now in theory is this inflationary? Yes. The reason new money creating is backed by debt purchase is to balance the equation so that there's less price pressure.

 

[innonimatu]

What would be the effect? Would material wealth be somehow stimulated by this hand-out? Would it just mean that due to inflation the winners simply get a larger piece of the national cake? Or something entirely different?

It would entirely on the overall situation where and when such a thing happened.

For example, if it happened now in the most indebted countries of Europe I have no doubt that the money would create extra demand: even if it were used to pay existing debt it would free up buying power otherwise compromised in the attempt to repay the debt. Should it happen in any country where the effects of unemployment and low wages have created repressed demand, it will increase demand. Whether it caused inflation or not would depend on the capability to satisfy that demand. Given both the unconstrained trade situation (so long as there is cash on hand) and the idle capacity in those places, inflation would be unlikely unless the money dump continued to happen many, many times. The key thing in this "globalized" world is that inflation in easily tradeable goods happens worldwide or not at all. That's why the bogeyman of inflation so often invoked by economists/politicians is usually a blatant lie. Small increases in income in one country are one drop in an ocean.

If it happened in exporting countries with existing high savings rates odds are that most of this money would likewise be saved. At extremely low interest rates. Which would make the issue of what to do with all that parked money even more pressing...