Printing Money Causes Inflation?

Oh really now?

It is nearly a law of modern economics that if the government prints money, this automatically causes inflation. It rests on some dubious assumptions, mostly that there is now more money in the marketplace chasing the same amount of good, and that therefore, the new money must cause some sort of demand inflation.

But I reiterate, there is absolutely no ipso facto law of economics that states that printing money automatically causes inflation, lowers the value of one’s currency, or raises interest rates.

Why would printing money lower the value of one’s currrency? It doesn’t. If your currency is backed up by something of real worth, such as gold, I suppose that printing more money would reduce the value of one’s currency. After all, you now have more dollars for the same amount of gold, so the dollar automatically declines in value.

But if your currency is not backed up by anything of any value, it simply has no real and true value whatsoever. It’s worth anything, or nothing, or whatever anyone says it is worth. Therefore, as US currency has absolutely no ipso facto value whatsoever (as it is no longer backed by gold) printing more of it can’t possibly lower its value in the same way as printing more gold-backed currency does.

How might printing money lower the value of US currency? Only in the sense that the value of US currency is determined by speculators on the international currency market. If the US prints more money, this might make speculators feel that US currency is not worth so much in their purely subjective opinion. Hence they may bid down the price of US currency.

But US currency has no real hard and pure value the same way a stock price has no real and pure value. A company’s stock price is worth whatever anyone thinks it is worth. It’s worth 100’s of dollars, or it’s worth pennies, or nothing at all. It’s worth whatever people think it is worth.

Supposedly, printing money automatically causes inflation via demand-push inflation. More dollars chasing the same supply pushes up prices by the supply and demand model. However, in the US economy, consumer demand is absolutely dead in the water. Dead, dead, dead, dead. Dead as a dead fish, rotting on the beach.

If the government prints some money and uses it to pay down the US debt or to pay for government spending already allocated instead of borrowing the money for such things, do you really think that there will be some huge demand-push inflation in the US? Is that new money really going to revive the dead US consumer demand, lying on the beach and stinking? No way. Demand will be as dead as ever.

This is particularly true if we print money to pay down US debt. This debt is all owed to very rich Americans or especially to banks. Giving very rich Americans and bankers some more money to play with is hardly going to revive the dead demand side of the US economy. Even more intelligently, we could print money to pay down US debt that is held by foreigners. Since their money is held overseas, giving them more money can’t possibly cause demand-push inflation in the US, since foreigners don’t spend their money here. They spend it in their own countries instead.

There is also an argument that printing money increases interest rates. US interest rates are currently near zero. Think they are going up soon?

You might be interested to learn that the US government just printed $15.2 trillion in the past two years. Yes, it is true. What did they do with that money? They used it to buy up the junk loans that were sitting on the books of US banks and financial corporations. They printed up the money and traded it for the crap loans. The government now owns the crap loans.

Did printing $15.2 trillion cause any inflation? It caused none whatsoever. Inflation is dead in the US, near zero. The big worry is deflation, not inflation.

Did printing $15.2 trillion lower the value of the US dollar? There is no evidence that it did.

Did printing $15.2 trillion cause a rise of interest rates? US interest rates are at about 0%, as low as they can go.

Nevertheless, for rightwingers, all of these things are right around the corner. The inflation is always right around the bend, as is the plunging dollar and the skyrocketing interest rates. All of these things must happen because they believe in some scientific law that states that printing money causes all of these things.

This is what is behind Rick Perry’s crazy ranting at Bernanke and Geithner, calling them traitors for printing money. The Right hates the idea of printing money because they want to starve the state. Printing money is one way that a state can pay its bills and debts. It’s a weapon in the government’s spending arsenal. The Right opposes government spending in and of itself, hence they oppose printing money.

23 Comments

Filed under Conservatism, Economics, Government, Political Science, Politics, Republicans, US Politics

23 responses to “Printing Money Causes Inflation?

