I know I shouldn’t listen to talk radio, but I do, and I hear some of the dumbest ideas ever. The one I dislike the most is “If we print money it will cause rapid inflation!”.
Lets get this straight: Printing extra money will not cause inflation. The only time in which printing money causes inflation is when our manufacturing ability is at peak production. With the current situation of 20+ million being unemployed, we are nowhere close to peak production, and as such can ‘create’ money.
Obviously once those people are employed again and we get closer to peak production we need to be more conservative with the process.
That’s all.
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#1 by Mike Baxter on August 14, 2009 - 10:57 am
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Not only does printing money cause inflation, it also disrupts the the market, playing havoc with interest rates, and the ability of private enterprise to rationally attempt any serious long-term economic strategy.
If the government’s statistics on interest rates were credible, instead of publishing the “core” rate of inflation, it would be as painfully obvious.
Google “the real rate of inflation” – it is very enlightening.
The government’s inflation stats are at best a joke, and are a deliberate attempt to mislead the public.
#2 by Joshua on August 14, 2009 - 11:12 am
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You are correct that printing money will not cause inflation *right now* because we are not at “peak production”. However, as soon as the economy gets traction again, it will find itself flooded with dollars and THEN inflation WILL hit hard. It may *only* get to 6% but most economists are expecting 9-12% inflation within the next few years.
You simply can’t ignore the more simple law of economics: supply and demand. When the supply of dollars goes up, the value of dollars goes down. Demand is regulated by the fed to minimize the effect of inflation and unemployment, but that balance (and the public) usually favors inflation.
Sorry to break it to you — we will be seeing inflation like we haven’t seen in 30 years.
#3 by Adhemar on August 14, 2009 - 12:24 pm
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Where did you get the ridiculous idea from that printing money only causes inflation is when the manufacturing ability is at peak production?
If that were true, any government could simply keep the manufacturing ability below peak production at all times, artificially if the economy is doing well, and print money every time it needs any. There would be no need for taxes, even.
Due to the government printing a lot of extra money was, there was hyperinflation in Zimbabwe even though production was definitely not at a peak. History can provide other examples as well.
#4 by Ryan on August 14, 2009 - 12:26 pm
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I don’t know where you get your economics schoolin’, but the idea that “the only time in which printing money causes inflation is when our manufacturing ability is at peak production” sounds mighty suspect to me.
Zimbabwe, for example, inflates its currency greatly due to overprinting — and their manufacturing ability is nowhere near peak production, with millions of Zimbabweans unemployed, impoverished, and willing to take any sort of work.
#5 by Ryan on August 14, 2009 - 12:27 pm
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I should clarify to say that I’m not an economist and do not understand economic theory. I’m just surprised by the seeming contradiction.
#6 by alex on August 14, 2009 - 12:51 pm
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From inflation theory:
M * V = P * Q
M = amount of money in circulation
V = transactions velocity of money
P = price level
Q = real value of final expenditures
From above equation: P = (M * V) / Q
Conclusion: If M gets higher P gets higher
#7 by sharms on August 14, 2009 - 1:00 pm
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The fun part of this will be coming to an agreement on the internet — I will try to explain where I am coming from.
First, we need to lose the idea of ‘money’, and instead just use it as an alias for ‘promise to deliver goods or services’.
Right now, millions of workers are under utilized. This is because the jobs they were previously in suffered a decrease in demand. If we print money and spend it, demand will rise across the board. Inflation occurs when people cannot produce goods in a timely fashion because they are at maximum efficiency, or in Zimbabwe’s case when they are unwilling or unable to make such goods.
A fair point is Zimbabwe, but they simply do not have the education or trained workers to produce 1st world goods, and they do not have a fair government in place to counteract that. Comparing governments of drastically different systems results in an apples to oranges comparison, although I am sure there are lessons to be learnt in any situation.
@Mike – I would argue that most inflation equations are incorrect. Some would say that since Coke cost .10 in 1950, and costs 1.25 now (with inferior ingredients), that inflation occurred. I disagree, because the costs of goods and services now is at an all time low. Home ownership and vehicle ownership are at all time highs, and everyone can afford food, cell phones, cable tv, and xboxes. In 1950 I simply could not lead the lifestyle I have now, because my money actually became worth more as the cost of new technology went down.
#8 by sharms on August 14, 2009 - 2:53 pm
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I also encourage anyone interested in my blog post another point of view:
Economics is not a natural science
#9 by Roland on August 14, 2009 - 4:34 pm
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The govt. controls the size of the money supply, but not the velocity. If people stuff their mattresses as fast as it’s printed, nothing changes–until they decide to take that money out & spend it. Then look out!
#10 by Matthew on August 16, 2009 - 4:14 pm
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http://www.nytimes.com/2009/05/29/opinion/29krugman.html
I know some people will instantly dismiss Krugman as a liberal Keynesian wignut, but he’s been right about an awful lot of what’s been going on, so his piece on inflation is worth a read.
#11 by Richard on September 20, 2009 - 9:46 pm
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Printing money may not cause inflation now, but it will in the future when that money is actually circulating in the economy. The worry about inflation is well-founded when you consider that it is difficult to suck that liquidity out of the market once things recover.
A corollary to that point is that printing money now, while it doesn’t lead to inflation, also doesn’t affect consumer behaviour.
An alternative way of phrasing things is: if you print money and give it to banks while they sit on it, nothing happens. No lending occurs, no economic stimulus, and no inflation. When things recover and banks do lend, you will have a sudden surge of inflation unless you suck that money out before. In the end, it’s pretty much a wash no matter what you do.