To the idiots who think that printing money leads to inflation

The Coffee Shop
1

hi there, i hope i got your attention.

so let’s start off by saying that your theory is stupid because every year the fed expands the money supply.

here’s a quick glance at the growth of m2 over the last 7 years:

2001 8.63
2002 7.51
2003 6.88
2004 4.73
2005 4.28
2006 5.01
2007 5.74
2008 6.81

HMM, what was inflation over this time?

2001 2.82
2002 1.6
2003 2.3
2004 2.67
2005 3.38
2006 3.22
2007 2.86
2008 3.8

wow, i see massive inflation that’s… wait, in part attributable to increases in the price of commodities (the above is all-items cpi, not core cpi), and not some sort of inflationary spiral caused by expansion in the money supply.

(it did, however, enable the asset bubble in real estate and to a certain extent equity markets as well… :))

but nowhere have i seen any of you guys talking about other factors that impact inflation such as the import of low-cost chinese goods (which helped greatly dampen inflation over the last decade) or wage expectations (which is why you hear a lot of talk in the media all the time - not just now - about how the fed needs to remain credible about keeping inflation low. they need to prevent inflation expectations from becoming entrenched in labour contracts).

having said that, for argument’s sake, let’s disregard all that i’ve said so far and assume for a moment that you guys are right, that printing money leads to inflation.

what’s the basis for this assertion? can you tell me one of the vital assumptions its based on? no? that’s what i thought.

here’s the basic mathematical equation that “explains” the assertion:

mv = yp

where m stands for money supply, y stands for output, and p stands for prices.

but wait

what does that ‘v’ stand for? does it stand for ‘victory’? how about ‘very awesome’?

no.

it stands for the velocity of money, which is basically the speed at which a dollar zips around the economy in the space of a year.

well guess the fuck what, your statement that “printing money causes inflation” is predicated on the assumption that the velocity of money is held constant.

WHICH IS AN ASSUMPTION THAT EVERY ECONOMICS STUDENT IS TAUGHT TO DISREGARD AFTER 2ND YEAR

and guess what else?

i’ve seen estimates over the last month that show the velocity of money has decreased by 15%-18%.

now let’s do some very crude calculations. i have to stress in that this equation is actually fairly shaky - which i think i made clear in the opening section of my post.

also, i am stealing these rough calcs from a coworker :slight_smile:

so let’s say m = m2, the broad money supply.

Facts:

M2 (feb 2009) =$8274.5bn

If V decreases by 17% then to compensate

M2*=9929.4bn

(m2* would be the equilibrium quantity of m2)

Or put another way the Fed needs to print $1.6549 trillion and drop it from the sky (or make a new bank with Assets=M2*).

Alternatively we assume that M is sticky upward and some of the change has to come from Y (also assuming P is sticky downward). Counting the $700bn TARP as an IV for M2 injection than the difference in Y is probably pretty close to what will experience this year in US economy (contraction of 2-7%).

so while you folks are railing against the fed for printing money, they are saving the economy.

well played, sirs.

2

let me add that there’s no such thing as a “law” in economics.

and i’m saying this even though i’m in economics!

all i can say is that the economic tools and theories that have been developed and that are widely taught today allow economists to make educated guesses.

sometimes they are very good educated guesses, but it doesn’t even approach the rigour or relative certitude of a science like physics or chemistry.

beware any economist (or investment professional) who tells you otherwise :slight_smile:

3

Maybe the problem with economists (such as yourself), is their incredibly limited mastery of the english language. We tend not to listen to what you have to say, because it sounds curiously similar to schizophrenia…

4

perfect - if i see any posts by you on economic topics, i now know i can skip over them, confident that it contains nothing of substance as you’ve never read, heard or learnt anything worthwhile thing about economic theory :slight_smile:
.

5

I, for one, will sleep well at night. The sophmoric article above explained the entire concept just fine.

I do hope you return with a differential analysis of both V and M, each at the boundaries…then idiots like me may even understand what you’re really trying to say.

6

Its useful that you point out that other parameters affect inflation besides money supply. I’m sure that is true.

However, all else held equal, it does in fact hold that printing money leads to inflation.

and im not sure we can jump to the conclusion that the fed is saving the economy by printing money, whether it causes inflation or not.

7

Historically does the velocity of money usually decrease during a recession and then increase after the recession?

8

boudreaux -

not going to happen, as

a) i am lazy;

b) more importantly, i don’t see a point. i think there are more important and relevant topics to discuss like lowering the us current account deficit/correcting global imbalances, decreasing consumption as a percentage of gdp, etc.

and i’m adding this one in now

c) i don’t think i’d be able to competently give a very detailed analysis of us monetary policy. i leave that up to my more educated peers!

jackmott -

i agree with you.

like i said in my post, theoretically, if you hold the velocity of money constant - which it’s not - and ignoring or diminishing the impact of the other factors mentioned, printing money would cause inflation.

that’s not very realistic, though.

