What's the downside to printing money?

[PRB]

Obviously.

Now I'm not getting hung up on stupid semantic quibbles like "monetary base" vs. "money supply." I understand what you mean by monetary base and by your question. Prices have gone up in terms of the US dollar because there keep being more and more US dollars created. It's pretty simple.

would the fact there are more dollars in circulation or possession always mean it's due to irresponsible printing? I mean, what IF people genuinely earned it by mining more gold or refining more oil? What IF people actually made more money and production by having babies that grow up to actually produce?

[helmuth_hubener]

would the fact there are more dollars in circulation or possession always mean it's due to irresponsible printing? I mean, what IF people genuinely earned it by mining more gold or refining more oil? What IF people actually made more money and production by having babies that grow up to actually produce?

The situation is very simple, logically:

There is, on any given day, a certain number of transactions that want to get done,

and there is also on that same day a certain amount of money that exists.

If there were two people on an island and they wanted to do two transactions and they had ten dollars, the prices in the transactions would be something. Let's make it simple and say five dollars each (they have no desire for saving nor anything else). If, on the other hand the ten dollars magically molt and they suddenly have twenty dollars, all else equal the prices in the two transactions would be double. Instead of five dollars each, it will be ten.

This only works perfectly and mathematically predictably if all else stays equal except for the magical increase in money supply which springs uncaused from the brow of Zeus, is perfectly evenly distributed, does not change any other factors, and occurs to humans without any psychology (such as sticky price expectations) which might make their behavior less predictable. That's what perhaps Madison doesn't understand. But the principle is still true and does, in fact, work roughly even in the messy and uncertain world that we actually live in. Creating more money does tend to decrease the price of money -- that is, it tends to cause more price inflation or less price deflation than would otherwise occur. Just as increasing the supply of anything else does tend to decrease its price.

And yes, this applies whatever is being used as money. If gold is being used as money and there is a huge gold hoard found that doubles the gold supply, that will tend to cause the price of gold to fall. All else equal. Which it never is. But the law of supply and demand is still useful to understand nevertheless.

[Madison320]

Obviously.

Now I'm not getting hung up on stupid semantic quibbles like "monetary base" vs. "money supply." I understand what you mean by monetary base and by your question. Prices have gone up in terms of the US dollar because there keep being more and more US dollars created. It's pretty simple.

Right, so my point is simple. Over the long haul, by far the main factor in prices is the monetary base. And since our monetary base has exploded, like never before, I expect prices to do the same eventually. The only thing I don't know is the timing.

[Madison320]

The situation is very simple, logically:

There is, on any given day, a certain number of transactions that want to get done,

and there is also on that same day a certain amount of money that exists.

If there were two people on an island and they wanted to do two transactions and they had ten dollars, the prices in the transactions would be something. Let's make it simple and say five dollars each (they have no desire for saving nor anything else). If, on the other hand the ten dollars magically molt and they suddenly have twenty dollars, all else equal the prices in the two transactions would be double. Instead of five dollars each, it will be ten.

This only works perfectly and mathematically predictably if all else stays equal except for the magical increase in money supply which springs uncaused from the brow of Zeus, is perfectly evenly distributed, does not change any other factors, and occurs to humans without any psychology (such as sticky price expectations) which might make their behavior less predictable. That's what perhaps Madison doesn't understand. But the principle is still true and does, in fact, work roughly even in the messy and uncertain world that we actually live in. Creating more money does tend to decrease the price of money -- that is, it tends to cause more price inflation or less price deflation than would otherwise occur. Just as increasing the supply of anything else does tend to decrease its price.

And yes, this applies whatever is being used as money. If gold is being used as money and there is a huge gold hoard found that doubles the gold supply, that will tend to cause the price of gold to fall. All else equal. Which it never is. But the law of supply and demand is still useful to understand nevertheless.

I agree that there are other factors besides the monetary base. If the monetary base had gone up maybe 50% over the last 5 years then you'd be right, the upward force on prices could easily be overcome by other factors. But the monetary base has increased by something like 600% over the last 5 years! It would take a miracle for the other short term factors to keep prices down. And what would happen if other countries quit using dollars and demand drops?

[Zippyjuan]

I agree that there are other factors besides the monetary base. If the monetary base had gone up maybe 50% over the last 5 years then you'd be right, the upward force on prices could easily be overcome by other factors. But the monetary base has increased by something like 600% over the last 5 years! It would take a miracle for the other short term factors to keep prices down. And what would happen if other countries quit using dollars and demand drops?

