Posted on 06/15/2022 5:22:33 AM PDT by RaceBannon
I still cant fully understand how the printing of money causes inflation. Economies are normally driven by supply and demand at the basic level. .
If I need something that everyone else needs, it tends that the people who make the product or supply the service will raise prices to make profit when fulfilling the sale side of this, the need of that product or service making more profit for the provider. .
Supply can affect price, also, the scarcity of the product means it costs more, generally, because new means to provide the initial raw materials or shipping of the completed product/service will rise without the profit going up or need to rise unless that profit is spent to create new shipping supply costs and not genuine profit. .
The government printing doesn't put money in my pocket nor does it put money in the pockets of the gas companies, the grocer, the manufacturer.
The general population does not receive money to spend nor do manufacturers get money to improve or increase production, nor does the act of transporting raw materials or finished product come from government. .
So, who gets the money that government prints? Things that government purchases, infrastructure, defense and international aid is where so much money goes, welfare, SS, and interest on bonds... .
Yet, if none of that printed money goes to providers of goods or services, how does printing money cause inflation of normal commodities? .
The only thing I can see connecting increase in prices is increase in shipping and transportation costs by national policy concerning oil exploration or development, such as Biden is doing by causing the intentional slowdown in oil and natural gas development. That causes gas to go up, shipping costs to rise, therefore production costs to rise which is passed on to the consumer. .
None of that last paragraph has anything to do with printing money. I need some help here.
A dollar represents an amount of perceived value, buying power. If you print 2x dollars without having 2x the productivity then a dollar just becomes worth 1/2 as much...hence prices go up and inflation.
I’m sure some pithy econ major gave a textbook answer, but, money is a product, more product, lower value. Supply, demand curve applied to money.
Money is not value.
Ok, "part of". But you obviously missed my point. That the "part of" is in the "noise level" when it comes to inflation. So why mention it?
And comparing them to a "legal counterfeiter of money" is absurd. They are legally tasked with making real bills and coins. That would be like saying a painter who is making copies of his original painting is a "legal forger".
That’s a tricky question and not so easy to explain. There are multiple components to the process, but let me give it a shot.
First of all, when we talk about “printing money” we aren’t talking about the US Mint firing up the presses and printing banknotes any more. It’s just little electrons in a computer system that go from “0” to “1” nowadays. So at the most basic level, the money is “created” as soon as that electronic switch is thrown to change a “0” to a “1” without a corresponding change from a “1” to a “0” in some other electronic account. The tricky part is explaining exactly where that happens in the modern banking system.
First, Congress passes spending for which they don’t have the money on hand to pay for. In order to pay for it, they have the Treasury issue bonds, and sell those bonds to the public. This way they trade debt for currency. The people who purchase the bonds (debt) can now show that on their balance sheet as an asset, and then they can go to the banks and get loans based on those assets. Now it’s actually at that point, when the bank issues the loans that the new currency is “created”. That’s the exact point when a “0” becomes a “1” without another “1” somewhere becoming a “0”.
To understand why that is the case requires explaining more about the modern banking system. But the basic gist is that banks are allowed by law to lend out money that they don’t actually have. So when they issue loans they are often creating money, money that they won’t possess until the loans are paid back, but it is money that goes into circulation right when the loan is issued. That’s why I say the “0” becomes a “1” when someone takes those government bonds to the bank and uses them as collateral for a loan.
“if every new unit of the medium of exchange was “backed” by things of value, there couldn’t be inflation.”
Really? So if every dollar bill was backed by an oz of gold, and the US discovered 1 trillion ozs of and mined it, and 1 trillion dollars were printed, backed by all that gold, and introduced into the money supply, what do you thing would happen? Inflation.
Can bankruptcy destroy money?
Consider a bank that writes down a credit card account as uncollectible. That is a charge against the bank’s assets and it reduces the bank’s lending power, hence reducing the amount of money in the system.