9

Wow. I can’t tell if you are being intentionally obtuse and just trolling or you really don’t have even a basic understanding of global economics. Either way it’s pretty amusing.

If you are just trolling you should at least: 1) get your calcs correct-at least the application of them. 2) present different stats as facts because what you put up there doesn’t support your claims, and 3) understand how the open market committee works on a daily/weekly basis especially with regard to,… wait for it…“V”.

That being said, please continue. I need some more amusement today.

10

“i’ve seen estimates over the last month that show the velocity of money has decreased by 15%-18%.”

I have in the past made the mistake of underestimating the collective intelligence of members of this forum, I try to help others avoid doing the same when situations arise. In my opinion, this statement earns you the title of Captain Obvious and represents that very mistake. While I have never claimed to be an economist, I have taken my fair share of economic theory classes in my lifetime as I am sure many on this forum have. Throwing formulas around is not going to “wow” too many frequent posters.

All that being said even if you are entirely correct (and just to be clear, I am not really giving you that credit), you are going to have to do a better job of explaining your position to be anything more than a nuisance in this world.

11

If printing money does not lead to inflation why does the government tax us? I’m sure that the government can print a lot faster than people can pay.

12

“well guess the fuck what, your statement that ‘printing money causes inflation’ is predicated on the assumption that the velocity of money is held constant.”

Yes, like most causal statements in economics, this one assumes ceteris paribus. In the equation mv = yp that you cite, v won’t necessarily remain constant. Quite frequently, in fact, the process of printing money may have the side effect of creating a popular expectation that the currency will lose value, causing v to rise as people hurry to shed cash. In such cases, p can be expected to rise at an even faster rate than m. A general note here: The value of currency is determined by the subjective utilities that people assign to it, something which is not easily modeled by mathematical equations.

Furthermore, as I pointed out in another post this morning (http://forum.slowtwitch.com/gforum.cgi?post=2254049;sb=post_latest_reply;so=ASC;forum_view=forum_view_collapsed;;page=unread#unread), y does not always remain constant, particularly during periods of great technological advance leading to more efficient production–such as in the 1920s, or in recent years. If that happens, then the monetary inflation may not be followed by a rapid increase in prices. Note that it is the technological advances that increase productivity during such periods, not the inflationary policy. Unfortunately, the technological improvements tend to conceal the inflationary process from the public eye, which brings me to the second point…

Regardless of whether or not y and v change, monetary inflation still has the same distorting effect on the allocation of resources, which is why such policy is always followed by a correction (the so-called “bust” phase of the business cycle). For that reason (as I explained in the other post), it’s better to use the word “inflation” in its original sense, i. e., meaning monetary inflation. Then one can sum up the situation as follows:

  1. “Printing money is inflation.”
  2. Such inflation will lead to a wage-price spiral if other conditions remain constant.
  3. Such inflation must inevitably be followed by a recession or depression.
13

Thanks, Rob…

14

If printing money does not lead to inflation why does the government tax us? I’m sure that thegovernment can print a lot faster than people can pay.
I don’t know about any of this m, v, y, crap - but this is great f-ing question. I want an answer!

15

“If printing money does not lead to inflation why does the government tax us? I’m sure that the government can print a lot faster than people can pay.”

Better yet, if one follows tegra’s theory, they should let us counterfeit more money on our own. After all, we’d only be “saving the economy” with a little extra stimulus. :wink:

16

He has a theory? That’s what that initial post was? I gave up on it the third time I tried to read through it in an attempt to understand his anti-Adam Smith scribblings. Ah, well…

T.

17

He has a theory? That’s what that initial post was? I gave up on it the third time I tried to read through it in an attempt to understand his anti-Adam Smith scribblings. Ah, well…

T.

perhaps we need to see an “invisible hand, bitch slap”

18

**Note that it is the technological advances that increase productivity during such periods, not the inflationary policy. **

Does inflationary policy ever increase productivity? I can’t imagine how it would.

19

No, I didn’t meant to imply that inflationary policy is ever good for productivity. My point was merely that the productivity increases from technological improvements can exert a downward pressure on prices, which may largely counteract the upward pressure on prices caused by monetary inflation–thereby tending to disguise the effects of the latter.

20

“perhaps we need to see an ‘invisible hand, bitch slap’”

Hey, that was funny! Who are you and what have you done with Ped-Tex?