4 ms·
It's not just the money supply, but the "velocity of money" [1] that matters. If the Fed prints 1 trillion dollars and gives it to me, but I keep it in my base
by gamegoblin 6y ago
It's not just the money supply, but the "velocity of money" [1] that matters.
If the Fed prints 1 trillion dollars and gives it to me, but I keep it in my basement and never spend it, why would inflation be expected? The velocity of that money is zero, hence its impact on prices is zero.
Inflation rises relative to the money supply multiplied by the velocity of money.
[1] https://en.wikipedia.org/wiki/Velocity_of_money https://en.wikipedia.org/wiki/Velocity_of_money
- geitir 6y agoBut now you have 1 trillion dollars so my money is deflated at your whim to use it
- eloff 6y agoAnd if that money is used to purchase financial instruments, say bonds, from investment banks and hedge funds, those funds then have money to put into other bonds or stocks, both of which have risen spectacularly in price. The velocity of money may still be low in this case, but asset inflation happened. It may be that the money hasn't trickled out into the real world in large enough quantities to cause inflation yet.
- ric2b 6y agoOk, I get your point, but in practice printing this much money is going to also increase the velocity, is it not? Who's going to just keep $1T in a vault and let it rot for a century? And if we expected that to happen, why even print it?