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I Don't Understand Why Printing Money = Inflation

  1. Dec 22, 2015 #1
    First and foremost, I apologize if this question is posted in the wrong section. I wasn't sure where to place it and figured it was at least tangentially related to math (and that the mods/admin would re-route my thread topic to a new location if appropriate :-p).

    On to my question:

    Something I've been conceptually struggling to understand is why printing money leads to inflation. We can take the U.S. as an example. If the government decides to print more $10 bills, for example, why would that affect the value of my own $10 bill?

    By analogy, I can understand that if we have an apple pie and it is divided into three parts and my parents and I each have one part, then re-dividing the pie into four parts (with the "extra" part given to a stranger) would make each individual slice smaller for me and my parents. However, that's based on an actual pie existing. Money in the U.S. is just a piece of paper that we arbitrarily assign some value to. It has no worth other than what we assign to it and we're also no longer on the gold standard (since the 1970's). So where does the decrease in value come from?
     
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  3. Dec 22, 2015 #2

    russ_watters

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    Someone else may move it...

    Here's where you went off track:
    Who is "we" and on what basis do "we" assign it value? Answer: value is a perception based on supply and demand. The supply is literally how much money is available and the demand is how much money is needed/desired to keep the economy moving. If the economy is strong and demands more money, the value will rise until more is printed. If money is printed when the demand isn't high, inflation results (per supply and demand, too much supply lowers the price).
     
  4. Dec 22, 2015 #3

    mathman

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    It sounds like an oversimplification. If more money is printed, but the Federal reserve simply holds on to it, what difference would it make? Furthermore nowadays many, if not most, transactions don't involve cash. Most significant purchases are made by check or charge.
     
  5. Dec 22, 2015 #4

    Erland

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    If people get more money, they will try to buy more things. So the demand for goods and services increases. Hence, sellers can and will raise their prices to earn more. This means inflation.

    But there may be exceptions, I suppose.

    And money held by the Fed doesn't count. It is not considered as money when it doesn't circulate.
     
  6. Dec 23, 2015 #5
    Hello,
    You need to understand money is just trust of ours with government.
    Economy works on the principle of demand and supply. If demand for dollars is constant but supply is increased by printing more money, they subsequently lose their value. Now suppose value of pair of shoes is constant, if value of money is reduced , we have to pay more bills while shoes has same economic value. Pie example is also same but you interpreted wrong. Value is same if it's distributed in 10 parts, each piece is small but if it's distributed in 5 parts , these are bigger. Gross production of country is constant but if it's more distributed, then each currency has less value.
     
  7. Dec 23, 2015 #6

    SteamKing

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    Money seems like a simple subject, but it's more complicated than you want to think:

    Both of the observations above are true up to a point. The amount of money in circulation as cash (currency, or paper bills and metal coins) at a given moment is only a small fraction of the total money supply. Economists use different categories when discussing the money supply in the economy:

    https://en.wikipedia.org/wiki/Money_supply

    Different countries use different classifications of how different types of money are counted, but for the purposes of this discussion, we'll use the definitions current in the U.S.

    Cash and coins in circulation (currency) are called M0. This is the stuff which is actually in your pocket or on your person, walking around with you. It doesn't include what's on deposit at your bank or in your retirement account or whatever. The other classifications, like M1, M2, etc. aggregate different forms of money besides the currency you spend, things like funds on deposit in bank savings accounts and whatnot.

    In the U.S., the Federal Reserve publishes data quarterly on the size of some of the various M-groupings of money, some of which can be used to gauge if inflation is present and to what extent it is changing, up or down. This data is public, so there's no hiding that inflation took a big leap in the last quarter of the year, because the Fed numbers will show it.

    People selling pies or Cadillacs can also get a look at these numbers on the money supply and can use this information to decide to raise the price of their products or not. Even if they don't, their suppliers and competitors can take a peek, and pretty soon this information filters out into the economy at large, in the form of changing prices. The guy making pies may not want to charge more, but if the price of flour or sugar rises, he may not have a choice, unless he wants to flirt with going out of business.

    When things get out of hand, when people perceive that their currency is worthless or nearly so, bad things happen, and the bad things can get out of hand quite quickly if nothing is done to restore confidence in the worth of the currency:

    https://en.wikipedia.org/wiki/Hyperinflation

    In Germany in the second half of 1923 alone, the value of the Reichsmark declined 7 orders of magnitude between the end of July and the end of November of that year. In other words, what could be purchased for 1 RM in July took 10,000,000 RM by November. The central bank there could barely keep up with printing new RM bills having higher and higher denominations, so that it didn't take a wheel barrow of cash in paper bills to buy a loaf of bread.

    You may think that $10 bill in your pocket is worth 10 dollars, but the guy you're buying that pie from may not fully agree. Until you both come to an agreement, no exchange will take place, and you won't get that pie.
     
  8. Dec 23, 2015 #7

    jtbell

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    Once upon a time we had a "Social Science" forum that included economics, but it didn't get much traffic. It was merged into General Discussion a year or two ago, in the interest of reducing the number of forums.
     
