Politicseconomicpolicy

Tue May 13, 2014, 08:18 PM

T/F? Increasing the monetary base causes inflation.

The right answer is, "That cannot be answered without specifying what the overall economic environment is like."

In a low-demand crisis with 0% Fed interest rates both history and conventional economics say it will not create inflation until the surrounding bad economy goes away.

This was a testable proposition. During the 1990s Japan faced deflation and doubled the Yen supply in trying to create some inflation, and could not.

But for some reason, folks continue to insist that the cause/effect MUST be right. So we got another real-world experimental test during the last five years, here in the USA:



Inflation is not caused by money supply. It is caused by demand, including demand for money borrowed at interest. (Which is how we turn a Fed authorization of another dollar into an actual dollar.)

Low demand=low inflation. (And "printing money" is not really printing money.)

It's like, "Would doubling the chocolate supply make this person fatter?" Not if he didn't want to eat it. Simply doubling the size of a pile of chocolate that someone is not going to eat wouldn't add a pound.

(Now, would doubling everyone's wages cause inflation? Yes. Of course. Because it would greatly increase demand. Demand isn't just wanting, it is wanting and being able to buy.)

chart from: http://krugman.blogs.nytimes.com/2014/05/08/predictions-and-prejudice/

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Reply T/F? Increasing the monetary base causes inflation. (Original post)
Zutak May 2014 OP
Tertius May 2014 #1

Response to Zutak (Original post)

Tue May 13, 2014, 08:31 PM

1. I think you are overcomplicating it

It is more correct to say that an increase in the money supply has an inflationary influence. However, as you noted, it is but one of many factors. Those other factors may well, and occasionally have, more than offset the influence of the increase.

In a system with so many variables affecting the outcome this really isn't all that surprising.

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