Shouldn’t money printing cause inflation?
Between 2008 and 2013 money supply grew at 33%, while inflation remained persistently low (below 2 percent).


Because inflation is also affected by the rate at which money changes hands in the economy (velocity), which has been falling just as fast:
Beaver Capital's avatar
Very interesting seeing the trend of the velocity of money... what possible conclusions could we draw from this?

Perhaps individuals are saving more/spending less or their incomes? Or is it just because the supply of money has grown MUCH faster than GDP?
Nathan Worden's avatar
@beaver_cap one potential theory is that as wealth inequality becomes more stark, the velocity of money slows down because rich people tend to park their money in assets and spend less often than poorer people. Perhaps a lot of the money is sitting in assets like real estate, where rich families have no plans of ever selling. A dollar that gets parked in the same asset for the generation is kind of like a dollar being removed from the economy.
Brett Schafer's avatar
Great point a lot of people seem to disregard. Also, if money is just sitting in a Federal Reserve bank account and not pushing its way out into the real economy, that is also not inflationary

Why QE inflation fears were unwarranted but the stimulus check inflation fears were warranted
Nathan Worden's avatar
@ccm_brett exactly— money that is added to the system that is spent often gives inflation a lot of chances to move higher (inflation happens when each incremental transaction was more than the previous). When there are less transactions, there are less increases that can occur. So it definitely matters if the new money is sitting in the Federal Reserve or distributed to people who will spend it.
Ben's avatar
In my non economist opinion when the fed increased its balance sheet, it was buying bonds. That means the other entity in that transaction was given cash. Cash to spend. 3-4 trillion worth
Nathan Worden's avatar
@rpinvestments right— and that cash should eventually make it’s way out into the broader economy, but apparently it didn’t as fast as in the 1990s. So inflation was definitely going to happen, but velocity of money is always changing, which makes it hard to predict when exactly the inflation happens.
Ben's avatar
@nathanworden good stuff. I learned something new
Edmund Simms's avatar
@rpinvestments and @nathanworden Central banks don't pay cash. Instead, they pay with central bank reserves. Commercial banks must have an adequate amount of these with the central bank to ensure that their transactions with other banks can clear each day. These don't affect the amount of spendable money in the economy.
Ben's avatar
@valuabl something about this is hard to fully wrap my head around. If the commercial banks didn’t have adequate reserves would they have to pull back on lending?
Edmund Simms's avatar
@rpinvestments Which part specifically are you confused about? I'll try my best to explain it in plain English.

  1. Banks don't lend money they have: they create money when they lend. You take a loan, and the bank pushes a button to put the deposit in your account.
  1. Central bank reserves are so banks can do transfers with each other. When you pay me, your bank tells the central bank to take from their reserve account and give it to my bank.
  1. Reserves only impact a bank's ability to lend if they don't have enough to settle the inter-bank transactions or if they don't meet the legal amount they need. But they can borrow reserves from other banks easily.
  1. When the central bank buys bonds from commercial banks, they pay with reserves. This means there are more reserves that banks can lend or borrow. More reserves but similar demand drives interest rates down.
Ben's avatar
@valuabl I think that made it worse. Not your fault. Thanks for trying. I’m going to put this one in the too hard pile and continue to not invest in banks
Edmund Simms's avatar
@rpinvestments I'm sorry. I wish I had done a better job instead of confusing you more. I'm happy to discuss and explain whenever you're interested.
Dissecting the Markets's avatar
To add to it, the effects of supply and demand are more influential on the price of goods and services than the power of money printing. Example: from 2016 to 2020, oil prices have been lower on average despite the immense amount of money printing that happened during that time.
Nathan Worden's avatar
@dissectmarkets good point and example^
Karan Malhotra's avatar
This always comes back to a misunderstanding of QE. All that happens is The Central bank buys bonds from authorised dealers (banks) and swaps them with bank reserves of equivalent value. THESE RESERVES CANNOT BE LENT OUT. And are trapped inside the banking system.

