By Itself, Printing Money Doesn’t Cause Inflation.

If they printed a lot of money and no one spent it, would there be any inflation?

We all understand the idea of shortage and surplus. A retailer with a shortage has near-empty shelves and could raise the prices on the few that remain and expect to sell them. Price inflation.

When the shelves are overflowing, a spring sale might move the excess. Prices fall.

If there are dozens of people waiting at the door waving money, prices rise.

The supply side

Supply crunches raise prices, but tend to be temporary. Other producers see the higher price and bring production on line to take advantage. The new supply pushes prices down again. Full shelves could indicate several things. Among them, people don’t want to spend their money yet.

The demand side

If people have more money and supply is unchanged, vendors can raise their prices and expect to sell the same quantity as before. Price is what establishes an equilibrium between supply and demand. It’s called the market clearing price.

If the government creates money, the idea is to increase demand. You must notice that they supply more money without increasing the supply of things to be purchased. Auctions happen if people decide to spend the money.

Another inflation factor

Governments use money supply to either boost or slow down the economy. When inflation is high they tend to draw money out of the economy by higher taxes or running budget surpluses and paying down debt. Reducing the money available tends to reduce demand.

When the economy is down, a little money added can supply a stimulus.

That’s just part of the equation though. People take action too. When they anticipate harder times ahead, they spend less. If they get extra money they save it or pay off credit cards and loans. There is more money, but it isn’t being used to buy anything.

The total amount of economic transactions is what will cause or deny inflation. I can spend a dollar only once, but the person who get s my dollar cans pend it to, and then a third, or even fourth person. The rate of turnover of the money supply is called the Velocity of Money. (V)

It affects prices too.

How it works

Money only affects prices if people spend it. If they don’t, there can be more money printed and no effect on prices.

From 1960 to 2007 the average (V) was1.856 times a year.. At the end of 2007 (V) was 1.977, $1.00 of money supported $1.98 of purchases. From 2007 to now the government has printed a vast sum. M2 money supply went from $7.4 trillion to $20.6 trillion, but not all of it was spent. The purchases amounted to $22.9 trillion at the end because (V )fell to 1.12,

This is what the graph of velocity of Money looks like.

The last 15 years are decidedly abnormal.

Okay? So what.

If (V ) at the end had been 2.0 instead of 1.12, the transactions would have been $41 trillion instead of $22.9 trillion. The supply would not have been there that quickly and prices would have risen. A LOT!

The actual money supply times its velocity is transaction value and if there is supply shortage the price goes up. It is not just the money supply, it is the money supply the people are using for transactions that matters. That is Supply times Velocity.

Why would velocity fall?

People save more when they are fearful. The economy looks to be weakening and I might lose my job. Covid-19. China. The list is long and different for each of us. No one makes impulse purchases when they are afraid for their economic future.

Predicting the future

If you knew the money supply was going to increase in future with no increase in the supply of goods, you would be able to predict prices would rise. We could also guess there is $18 trillion of potential purchasing power if velocity goes up to 2.0 again. The government has been able to hide the inflation due from their money printing operation because not a lot of it was spent.

What if they cannot sustain the uncertainty and fear? Why would we want them to do that?

What would happen if $18 trillion of hidden spending power reappears?

Exactly! Much higher prices.

If it hit all at once and supply was unchanged, prices would become 41/22.9 of their current level. An increase of 80%. Even if it happens over 5 years, the inflation just from unwinding the excess would be around 12.5% a year and that is with no new printed money. Much chance of that? I think not.

An easy prediction – We should expect inflation because the government has an unsolvable problem. If they want to borrow money to pay for exotic and possibly unneeded or postponable services, the interest rates they pay will increase. As higher rates reduce make personal borrowing less attractive, it forces some money into the economy from savings.We can expect (V) to increase. Inflation will rise and make an even higher rate of interest necessary. People tend not to lend money at 4% when inflation is 6%.

It’s called stagflation. Slow economy and high inflation. It’s what president Carter faced in the late 70s and it is where Japan has been for three decades.

Social programs will be damaged because the government cannot afford all of them. That will hurt the poor more than others. New ones being proposed will add to the problem.

Defensive savings will be fruitless too. The purchasing power of the money saved will shrink over time. 7% inflation halves the purchasing power about once a decade. 12% every six years.

Tax rates will go up as the government grasps at straws. The easy things for them to do, borrow, print money, and raise taxes, are ones that add to the harm. Higher taxes and more spending are not answers.

“Vicious circle” comes to mind. Things go from bad to worse and then the cycle repeats.

Your personal defences

There are a few:

  1. Increase your ability to earn money. Education, a sideline business, work more hours.
  2. Get control of lifestyle spending. The goal should be to have enough money. Some parts of your current lifestyle are more necessary than others.
  3. Reduce the price of your lifestyle. Shopping for example.
  4. Be careful with debt. Inflation shrinks the value of a loan, but higher rates require cash every month.
  5. Avoid dollar denominated investments.
  6. Consider precious metals and possibly crypto. They might work in the very short term. My guess is governments will outlaw both when it gets tight.
  7. Vote for people with economic sensibility and integrity. They might provide a way forward, but it will take a decade at least to fix the problem. And a complete revision of voter’s ideas about government should be doing.
  8. Be aware that as the economy becomes less insane, the spender type of politician will reappear. Deny them office no matter what they promise.

The takeaway

Bad times won’t last. Strong people will, if there are enough of them.

Governments do not solve problems, they cause them, or in the most generous interpretation, invite them.

Learn to live within your means

There may come a time when Mexico builds and pays for a wall at the southern border just as Donald Trump promised. If they do, it will be to keep fleeing Americans out.

Printing money is a something for nothing idea. The problem is if some gets something for nothing, someone else gets nothing for something. They don’t tolerate that indefinitely and not beyond a modest limit. Common sense says something for nothing can’t happen forever.


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I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

One Comment on “By Itself, Printing Money Doesn’t Cause Inflation.

  1. Pingback: Inflation Is About More Than Printing Money – moneyFYI

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