Thursday, May 14, 2020

Why no inflation with printed money? My hypothesis.

Seems like our federal government is now being largely financed by printed money. Not borrowed money, I guess. For years, not enough taxpayer money and too much spending for "pay as you go." Now due to the virus this situation is even more pronounced.

A hazard from printed money is inflation, but some economists wonder, "where is the inflation?"

I recently saw a comment, on Facebook, that seems to answer that question succinctly. "Deflation is cancelling out inflation." Brilliant.

Some things go way up in price while other things don't go up, or even go down in price due to cheap imports, technology or economic downturns. This catches people and business; especially small business; in a bind. How does one pay rising rent when the cost of the widgets one is selling goes down?

The trade situation weighs into this as well. When there is monetary restraint, meaning the printing of less money, the dollar remains stronger. This means our domestic market gets flooded with cheaper widgets from overseas.

It also means foreign money flows into the US as a "safe haven" for investors. This pushes up the cost of things like real estate, thus increasing the cost of living and doing business in the US.

On the other hand, if we print money and devalue the dollar, our products become cheaper on world markets thus helping American business and workers sell products to the world market. It can make products more expensive for American consumers.

Often workers are consumers as well. We do often want the best of both worlds.

Being caught between cheap products and expensive things like healthcare costs, education costs and land values can hurt; especially if you make your living manufacturing and selling products. It's like doing the splits. It's the splits that hurts.

If there's too much inflation so inflation gets totally out of control, that would hurt also, eventually. That doesn't seem to be a problem in the foreseeable future, tho.

Farther down the road and theoretically, yes. Out of control inflation can be a big problem.