But you are right that there is confusion about money of different types. If Musk’s wealth increased $1 billion it doesn’t mean that he acquired a stack of $100 bills 80,000 inches (~1.25 miles) high. On the other hand, he can go to an investment bank(s) and get assets converted into spendable cash to make an acquisition.
So the differences in kinds of money revolve around the difficulty and expense of conversions from one type to another.
I know. It’s hard.
*shakeshead*
Deflation ( 1930’s ) is the opposite. To few dollars chasing to many goods.
Some think that the Long Depression of 1873-1896 was caused, or at least exacerbated, by the lack of new gold supplies after the California Gold Rush plus the demonetization of silver. This caused deflation because the economy was expanding faster than the money supply.
It was alleviated by the South African and Alaskan gold discoveries.
https://en.wikipedia.org/wiki/Long_Depression
Maybe you can keep the price at $5 and liquidate your entire daily bread inventory by 10:00 A.M. BUT I ASSURE YOU YOUR COMPEPITORS WILL NOT.
Let’s say you are a coke/meth addict and you father is the President...
“Can bankruptcy destroy money? Here, “money” is used in the sense of wealth”
“the answer is no.”
Wrong. You totally ignore the value of brand names (sense of wealth) that a company may have, or it’s goodwill value (sense of wealth) . Plus the value of it as a whole, may be have more value than the value of it’s separate parts sold off after bankruptcy. If Trumps declared bankruptcy and his buildings with the name Trump on them were sold, and instead had the name “Joe” on them, those buildings would almost certainly be worth less. Brand names sell much than the the dead identical product, made from the same assembly line or food plant. All those wealth components can drop to zero. That’s “sense of wealth” going bye, bye.
The actual prices paid are probably on the FED website somewhere. Don’t know if that is public info.
The FED was an uber deep pocketed investor (The FED) who could buy distressed assets and hold them until the economy (real estate market) turned around, and prevent the weak hands from going under, which have been enormously destructive. Bernanke’s QE actually made a nice profit for the US Treasury.
Read this:
“In the meantime, however, quantitative easing has been enormously profitable for the Fed — and for Uncle Sam, which garners all profits from the central bank. The Federal Reserve earned nearly $90 billion in 2012, after accounting for all its expenses. “
https://finance.yahoo.com/blogs/the-exchange/ben-bernanke-huge-gift-taxpayers-150419151.html
As to the money side of Friedman's proposition, the effects of more government spending vary depending on how it is financed. If the spending is balanced by a general increase in tax rates, the increase in spending tends not to have a general inflationary effect. On the net, the extra spending and taxes move money from the private side of the economy to the government side.
If, instead, the extra spending is financed by creating and issuing new money, the money supply is boosted directly and, assuming other things are equal, an inflationary effect can be anticipated because more money is chasing the same supply of goods and services.
It bears explanation as to how money is created. It can simply be money in the sense of deposits created on the US government's ledger books by the US Treasury and then spent by the US government without there being any revenue that came in in the form of taxes or other money.
Nowadays, the US Treasury and the New York Federal Reserve Bank also routinely buy and sell US government debt on a massive scale, with the money created or taken in moving directly into the financial sector.
When the Treasury and the Fed sell bonds, notes, and bills, they take money out of the economy. When they buy them, they put money into the economy. In relatively short order, this money can reach the real economy and affects borrowing and economic activity.
Keep in mind also that money these days has different definitions depending on how much in the way of deposits and cash equivalents are included. In the most basic form, money in economics means cash and money on deposit in checking and short term savings accounts. More broadly, money can also be defined to includes financial cash equivalents, meaning things that can be on deposit and easily sold for cash or borrowed against, like CDs and notes, bills, and bonds, both private and public.
These various definitions of money all have their uses, but for our purposes, new money in any form created and issued by the US Treasury and Fed tends to have an inflationary effect. Thus not just new cash, but also new debt issued by the US Treasury tends to have an inflationary effect because for private parties, that debt is a financial instrument that can be deposited, borrowed against, and used to finance spending.
