Note that the title of this post doesn't say "only deficit spending is inherently inflationary," which is the prevalent conception among laypersons, commentators, and even many economists. In the interest of keeping the preceding post from being any longer that it is, I glossed over the relationship between government spending, deficits, and inflation. This post fills the gap.
Suppose government arrives on the scene one fine day and says: "You Americans need our services, so we're going to tax you $2 trillion in order to provide things that we want you to have." A few of those things -- such as defense and justice -- will be worth something to almost everyone. Some of those things will be valued only by persons who want someone else to pay for them. Most of those things will be heavily regulatory and thus will detract from GDP. To assume, as I do in this example, that the $2 trillion is effectively thrown away is to be generous to government.
Government's edict has the same effect as if the producers of $2 trillion worth of valuable goods and services walk off the job. (More accurately, it's as if they walk off the job and begin to vandalize homes and businesses.) Only, in this case, government entices them off the job with $2 trillion in "tax dollars." But the the taxes are an illusion.
When the producers of $2 trillion worth of real output walk off the job, at the behest of government, it is as if government were destroying real output. But government pretends that it's producing $2 trillion worth of real output, so (1) it levies taxes for government services, most of which taxes fall on the productive sector, and (2) it pays producers of government services from those taxes.
But the producers of real output know what's happening, so they raise prices by enough to compensate for the taxes they're paying. And government collects those "empty dollars" in the form of taxes. Why are those tax dollars "empty"? Because they don't represent real output, government having destroyed the same by enticing producers out of the real economy.
In sum, government pays the producers of government services in "empty dollars," which those producers then try to spend on real output.And so we have $12 trillion chasing $10 trillion worth of real goods and services.
That's real inflation. No deficit spending necessary. And it happens every time government finds a way to widen the gap between what the productive sector could produce and what it actually produces, after government has worked its will.
What if government were to borrow the $2 trillion instead of raising taxes by $2 trillion? Borrowing doesn't change the outcome, just the way we get there. It's still as if the producers of $2 trillion worth of valuable goods and services walk off the job. Only, in this case, government entices them off the job with $2 trillion that it calls "borrowing" instead of "taxes." Again, if the producers of $2 trillion simply walk off the job, that leaves a real GDP worth $10 trillion. This time, however, the producers of that output don't raise prices to compensate for taxes; they raise prices to capture the $2 trillion that government puts in the hands of producers of government services. The result is as before.
Here's another way to look at it: Taxation results in supply-side inflation, as producers of real output raise prices to compensate for taxes; borrowing results in demand-side inflation, as producers of real output raise prices as government injects new money into the system.
When government enters financial markets for additional funds, that raises the demand for money. The usual result would be higher interest rates, which would tend to dampen private investment and consumption to some degree.
However, when government borrows instead of raising taxes it leaves nominal dollars in the hands of the private sector. Some of those dollars flow into financial markets, thus increasing the supply of money.
The next time someone tells your that taxes should be raised in order to be "fiscally responsible" and to stem the tide of inflation, tell him this: Government spending is inherently irresponsible because it reduces real output. And government spending is inherently inflationary, not matter how it's financed.