Revisiting Distortionary Effects of Increasing The Money Supply

It doesn’t take an economic genius to understand why increasing the money supply leads to an increase in the general price level.

Let’s look at a thought experiment. Let’s say you could create perfectly passable hundred dollar bills. You use this fake money to buy a couch. The economy didn’t suddenly grow 100 dollars, despite your insistence that you’ve gotten something of value, because the value was taken from someone else.

Over time, as you increasingly spend this money, there become more dollars chasing the same amount of goods and services. This results in prices rising. Interestingly, prices rise at varying speeds depending on the proximity to the person creating the money. Because the couch seller was among the first people receiving this new money, he would be able to adjust faster than someone further away from the initial source. The fake money wouldn’t necessarily move to a food vendor as quickly, so it would them longer to catch up to what real prices should be.

This analogy really makes you a scumbag, because even if you aren’t caught, you’re distorting the economy, stealing from everyone in a subtle way, while appearing to be a patron.

Enter the US government. The US government does exactly that when it tries to print more money to pay its debts (the couches and social programs). Typically, banks are the first intermediary that gets their hands on this money, and are able to capitalize upon their position as a result of it. Inflation hits everyone, and for some reason because ‘experts’ proclaim the importance of doing so, people fall for the same idiocy hook, line, and sinker.