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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.

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.