Brand names do not disappear upon a bankruptcy. If the brand is valuable in spite of the bankruptcy, the parties involved will act to conserve that value independent of the financial reorganization of the firm. It’s wrong to suppose that they’re idiots. They’re not going to allow significant value to just disappear.
To kind of rescue you, many companies go bankrupt because their brand no longer have value. In the example I gave, I didn’t say why the firm was no longer as valuable as its cost. It could be that the lose of value to the firm is due to its brand no longer adds value to its product or service.
This is another case where I was curt in order to return to the question of what is the connection between money and inflation. You went down a rabbit hole.
Inflation is simple:
When there is too much money chasing too few goods, you wind up with inflation.
The most common cause of inflation is governments print money in order to pay debts, or spend on other things... adding more money into circulation with no increase in goods available, prices go up.
You should send your clarification in to Merriam-Webster. I have a hard enough time trying to use English to explain economics. I’m counting on other people to correct English where this is necessary.
People actually use the word “money” to mean wealth; as in the example of Elon Musk that you give. And, this meaning of “money” is in the dictionary.
People actually use the word “money” to mean income; as in how much money do you make. This meaning, too, is in the dictionary. I myself make no money in the sense of medium of exchange. But, I do make money.
But when economists talk about money and inflation, they’re talking about money as a medium of exchange.
This is a terrific clarification or even correction.
When the Europeans discovered the New World, the availability of silver and gold increased tremendously and guess what happened to prices of things such as wheat, pork, leather, unskilled and skilled labor?
Those prices went up.
The historical episode is called The Price Revolution.
Long before that, Aristotle said money should consist of things of value, such as iron or silver, even though the value of money (relative to other things) would fluctuate due to the supply and demand of the things that are money. [1]
But, by the time of the discovery of the New World, the Europeans were so used to inflation resulting from the debasement of originally silver denarius coins of the Romans, that they thought you couldn’t have inflation with full-bodied coins.
Yet, you could.
The proper definition of inflation is (as I stated): an increase in the medium of exchange in excess of the increase of goods and service; and, yes, this can happen with commodity-backed money. But, as argued by Aristotle and many others through history, usually this problem is associated with unbacked money.
[1] other examples of inflation with commodity-money include wampum in New England during the colonial period; and, tobacco-money in Virginia also during the colonial period.
Can the Fed be described as a legal counterfeiter?
We would hope that taxation isn’t theft, but is, as Benjamin Franklin once said, the price we pay for civilization.
Yet to think taxes are never theft, but are always just, is a sin of blasphemy. It makes the state into God. Consider Jesus’ teaching on God and Caesar.
The Lutherans got into real trouble on deifying the state during Hitler’s rule over Germany. Yes, the Lutherans said, you could revolt against the Pope, but you must obey Hitler under penalty of mortal sin.
I should hope after the Nuremburg Trials nobody ever again says I was just following orders.
The state has the power to kill, 007, but must exercise that power with due process.
The state has other powers, including the power to print money. But, it can abuse those powers. I don’t think the U.S. government has ever so abused the power to print money as to commit a mortal sin. But, it has committed some venial sins with printing money.
Consider that inflation impoverishes those on fixed incomes, generally senior citizens, unable to return to the work force to make up their loss of purchasing power. Doesn’t that make inflation a particularly cruel form of tax?
And, when Joe Biden and Janet Yellen meet their maker, how good will their excuse be for impoverishing some of the most vulnerable members of society, that they thought the long-established laws of economics didn’t apply to them?
In their zest for certain do-gooding, as they saw it, they rationalized their violation of these long-established laws. Their response, just yesterday, is to call their political adversaries “liars.” This doesn’t sound humble or contrite.
The prophet Isaiah warned us. They have turned your silver into dross. We are living in corrupt times, with wicked rulers. In another part of this thread, I described the elections as our remedy for leaders that fail us. On the moral issue, more fundamentally, our country is in need of revival
What is a bubble?
When a bunch of people buy an asset, any asset, with the sole intention of selling it to someone else at a higher price, that is a bubble.
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