The monetary base increased by that amount because banks had tons of money people weren't borrowing. The monetary base is cash plus bank reserves (money in their vaults or money they parked at the Fed because there was no demand for it). Money in banks is not circulating- having any impact on prices. It has to be spent to do so.

The money supply (which is NOT the monetary base) did not grow by 600%. M2 is the most commonly used measure of money supply. In five years, M2 has increased about 15%- not 600%.

You are focused on the wrong thing- that is why you aren't seeing the impact you think you should be seeing. M2 is more important as far as price inflation is concerned. The size of the monetary base has zero impact on it.


http://deshurkoblog.com/2011/10/26/c...ly-be-trusted/

Now if that monetary base were to suddenly and sharply decline (because spending and borrowing was soaring- drawing on that excess cash banks have), then you probably would see an impact on prices. That would not be because of the size of the monetary base but because of economic activity. If the monetary base leaks out slowly into the economy (slow growth in demand for money) it would have minimal impact on prices.

[Zippyjuan]

http://www.businessinsider.com/the-m...-supply-2011-3
This is from 2011 but explains some of it.

The Myth Of The Exploding US Money Supply

Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation. We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow. But regular readers are all too aware that the monetary base has no correlation with the broader money supply. The reasoning is simple – the money multiplier is a myth. So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves. It doesn’t result in more apple sales (loans). Banks are never reserve constrained. The explosion in reserves and continuing decline in loans makes this crystal clear. The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.

But what about M2? Isn’t it also exploding higher now? Not really.
<snip>


The story here couldn’t be more self explanatory. The US M2 money supply is simply not expanding anywhere close to its historical rate. The only country where the M2 money supply is seeing any sort of substantive growth is in China. And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices. While I don’t think it’s incorrect to blame some speculative aspect of this rally on the Fed it is entirely incorrect to blame the Fed for the commodity rally due to their “money printing”. The fact is, the USA is not expanding the money supply at an alarming rate.

Chart is money supply from different countries/ areas.

[Madison320]

The monetary base increased by that amount because banks had tons of money people weren't borrowing. The monetary base is cash plus bank reserves (money in their vaults or money they parked at the Fed because there was no demand for it). Money in banks is not circulating- having any impact on prices. It has to be spent to do so.

The money supply (which is NOT the monetary base) did not grow by 600%. M2 is the most commonly used measure of money supply. In five years, M2 has increased about 15%- not 600%.

You are focused on the wrong thing- that is why you aren't seeing the impact you think you should be seeing. M2 is more important as far as price inflation is concerned. The size of the monetary base has zero impact on it.

The monetary base has everything to do with the money supply. That's why it's called "high powered money". The fact that M2 is not way up is because the money multipliers are down. What happens when they go up?

http://en.wikipedia.org/wiki/Monetary_base

"The monetary base (MB) is called high-powered because its increase will typically result in a much larger increase in the supply of demand deposits through banks' loan-making; a ratio called the money multiplier.[1]"

Now if that monetary base were to suddenly and sharply decline (because spending and borrowing was soaring- drawing on that excess cash banks have), then you probably would see an impact on prices. That would not be because of the size of the monetary base but because of economic activity. If the monetary base leaks out slowly into the economy (slow growth in demand for money) it would have minimal impact on prices.

The monetary base does not decline when banks remove money from their reserves. It just changes locations. Suppose the monetary base was 1 trillion and all of it was in reserves. Now suppose commercial bank A cashes 500 billion of that 1 trillion. What's the monetary base now? Answer: 500 billion in reserves + 500 billion in cash = 1 trillion.

You make is sound like the fact that the money multipliers are currently low, and the fact that a lot of the money is in reserves means we won't have price increases. But these facts show that the potential price inflation is even HIGHER than the rise in the monetary base would indicate.


You never answered my question. Why have prices, measured in dollars, gone up so much in the last 100 years?

[Zippyjuan]

The monetary base does not decline when banks remove money from their reserves. It just changes locations. Suppose the monetary base was 1 trillion and all of it was in reserves. Now suppose commercial bank A cashes 500 billion of that 1 trillion. What's the monetary base now? Answer: 500 billion in reserves + 500 billion in cash = 1 trillion.