  9. Dec 23, 2015 #8

    jtbell

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    Also, if companies or people simply hold onto their money, printing more of it (using "printing" in the sense of money-creating activities in general) doesn't do much.

    During the recent Great Recession, the US Federal Reserve "printed" a lot of money by buying massive amounts of outstanding bonds in a "quantitative easing" (QE) program. Nevertheless, inflation has remained very low because the money isn't being used as much as it could have been. The technical term for this is velocity of money.
     
  10. Dec 23, 2015 #9

    Erland

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    Maybe it would have been more efficient, if the purpose was to accomplish inflation, not only to "print" a lot of money, but also to give them mostly to the poorest people, since they have more incentives to increase their living standard, and hence to spend the money, than richer people.
     
  11. Dec 23, 2015 #10

    SteamKing

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    Or they could buy lottery tickets with it, since it's 'free' money.

    Richer people spend their share of money. They're not all misers like Scrooge McDuck with swimming pools filled with currency.

    Just take a cruise thru the bigger daily news sites in NYC or LA and you'll see people listing and buying condos and estates for what were once considered to be small fortunes. IDK if you've priced new Ferraris lately, but it's almost impossible to find one for less than $200K.
     
  12. Dec 23, 2015 #11

    Erland

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    Sure, but poor people have much less of choice to spend their money than rich people. A very rich person has a choice to be like Scrooge McDuck, but a very poor person has not.
     
  13. Dec 23, 2015 #12

    SteamKing

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    Still, expecting everyone to make the right choice with their money, especially windfalls, is a tad idealistic, IMO.

    There are many reasons people are poor, and some reasons are beyond their control to fix, to be sure. If poverty could be erased simply by throwing money at it, it's a condition which should have disappeared long ago, yet it persists.
     
  14. Dec 23, 2015 #13
    So Maynard Keynes believed and FDR practiced.
     
  15. Dec 23, 2015 #14
    Well that looks like nonsense.
    First we have a lot of poor people so we throw a lot of money at them.
    Second we still have a lot of poor people.
    Either the money never got to the poor people or more than likely the rich people with the money are stingy and never threw enough in the first place.
     
  16. Dec 23, 2015 #15

    SteamKing

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    It's also axiomatic that if you subsidize some practice or behavior, you'll get more of it.

    Sure, it's easy to cynically think that most, if not all, of the money spent to alleviate poverty was somehow diverted by mysterious, unspecified forces and unidentified bad actors, or that insufficient resources were devoted to the problem in the first place. If the latter, then it becomes incumbent on you to say how much should have been spent, if what was spent fell short. If the former, then that's cottage industry conspiracy theorizing and serves only to demonize one group as the cause of another group's misery and misfortune.

    But we don't depend on the rich to solve all of society's problems, and we haven't since the time nation-states became going concerns. Since at least the 19th century, the idea has evolved and been put into practice, with varying degrees of success, that it is one of the functions of government to tend to the interests of those least able to fend for themselves. I mean, that's the whole raison d'etre for socialism in the first place:

    https://en.wikipedia.org/wiki/Socialism

    That phrase, 'From each according to his abilities, to each according to his needs', is the Marxist principle summed up in one handy slogan.
     
  17. Dec 23, 2015 #16
    Perhaps you gentlemen would care to site peer-reviews papers to support your informed positions.
     
  18. Dec 23, 2015 #17

    russ_watters

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    You're splitting a hair that doesn't exist: when someone says "print money" in a question like this, they always mean to print it and release it (sell it) to the banks. To print it and hold it would be pointless.
     
  19. Dec 23, 2015 #18

    russ_watters

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    That's not how money creation works. The money isn't "given" to anyone, rich or poor: it is sold (or rather, used to purchase things by the government).
     
  20. Dec 23, 2015 #19

    SteamKing

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    In FY 2012 alone, almost $800 billion was spent on about 100 separate programs sponsored by different departments and agencies of the federal government to fight poverty:

    http://budget.house.gov/waronpoverty/

    The total federal budget for that year was a little over $3.5 trillion:

    https://en.wikipedia.org/wiki/2012_United_States_federal_budget

    Since 1965, the total amount spent has been estimated at anywhere from $15 trillion to $22 trillion. By any measure, that's a lot of money.

    By way of contrast, the 400 richest Americans on the Forbes 400 list have a combined net worth of $2.34 trillion:

    http://www.forbes.com/sites/luisakr...-facts-and-figures-about-americas-wealthiest/

    Either the richest Americans are doing a remarkably poor job of looting the poor, or other factors are at play here.
     
  21. Dec 23, 2015 #20

    Erland

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    Recall that we originally talked about accomplishing inflation, not about fighting poverty per se.

    Anyway, what about this:

    1. Treasury issues bonds.
    2. The Fed buys the bonds, getting a debt.
    3. Treasury uses the payment for the bonds to subsidies for poor people.
    4. The poor people use most of the subsidies for consumption.
    5. The increased consumption leads to increased demand.
    6. The increased demand makes sellers to raise their prices.
    Result: Inflation.

    Isn't this quite normal fiscal and monetary policy?
     
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