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Printing money != inflation - at least given a modern understanding of inflation, where inflation is defined as a change in the price level. What is it that ca

Printing money != inflation - at least given a modern understanding of inflation, where inflation is defined as a change in the price level. What is it that causes prices to change? Ultimately, prices in the real economy are changed by producers and vendors based on signals that they receive. The only signals that really matter in that regard are (a) cost of supply and labor, and (b) demand for their product. So now we have all these trillions of US$ in as-good-as-money floating around, but they are essentially stationary wealth deposits, which is why we are not seeing inflation. What if this changes? This is where I believe most people become confused. If the owners of those as-good-as-money treasuries suddenly decided that they'd rather own paper money as opposed to treasuries, then the US treasury would have to print the required paper money without there being any inflation at all. Instead of non-moving treasuries there would now be non-moving paper bills - there is no difference (except that treasuries pay a little bit of interest). So clearly it cannot be the printing of paper that causes inflation. However, if those people then decide to go on a spending spree, then it is quite possible that the additional demand drives prices up in the real economy. So it is the huge reservoir of wealth that, if it were suddenly released, could cause inflation. If that's what you're worried about, then you have to think about ways to get rid of that wealth. Taxing the rich, perhaps?

richcollins 14y ago
If the fed printed 10x the current money supply in dollars and handed them out to everyone, prices wouldn't change?
- nhaehnle 14y ago
  Clearly in this scenario, people would have more available money and therefore likely spend more. This additional spending could cause inflation. This is very different from what InclinedPlane was talking about, namely paying back the debt by just printing money. And I'm not just talking theory here, but empirical observation, because this has already happened! That's what QE is all about. The Fed creates a lot of money to buy treasuries, which is (from the perspective of the private sector) equivalent to printing money to pay back the debt. That hasn't caused inflation, and the reason for that is very simple. From the point of view of the private sector, exchanging treasuries for money is simply an asset swap. It minimally affects the yield curve, but that's it. The purchasing power of everybody stays the same, and therefore aggregate demand stays the same, hence no inflation. Compare that to your scenario, in which the purchasing power of everybody is increased significantly, hence most likely aggregate demand would increase significantly, likely causing inflation. Very different scenarios with very different outcomes. To sum it up: printing money is not inflationary. Spending can be inflationary, but then it doesn't matter who is doing the spending (imagine the richest 500 people in the US suddenly spending all their wealth - that would cause quite the spike in inflation!).
  - richcollins 14y ago
    OK so by your logic everyone in my scenario that would have received the cash could instead create pieces of paper that are promises to pay back the money and sell them to the fed. Would this still constitute an "asset swap" that doesn't create inflation. The problem is that new money was created to buy relatively worthless assets, increasing the money supply and decreasing the relative wealth of dollar holders to those that the fed bought "assets" from. Once the banks spend this money, the latent inflation occurs and prices increase, making everyone that had dollars poorer relative to those that received the fed bailout.

richcollins 14y ago

If the fed printed 10x the current money supply in dollars and handed them out to everyone, prices wouldn't change?

nhaehnle 14y ago
Clearly in this scenario, people would have more available money and therefore likely spend more. This additional spending could cause inflation. This is very different from what InclinedPlane was talking about, namely paying back the debt by just printing money. And I'm not just talking theory here, but empirical observation, because this has already happened! That's what QE is all about. The Fed creates a lot of money to buy treasuries, which is (from the perspective of the private sector) equivalent to printing money to pay back the debt. That hasn't caused inflation, and the reason for that is very simple. From the point of view of the private sector, exchanging treasuries for money is simply an asset swap. It minimally affects the yield curve, but that's it. The purchasing power of everybody stays the same, and therefore aggregate demand stays the same, hence no inflation. Compare that to your scenario, in which the purchasing power of everybody is increased significantly, hence most likely aggregate demand would increase significantly, likely causing inflation. Very different scenarios with very different outcomes. To sum it up: printing money is not inflationary. Spending can be inflationary, but then it doesn't matter who is doing the spending (imagine the richest 500 people in the US suddenly spending all their wealth - that would cause quite the spike in inflation!).
- richcollins 14y ago
  OK so by your logic everyone in my scenario that would have received the cash could instead create pieces of paper that are promises to pay back the money and sell them to the fed. Would this still constitute an "asset swap" that doesn't create inflation. The problem is that new money was created to buy relatively worthless assets, increasing the money supply and decreasing the relative wealth of dollar holders to those that the fed bought "assets" from. Once the banks spend this money, the latent inflation occurs and prices increase, making everyone that had dollars poorer relative to those that received the fed bailout.