Yes, the monetary base does decline when banks remove money from their reserves- by definition. If A = B + C and if B is reserves with C being Cash and B gets smaller by taking money out of reserves, then A (the monetary base) will go down. Basic algebra.

Cash is the sum of all the coins and paper money printed up by the US Treasury. Reserves are deposits a bank has not lent out. A bank would not use reserves to purchase cash- that would only change the form of their reserves- not the amount of reserves. You are right that $500 billion plus $500 billion is $1 trillion- but that money is still all reserves- until it is loaned out. You haven't reduced reserves in your example. If money is lent out, their reserves go down and since the monetary base is by definition cash in the entire banking system plus reserves, lowering reserves by making loans will lower the monetary base.

To multiply money, you have to lend it out. Excess reserves are not lent out so the multiplier on that money is zero. If a bank is making loans, again, reserves are declining and so is the monetary base. It can potentially multiply in the future but as long as it is in the base (reserves) , it cannot multiply.

Note from your own link:

In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) in a country is defined as the portion of the commercial banks' reserves that are maintained in accounts with their central bank plus the total currency circulating in the public (which includes the currency, also known as vault cash, that is physically held in the banks' vault).

The monetary base should not be confused with the money supply which consists of the total currency circulating in the public plus the non-bank deposits with commercial banks.

You never answered my question. Why have prices, measured in dollars, gone up so much in the last 100 years?

I was trying to clarify one point without confusing it by having multiple topics going on but prices will increase for many reasons- one can be increases in the money supply. The problem is that the monetary base is not a measure of the money supply- this is what I have been trying to get across to you.

The Base may have gone up sharply, but the money supply hasn't. That is why we haven't seen any spikes in prices. Supply is what matters- not the base.

Increasing the monetary base actually is a slowdown of the circulation of money- not an increase. One of the tools the Fed has (which they don't really use because it is crude and has limited effect) is to reduce money circulating by requiring banks to keep more money in reserves by increasing reserves requirements. That reduces the amount of loans they can make and reduced the amount of money which would have otherwise been circulating. The growth in the monetary base today is because there is no demand for the money the Fed has been using to buy US Treasury notes and mortgage backed securities so it is just sitting around at the banks.

If the monetary base declines, that will mean that more money is circulating and could potentially lead to higher prices (again, depending on how quickly or slowly the base reduces itself). Had that money gone into circulation instead of reserves and the base stayed low, then we might be seeing higher prices today than we are.

[Madison320]

I was trying to clarify one point without confusing it by having multiple topics going on but prices will increase for many reasons- one can be increases in the money supply. The problem is that the monetary base is not a measure of the money supply- this is what I have been trying to get across to you.

From the Federal Reserve's website:


"There are several standard measures of the money supply, including the monetary base, M1, and M2"

http://www.federalreserve.gov/faqs/money_12845.htm

[Zippyjuan]

Up until the Great Recession, the Monetary Base was basically all cash since banks didn't want to carry any excess reserves. I concede it is a measure but it is not a terribly useful one to try to predict anything like price inflation.

Link also points out:

Over some periods, measures of the money supply have exhibited fairly close relationships with important economic variables such as nominal gross domestic product (GDP) and the price level. Based partly on these relationships, some economists--Milton Friedman being the most famous example--have argued that the money supply provides important information about the near-term course for the economy and determines the level of prices and inflation in the long run. Central banks, including the Federal Reserve, have at times used measures of the money supply as an important guide in the conduct of monetary policy.

Over recent decades, however, the relationships between various measures of the money supply and variables such as GDP growth and inflation in the United States have been quite unstable. As a result, the importance of the money supply as a guide for the conduct of monetary policy in the United States has diminished over time.

[helmuth_hubener]

Right, so my point is simple. Over the long haul, by far the main factor in prices is the monetary base. And since our monetary base has exploded, like never before, I expect prices to do the same eventually. The only thing I don't know is the timing.

I would agree. And I think there are good reasons to think that we will have a monetary crisis eventually. But I mean that "eventually" really, really seriously, and that "eventually" could be really, really long. I should write it like this:

E E V V E E N N T T U U A A L L L L Y Y

You say "the only thing I don't know is the timing," as if that is no big deal. That is EVERYTHING! The only thing this guy didn't know was the timing, too:



And, even more relevantly, this guy:



You should absolutely pick up this book from Amazon. Crisis Investing: Opportunities and Profits in the Coming Great Depression, by Doug Casey. It's great. It will explain exactly what you are explaining. It will tell you all the exact same things are inevitable that you already know are inevitable. You will be 100% on board with it, just in 100% agreement.

