When there is no gold standard and no increase in taxes, increases in government spending requires increased borrowing and increased creation of money out of thin air to pay for it. When the velocity of money is constant, increased creation of money out of thin air causes increased money supply, which causes increased aggregate demand, which leads to higher average price level.
Let’s say you did a lot of work for someone, and they offered as payment a limited series art print by a very famous contemporary artist - numbered and signed by the artist. There are only 50 of these prints in existence. You see it as an investment, and you accept.
The artist, though, overspends what he makes (think US government) and needs more money. So he decides to print many more of this same print, sign them and sell them. He prints so many that you can see them in bars, restaurants, even sold on a home shopping network.
How much is your print now worth? If you were trying to use this print as barter to purchase something you need, could you purchase as much with it AFTER the many additional prints were distributed as you could before?
Because it’s printed out of thin air and dilutes the real value of a dollar!
Check out the US debt clock which does not include unfunded liabilities: The U.S. has $162 trillion in unfunded liabilities.
https://usdebtclock.org/index.html?taxpayer=
Note Biden’s actions it covers it all.
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.
I know. It’s hard.
*shakeshead*
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.
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.
yet, the costs of what is going up?
Everything, yet what causes those costs to go up?
when policy changes control how materials are retrieved, then, yeah, cost goes up, but just the simple adage, the fed is printing money! doesn’t explain anything.
The government printing money is a different excuse than the govt is stopping oil production and use of coal for power generation and the govt is at war the overseas shipping is stopped so precious metals and raw ore is not as available so costs go up.
If the government is buying bonds of their own, using their own money to buy from themselves, how does that make my groceries rise in price??
I fail to see any connection and all I hear and read is “When the govt prints money, money devalues and it makes prices go up and that is inflation”
Well, govt can print money all day and also pump more oil than ever like under trump and we had an economic boom. Inflation was quite low under some of the highest printing in history, highest deficit spending high, yet economic boom.
Under the same conditions. Yet the dollar did not devalue.
the printing of money did not cause oil production to slump or refineries to slow down, energy policy did. All goods, since they come by truck, need to rise in cost to recover the shipping costs. That is clear inflation caused by policy that is ongoing now. None of that is caused by printing money.
The repetition of “printing money causes inflation” is not explaining what I believe is the main cause of inflation now, and that is an intentional destruction of a working energy policy by shutting down oil leases and pipelines and phony sanctions on russian oil and increased oil imports at higher prices.
Supply and Demand.
More demand for the goods.
More of a demand increase than a supply increase, the price goes up.