The immediate act of borrowing money into circulation (a more accurate term to describe what happens when government creates money out of thin air), is an act of inflation. It is the very definition of inflation.
However, in a fiat money/central bank/fractional reserve banking (FRB) monetary environment, the very structure of FRB is one of leverage on the money supply. Banks that are allowed to practice fractional reserve banking also create money out of thin air based on the leverage that the “reserve ratio” implies. (leverage ~= 1-d/d)
On the upside, when private wealth increases, demand deposits increase and the bank can leverage those deposits (according to the reserve ratio) into new loans from which it earns interest and fees. This new money is the very same as if the government had printed it. It serves to bid up prices of goods and services.
But on the downside after the predictable “recession”, when private wealth decreases, the very same leverage has the opposite effect on loan creation, which is to say that fewer demand deposits reduce the ability (and willingness) of the bank to grant new loans, and that reduction is subjected to the very same multiplier, operating in reverse. This is a “contraction”.
This occurs during inflation, like is are happening at this very moment in Zimbabwe where inflation may hit 1.5 million percent. [1] Anyone who can convert their money wealth into something else such as gold, other currencies, hard assets like a tank of gasoline, a bag of grain, will do so. The local currency becomes worthless even as the nominal amount skyrockets. So the locals stop using it as much as they can. The nominal currency will keep hyper-inflating, but the amount of wealth it monetizes will plummet. This is why I wrote that inflation (and I was speaking of the extreme kind), can actually cause a drop in the money supply. Hyper-inflation causes the ultimate “drop” in the money supply when the currency collapses and will no longer be accepted by anyone. Its value drops to that of toilet paper and the government, if it survives, will take drastic steps to issue a currency, usually one with a different name, maybe even liked to the value of a hard currency like the dollar.
I am sure that everyone recalls the pictures of Germans with wheelbarrows of paper currency, money that became more valuable for fuel in the stove than for spending in the store.
[1] see: http://news.google.com/news?hl=en&ned=us&q=zimbabwe+inflation&btnG=Search+News
When private wealth increases, there are more goods and services being created, driving down the prices of goods and services.
But on the downside after the predictable “recession”, when private wealth decreases, the very same leverage has the opposite effect on loan creation, which is to say that fewer demand deposits reduce the ability (and willingness) of the bank to grant new loans, and that reduction is subjected to the very same multiplier, operating in reverse. This is a “contraction”.
Very interesting. Not what you said before (money supply contracts during inflationary periods causing deflation) so what's your point?
This occurs during inflation, like is are happening at this very moment in Zimbabwe where inflation may hit 1.5 million percent
Yes, inflation, increased money supply. Again, so what? Where is the deflation in your Zimbabwe example?
Hyper-inflation causes the ultimate “drop” in the money supply when the currency collapses and will no longer be accepted by anyone.
LOL! Just admit you were wrong. Your spinning is making me dizzy.
The dollar is hard currency? Not long ago you were calling it worthless paper.