  1. tulio

    Inflation is not dead. If it is, explain why I place my roommate and I rented for $900 a month back in 2000 is now renting at about twice that much now? Why have I seen my grocery bills double in the last ten years even though I am still a single guy and eat the same amount of food? Why was gasoline $1.50 a gallon a decade ago and now hovers around $4/gallon. Why was a single family home in L.A. under $200k in 95 and is now twice that much? Why was $45k a year considered a good salary in 1990 but is considered working class pay in 2011? Why is $200k a year the new 100k a year? Why was college so cheap 15 years ago compared to now?

    Sorry, I don’t buy this nonsense the government claims about no inflation. I see it every time I go to the grocery store. Our food is getting more expensive while the packaging is shrinking.

    • greenspan invented something called “inflation ex inflation” (inflation without inflation). LOL. the theory is that if fish becomes expensive, you’ll by pork, if pork becomes expensive, you’ll buy beef.. lather, rinse, repeat. don’t even get me started about the logical fallacies involved in that mess. so, in the past 3 years, i’ve been given a raise of around 7 percent total and based in my salary and “real inflation” i’m now making around 1000 dollars a month less than in 2008. conspiracy to keep us poor? perhaps.

      • The US government’s inflation model is not bad. I don’t mind it. I don’t think it meant to cover up inflation at all, but I could be wrong after all.

        • Uncle Milton

          To Rob:

          The US government’s inflation model is not bad. I don’t mind it. I don’t think it meant to cover up inflation at all, but I could be wrong after all.

          The way the CPI was calibrated was altered in the 80s and again in the 90s. Going by an earlier CPI scheme would show inflation of around 7% for the last few years. Considering that Social Security increases are based upon the CPI.. there is at least, incentive by the government to under report inflation. Why do the politically impossible and cut social security directly when actual payments are declining by a few percent every year. A 4% annual reduction in SS payments due to a restructured CPI means that in 10 years the average payout will 32.5% less. A 3% means the payment in ten years will be 27% less.

          http://www.shadowstats.com/alternate_data/inflation-charts

          I am of the opinion that the real figures are somewhere between what Shadow Stats reports and what the US government reports.

        • WMarkW

          The government’s inflation model takes improved quality into account for some technology items like computers. So if a computer with a 50GB gets a 100GB drive, then the portion of the computer’s price that is attributed to hard disk space is considered to have dropped by half.

          This is OK to measure inflation as a macro-economic phenomenon, but it means that inflation is no longer measuring the cost of running a household. You can’t replace your 2005 computer with an equivalent model costing half as much. You have to get one twice as good for the same price. But twice as good doesn’t double its usefulness to you, because that’s still limited by your typing speed, hours you have available for computer used, DSL line speed, and other exogenous factors. The CPI confounds how good the stuff in your house is with how much you paid for it.

        • Uncle Milton

          To Rob:

          The US government’s inflation model is not bad. I don’t mind it. I don’t think it meant to cover up inflation at all, but I could be wrong after all.

          I looked up the GDP, CPI, and Money Supply figures for January 1995 to January 2007. (Which would be using the modern methods for CPI and avoid the recession periods of the early 90s and now…)

          GDP growth 1/1995 to 1/2007:
          http://www.data360.org/dataset.aspx?Data_Set_Id=354
          48%
          Inflation per 1/95 to 1/2007 CPI:
          http://146.142.4.24/cgi-bin/cpicalc.pl?cost1=100&year1=1995&year2=2007
          36%

          GDP growth plus inflation 1/1995 to 1/2007:
          201%

          M2 money supply growth 1/1995 to 1/2007:
          202%
          http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm

          A very close match… one could argue that by discounting inflation the US is inflating it’s GDP figures.

          How much has M2 grown since the financial crisis ?
          From August 2008 to now: 10.5%
          http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm
          Inflation from August 2008 to now: 4.9%
          http://146.142.4.24/cgi-bin/cpicalc.pl?cost1=100.00&year1=2008&year2=2011
          GDP growth August 2008 to now: 0.5%
          http://www.data360.org/dataset.aspx?Data_Set_Id=354
          GDP growth plus inflation August 2008 to now: 5.4%

          M2 growth in excess of inflation and GDP growth form August 2008 to now: 4.8% or about 1.6% a year.

