Comments on: Effect of Printing Money on Economy http://www.economicshelp.org/blog/economics/effect-of-printing-money-on-economy/ Economics Blog - current events and economics essays Thu, 18 Mar 2010 19:46:30 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: How Long Will Interest Rates Stay Low? | Finance Blog http://www.economicshelp.org/blog/economics/effect-of-printing-money-on-economy/comment-page-1/#comment-2858 How Long Will Interest Rates Stay Low? | Finance Blog Tue, 10 Mar 2009 09:23:17 +0000 http://www.economicshelp.org/blog/?p=1377#comment-2858 [...] The effects of quantitative easing on inflation is hard to quantify. Traditional analysis (in normal times) suggests printing money causes inflation. This link is not as simple though. With falling velocity of circulation, it is possible to increase money supply without inflation. For more details see: effect of printing money on economy [...] [...] The effects of quantitative easing on inflation is hard to quantify. Traditional analysis (in normal times) suggests printing money causes inflation. This link is not as simple though. With falling velocity of circulation, it is possible to increase money supply without inflation. For more details see: effect of printing money on economy [...]

]]> By: Ralph Musgrave http://www.economicshelp.org/blog/economics/effect-of-printing-money-on-economy/comment-page-1/#comment-2841 Ralph Musgrave Sat, 07 Mar 2009 07:52:42 +0000 http://www.economicshelp.org/blog/?p=1377#comment-2841 The above is a good summary of quantitative easing. But I disagree on the following points. It is claimed above that “If a government prints money faster than the growth of real output it reduces the value of money and this invariably causes inflation.” The word “invariably” is too strong. Printing money does not necessarily cause inflation: the initial effect is to boost demand. If demand is boosted by just enough to escape the recession, but not by so much as to cause excessive demand, then with a bit of luck, no inflation would ensue. The US monetary base has DOUBLED in the last quarter. This is unprecedented, but no one is expecting rampant inflation in the US any time soon. The third para above refers to “ quantitative easing (a form of printing money)”. Q.E. does not necessarily involve printing money. The Bank of England a month or so ago announced that it intended starting on Q.E. quite soon, but that it would initially sterilise any money supply increase by selling gilts. They said that a month or two down the road they would think above ceasing to sterilise if it looked as though the economy needed a stronger boost. “In a very serious recession, demand falls so much that it is possible to increase money supply without creating deflationary pressure.” The word “deflationary” should be “inflationary” should it not? The above is a good summary of quantitative easing. But I disagree on the following points.

It is claimed above that “If a government prints money faster than the growth of real output it reduces the value of money and this invariably causes inflation.” The word “invariably” is too strong. Printing money does not necessarily cause inflation: the initial effect is to boost demand. If demand is boosted by just enough to escape the recession, but not by so much as to cause excessive demand, then with a bit of luck, no inflation would ensue. The US monetary base has DOUBLED in the last quarter. This is unprecedented, but no one is expecting rampant inflation in the US any time soon.

The third para above refers to “ quantitative easing (a form of printing money)”. Q.E. does not necessarily involve printing money. The Bank of England a month or so ago announced that it intended starting on Q.E. quite soon, but that it would initially sterilise any money supply increase by selling gilts. They said that a month or two down the road they would think above ceasing to sterilise if it looked as though the economy needed a stronger boost.

“In a very serious recession, demand falls so much that it is possible to increase money supply without creating deflationary pressure.” The word “deflationary” should be “inflationary” should it not?

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