The only problem is he was explaining why it was inevitable in 1980.

You may not live long enough for your "eventually" to come to pass.

Better to live with reality as it is. Also it only makes sense to admit that you simply do not know what 7 billion people's choices are going to be tomorrow, nor the next day, nor the next.

[PRB]

I would agree. And I think there are good reasons to think that we will have a monetary crisis eventually. But I mean that "eventually" really, really seriously, and that "eventually" could be really, really long. I should write it like this:

E E V V E E N N T T U U A A L L L L Y Y

You say "the only thing I don't know is the timing," as if that is no big deal. That is EVERYTHING! The only thing this guy didn't know was the timing, too:



And, even more relevantly, this guy:



You should absolutely pick up this book from Amazon. Crisis Investing: Opportunities and Profits in the Coming Great Depression, by Doug Casey. It's great. It will explain exactly what you are explaining. It will tell you all the exact same things are inevitable that you already know are inevitable. You will be 100% on board with it, just in 100% agreement.

The only problem is he was explaining why it was inevitable in 1980.

You may not live long enough for your "eventually" to come to pass.

Better to live with reality as it is. Also it only makes sense to admit that you simply do not know what 7 billion people's choices are going to be tomorrow, nor the next day, nor the next.

Liberty movement: Mocking global warming alarmists, doesn't see the hypocrisy of being hyperinflation alarmist.

[Madison320]

Up until the Great Recession, the Monetary Base was basically all cash since banks didn't want to carry any excess reserves. I concede it is a measure but it is not a terribly useful one to try to predict anything like price inflation.

Link also points out:

OK, so why has M2 increased so much over the last 100 years?

[Madison320]

I would agree. And I think there are good reasons to think that we will have a monetary crisis eventually. But I mean that "eventually" really, really seriously, and that "eventually" could be really, really long. I should write it like this:

E E V V E E N N T T U U A A L L L L Y Y

You say "the only thing I don't know is the timing," as if that is no big deal. That is EVERYTHING! The only thing this guy didn't know was the timing, too:



And, even more relevantly, this guy:



You should absolutely pick up this book from Amazon. Crisis Investing: Opportunities and Profits in the Coming Great Depression, by Doug Casey. It's great. It will explain exactly what you are explaining. It will tell you all the exact same things are inevitable that you already know are inevitable. You will be 100% on board with it, just in 100% agreement.

The only problem is he was explaining why it was inevitable in 1980.

You may not live long enough for your "eventually" to come to pass.

Better to live with reality as it is. Also it only makes sense to admit that you simply do not know what 7 billion people's choices are going to be tomorrow, nor the next day, nor the next.

So you're saying that because some guys made bad predictions that nothing can be predicted?

[helmuth_hubener]

So you're saying that because some guys made bad predictions that nothing can be predicted?

No, I am not saying that.

Here is something to consider:

The exact, exact, exact, exact, exact same reasons that you are so convinced that hyperinflation is coming were why Doug Casey was so convinced that hyperinflation was coming in 1980.

Read the book, Madison. Honestly, read it. You can probably get it for one cent.

Yep, sure enough:

http://www.amazon.com/Crisis-Investi.../dp/0936906006

I am not saying that Doug Casey was wrong, exactly. It may have been coming. I am not saying that you are wrong, exactly. It may still be coming. But it will not necessarily come in your lifetime. And so it's something to be prepared for, but it's not something to bet on.

[Zippyjuan]

OK, so why has M2 increased so much over the last 100 years?

Why has the population increased so much over the last 100 years? Why has the economy grown so much over the last 100 years?

If the money supply grows along with the economy and population, there is no pressure on prices due to an increasing money supply- the growing economy demands more money. If the money supply grows faster than the population and economy then it can apply pressure for higher prices. Price inflation has been low because growth in the money supply has not been much above growth in the economy/ population.

[PRB]

So you're saying that because some guys made bad predictions that nothing can be predicted?

of course, why else can we say global warming is a scam?

[Madison320]

No, I am not saying that.

Here is something to consider:

The exact, exact, exact, exact, exact same reasons that you are so convinced that hyperinflation is coming were why Doug Casey was so convinced that hyperinflation was coming in 1980.