  2. WMarkW

    Printing money causes some combination of:inflation, recession and a negative balance of payments deficit. We’ve avoided the first to date by throwing in the towel on the latter. When the Chinese start cashing their bonds, we’ll pay through either inflation or selling them our real estate.

  3. I most certainly do not agree with this. Printing money of course does not cause recession or depression. It’s one way to get out of one. The current recession was of course not caused by printing money. Printing $15.2 trillion did not cause one bit of inflation either. I don’t understand your last statement. I believe we could easily buy back the Chinese debt by printing money at the moment. With US demand dead in the water, inflation is not a possibility. Inflation is caused by increased demand in general, except for speculation driven inflation.

  4. James Schipper

    Dear Robert
    You are right in pointing out that monetary expansion doesn’t always lead to inflation. However, there has virtually never been a major inflation without massive monetary expansion. An exception was the major inflation in the Philippines in the final days of the Japanese occupation. The Japanese had introduced their own currency in the Philippines. People assumed that this currency would become worthless after Japan’s defeat. So, when the writing was on the wall for Japan, the Japanese-managed currency lost value very rapidly, which is another way of saying that there was a big inflation, but without monetary expansion.

    Inflation is not just a general rise in the prices of consumer goods. It could also be asset inflation, such as occurred in the US roughly from 2000 to 2008. Such asset inflation can’t occur without major monetary expansion. The Fed enabled the asset inflation through its easy credit. In a modern economy, there is no sharp distinction between money and credit.

    Inflation arises when aggregate demand exceeds aggregate supply. However, if you put more money in people’s hands, aggregate demand will normally increase because people have more to spend. If there is a liquidity trap, people may just sit on their extra cash.

    In a recession, which by definition is a situation in which aggregate demand falls short of potential aggregate supply, there can be considerable monetary expansion without inflation. However, we aren’t always in a recession.

    In conclusion, the relation between the price level and the money supply is more complex than monetarists used to claim, but don’t recklessly play around with the money supply. You may end with unwanted inflation.

    Regards. James

  5. It seems to me that printing money like that might not cause inflation directly, because the economy isn’t simple. Bu if the government were to confiscate, say, 90% of some commodity, like hammers, and just store them in warehouses, wouldn’t the price of hammers go up, as people bid to get their share of the reduced supply? And, if instead of confiscating them, the government just printed money and bought all those hammers, the effect of reducing the supply would be the same, no? And if you’re right, why shouldn’t the government simply print all the money it needs for everything and never tax anybody? And print some more just to give to everybody? Anyhow, here’s an attempt at a refutation:
    http://ex-army.blogspot.com/2011/08/funny-money.html

  6. fyi…

    http://mises.org/daily/4692
    The Michael Sproul Doctrine
    Thursday, September 23, 2010 by Robert Blumen
    The Wikipedia entry on the real-bills doctrine advances the controversial proposition that banks can increase the quantity of money without diminishing the purchasing power of each unit. To quote directly, “So long as money is only issued for assets of sufficient value, the money will maintain its value no matter how much is issued.” I will refer to it as the Sproul doctrine. …..

  7. Uncle Milton

    To Rob:
    Printing Money Causes Inflation?
    As I understand it some printing (or increase ) of money is allowed under monetary theory… basically the idea is to increase the amount of money to match the growth of the economy.

    You can even have inflation when you money is based upon precious metals. For example there was inflation in Spain after they started heavily mining the gold and sending it back to Europe and the discovery of the Americas.