That’s why none of the money makes it’s way into the broader economy and does not, and cannot cause inflation.

The intended effect is to lower bond yields, lower the price of collateral and raise asset prices as people get pushed out of Low yielding bonds into other securities seeking return, but this is a. Indirect b. Not at all guaranteed

Plot the same graph for the ECB and the BOJ and not only do you not see inflation, but also don’t see increase in asset prices

Stimulus checks on the other hand are direct cash transfers to people and do get spent, causing an increase in demand.
Nathan Worden's avatar
@karan10489 Really great point here^
Followed 😃
Edmund Simms's avatar
@karan10489 You're up to date on your modern monetary theory! A+ explanation, sir
Conor Mac's avatar
@valuabl Karan is a smart dude
Edmund Simms's avatar
There are two reasons: First, money creation doesn't cause consumer price inflation if the economy can adequately accommodate the new money. Second, most of what people think is money creation isn't—they misunderstand what money is and how our banking system creates it.
Nathan Worden's avatar
@valuabl Amen— and to be fair, understanding money and how our banking system creates it gets into the weeds a tad for people not interested in money & finances. So boiling down the explanation to a simple but still accurate description is very useful. (You are good at this by the way 😃)
Edmund Simms's avatar
@nathanworden That is a stunning compliment. Thank you!
Alan's avatar
The Fed seems so distracted by the stockmarket. They seemed unduly worried about the market going up before Jackson hole and are overtly happy it went down after Powell’s speech. They seem to think the stock market is a very major driver of inflation whereas that seems unlikely to be true.

Either that or they want to create tightening through tough talk so they don’t have to raise rates as much.
Deer Point Macro's avatar
This is due to the changes in the quantity theory of money. P=MV/Y would assume that money supply does not necessarily lead to increases in the price level, but outside the level of output, and additional the velocity of money. So as time has passed in the long-run we realize that the velocity of money is not constant, and is secular trends. This is the real idea of why monetary inflation (doesn't exist)
Rihard Jarc's avatar
I think the tipping point in 2020 and 2021 was because of fiscal stimulus (helicopter money) together with monetary. First time we saw both of that combined.
Moses Sternstein's avatar
IMO, macro jargon tends to over-complicate what's a relatively straightforward supply-demand concept. If you created more cars without a change to the demand for cars, then prices would drop. If you created more money, without a change to the demand for money, then prices would drop. The "velocity" of money is just a rough proxy for demand--if you're doing a lot of transacting, then the money supply ought to increase (for the same reason that money is useful in the first place). If you just add more money without any change to the underlying economic behavior, then you're just cheapening the money that's already there.
Nathan Worden's avatar
@holymoses Ooo I like this^, I think this is better than saying ‘velocity of money’ — as that tends to lose people. Going to try out this explanation next time I’m discussing this.
Nathan Worden's avatar
@holymoses wait, but quick follow up on:

“If you created more money, without the demand for more money, then prices would drop”

Is that true?

If there is more money but the same amount of goods, doesn’t that force people to pay more to get the thing they wanted?
Moses Sternstein's avatar
@nathanworden ...sorry for the delayed response, but the "price of money would drop," which is admittedly unclear, but the point is to think of money as a good, subject to the same principles of supply-demand. If you supply more of it without any change to demand, it becomes less valuable, i.e. the price drops, (which means the price of everything else goes up).
Nathan Worden's avatar
@holymoses Got it, I take your point, and I think we were saying the same thing in two different ways 😄
Ian MacLean's avatar
Inflation is an expansion in the money supply. All else is obfuscation. Von Mises dissects the velocity thing pretty humorously in his work; I recommend it. The absence of price effects in the US over that period has a lot to do with the global demand for/shortage of dollars in the Eurodollar system. /2cents
Edmund Simms's avatar
@madbadetc How does Japan fit into the money supply inflation argument? If you have time, would you mind sharing your thoughts on this?