Wrong, Wrong, Wrong, Wrong

The main two factors for price inflation are debt and the monetary base. Actually the monetary base is the main one, but governments tend to print when they are in debt. So maybe the best way to say it, is the monetary base drives prices higher and the debt drives the monetary base higher.

But in 1980 the monetary base and the debt were not rising that much!!!!

[helmuth_hubener]

But in 1980 the monetary base and the debt were not rising that much!!!!

Oh my goodness, read the book, of course they were!

[Madison320]

Why has the population increased so much over the last 100 years? Why has the economy grown so much over the last 100 years?

If the money supply grows along with the economy and population, there is no pressure on prices due to an increasing money supply- the growing economy demands more money. If the money supply grows faster than the population and economy then it can apply pressure for higher prices. Price inflation has been low because growth in the money supply has not been much above growth in the economy/ population.

So the massive increase in M2 is due to population growth????

I looked up a chart on M2 and in 1959 (that's as far back as it went) M2 was 286 billion. Now it's 11,351 billion. That's an increase of 4,000% (40 times). Population in 1959 was 180 million now it's 310 billion. That's an increase of 172% (less than double). Do you still think the increase in M2 is due to the population increase?

[Madison320]

Oh my goodness, read the book, of course they were!

Why do I have to read that book to know that the monetary base and debt were not rising that fast in 1980? Can't I just look a chart?

Why am I wasting my time with you and Zippy and PRB? I feel like I'm getting tag teamed by three trolls!!!!! PRB claims prices have not risen over the last 100 years, Zippy claims money printing has no effect on rising prices, and while you agree that money printing causes prices to rise, you think it won't happen anyway because some guy wrote a book in 1980. Arghhhhhhhhhhhhhhhhh!!!!!!!!!!!!!!

[Zippyjuan]

So the massive increase in M2 is due to population growth????

I looked up a chart on M2 and in 1959 (that's as far back as it went) M2 was 286 billion. Now it's 11,351 billion. That's an increase of 4,000% (40 times). Population in 1959 was 180 million now it's 310 billion. That's an increase of 172% (less than double). Do you still think the increase in M2 is due to the population increase?

What has happened to GDP in that time? In 1959 it was $506 billion. https://research.stlouisfed.org/fred2/data/GDP.txt Today it is $17 trillion. An increase of 3,400%.

I have not claimed that printing money has no impact on prices and no- the increase in M2 was not DUE TO population growth- what I was saying is that if the economy is growing at about the same rate as the money supply that that is not price inflationary. If we were producing two apples and had $2 to buy apples then an apple costs $1 each. If we produce four apples and the money supply is $4 dollars (a doubling) apples are still $1 each.

[PRB]

Why do I have to read that book to know that the monetary base and debt were not rising that fast in 1980? Can't I just look a chart?

Why am I wasting my time with you and Zippy and PRB? I feel like I'm getting tag teamed by three trolls!!!!! PRB claims prices have not risen over the last 100 years, Zippy claims money printing has no effect on rising prices, and while you agree that money printing causes prices to rise, you think it won't happen anyway because some guy wrote a book in 1980. Arghhhhhhhhhhhhhhhhh!!!!!!!!!!!!!!

clearly the 4 of us can't all be right.

[helmuth_hubener]

you think it won't happen anyway because some guy wrote a book in 1980.

Actually, I did not say this, do not say this, and am not planning on saying this any time soon. I am agnostic on whether or not prices are going to rise rapidly in the next little while. Does that make sense? I am not saying yes, I am not saying no. I'm saying I don't know.

You, on the other hand, are saying that you do know. You say you don't know when, but actually you do know it will be "soon," so you kind of do know when, just not in any quantifiable, falsifiable, or useful way. Well, what can I say, Madison? I'm glad you know everything.

How old are you, by the way?

[PRB]

Well, what can I say, Madison? I'm glad you know everything.

How old are you, by the way?

What is this? a bar? I didn't know I have to get carded to be a conspiracy theorist.

Every conspiracy theorist knows "A 3 year old knows that!", you're never too young to believe in conspiracy theories, it's the older you get that the more brainwashed you are and the less you're able to think for yourself and discover the TRUTH.

He doesn't know everything, he just knows more than us because he spent a few hours Googling stuff he wants to believe, who are we to tell him he's wrong?