    “The Spanish Empire had grown substantially since the days of Ferdinand and Isabella. The Aztec and Inca Empires were conquered during Charles’ reign, from 1519 to 1521 and 1540 to 1558, respectively. Spanish settlements were established in the New World: Mexico City, the most important colonial city established in 1524 to be the primary center of administration in the New World; Florida, colonized in the 1560s; Buenos Aires, established in 1536; and New Granada (modern Colombia), colonized in the 1530s. The Spanish Empire abroad became the source of Spanish wealth and power in Europe. But as precious metal shipments rapidly expanded late in the century it contributed to the general inflation that was affecting the whole of Europe. Instead of fueling the Spanish economy, American silver made the country increasingly dependent on foreign sources of raw materials and manufactured goods.”

    http://en.wikipedia.org/wiki/Habsburg_Spain#The_Spanish_economy_.281516.E2.80.931700.29

    It also happened when the Emperor of the Mali empire made a pilgrimage to Mecca in the 14th century. He brought a substantial amount of gold with him and doled it out liberally:

    http://en.wikipedia.org/wiki/Musa_I_of_Mali#Islam_and_pilgrimage_to_Mecca

    “Musa’s journey was documented by several eyewitnesses along his route, who were in awe of his wealth and extensive procession, and records exist in a variety of sources, including journals, oral accounts and histories. Musa is known to have visited with the Mamluk sultan Al-Nasir Muhammad of Egypt in July of 1324.
    Musa’s generous actions, however, inadvertently devastated the economy of the region. In the cities of Cairo, Medina and Mecca, the sudden influx of gold devalued the metal for the next decade. Prices on goods and wares super inflated in an attempt to adjust to the newfound wealth that was spreading throughout local populations. To rectify the gold market, Musa borrowed all the gold he could carry from money-lenders in Cairo, at high interest. This is the only time recorded in history that one man directly controlled the price of gold in the Mediterranean.”

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  11. fidy

    isn’t it… demand pull inflation?

  12. Chris

    If government borrowing and spending was really at the heart of inflation then why wouldn’t the same reasoning apply to banks? They create money out of thin air all the time. Banks are only required to hold 10% on deposit of what they lend out and banks can lend to other banks. I.e. if governments cause inflation by creating money it is only reasonable to conclude that banks cause inflation in the same way.

  13. Tom Brown

    Yes, the way I understand it is that banks create a lot more money than the government… and it’s not printed… it’s created. About 95% of money is never printed… it’s just electronically created. So if you go into a bank which has $10 of deposits and request a loan for $9, the bank enters $9 credit in your account, and you sign a document saying you’ll pay the bank $9+ interest. Now you buy something from somebody else and they put the $9 in their bank. Now their bank can loan out 0.9*$9 to somebody else, etc, etc, etc. It’s an infinite series, and it sums to a finite number: 10*0.9/0.1 in this case, or $90. So that original $10 in deposits in the first bank is “leveraged” up by the banks to $90 without ever printing anything. Each bank holds 10% of it’s loan in reserve. You don’t need an infinite number of banks either… this can all be done through a single bank. Also, as I understand it, banks have many ways of skirting this reserve requirement… thus the actual reserve requirement is much much smaller, and thus they can create even more money! When you pay off the loan, the money the bank created is destroyed… except of course for the interest, which had to come from somewhere else.

  14. Printing money causes inflation is not always true indeed.
    Please not that money inflation emerges from uneconomic use of fresh money.

  15. “Printing Money Causes Inflation?”, this is a general question indeed.

    Here’s why: in case you employ fresh or printed money in the production of basic assets, inflation wouldn’t occur in the basic commodities’ segment. But due to the new money’s presence in the economy, inflation in other sector(s) would occur. Similarly, when the new money printed is not used in production of assets, (it means it is used in consumption like providing loans, etc.) then inflation in basic commodities’ segment and other segments, too, is feasible.
    Inflation is a macro factor.

    You can find more at the following links:
    http://theglobalecon.com/printing-of-money/
    http://theglobalecon.com/printing-more-and-more-money-is-not-always-a-con/

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  17. ray gorman

    I once wrote an essay called “History as LSD”. After reasding this latest example of Lindsay drivel I shall have to write one “Economics as LSD”. A born idiot like Robert Lindsay is a born idiot.

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