i understand that inflation happens if the costs to produce the goods go up, such as if all the laborers demand a raise then the store will have to charge more. what i don't understand is that they say when the fed prints money then that creates inflation (could be i am remembering wrong and this does not cause inflation rather it has a different effect) . but i would think that this should only apply when they are giving the money to everybody such as stimulus checks, but why does the fact that they are buying bonds create inflation (i'm under the assumption that it does)? everytime they buy bonds the money is ending up in our pockets? for some reason i never felt it in mine!! thanks for putting up with my ignorance and looking forward to the responses
I dunno a lot of people are smarter about this than I am. I have one full semester of college level econ so you could say I am about as smart as your average MBA from wharton. Buying bonds from the government is the way cash goes into circulation. Government issues a big ole IOU and the fed prints the cash. That cash exists in some coffer somewhere (or a digital receipt). I'd imagine a simple calculation would be something like 1 - $new_cash/$old_cash to get some dead simple inflation number. So, because there's more cash in circulation, all of the cash currently in circulation is devalued. This causes inflation because the mechanism of action is the cost of goods goes up (first theoretically, and then realistically). It doesn't matter if the cash is issued to the proles, all that matters is it exists.
i figured it would be something like what you are saying. but if i were to guess, i would say that most of the money that the fed prints is staying in the big funds that are dealing with the bonds, and not ending up at the cash register in walmart.
It doesn't even have to do that. Again, the fact the cash exists devalues the currency. Imagine you had a basket of apples you sell for some price. If you consider all apples you know about you can reach a fair price for those apples in your market. But what happens if someone who was hoarding apples comes in to dump theirs? This is why it doesn't matter. The fact the money exists means the government can issue it at will. This causes an instantaneous decrease in the value of the dollar because regardless of when those dollars are used, they exist, and so the value of current dollars has to decrease to equalize with the new dollars.
i agree with what you are saying. but that would just mean that it is worth less, and maybe it would make a difference if i try to exchange it with a different currency. but in the united states it should still have the same amount of purchasing power because i don't see how the fact that here are more dollars locked up somewhere can cause that walmart can raise their price? so are tou saying that all it does is devalue the dollar but in the usa it shouldn't make a difference, or are you saying that somehow your reasoning also applies to a reduction in purchasing power in the usa?
The reduction in purchasing power comes from how money actually reaches the proles. Which is through debt obligations. Money becomes cheaper. Think of how houses go up. It's the simplest example I can think of. When inflation raises, money gets cheaper, banks get cash into the hands of people through cheaper mortgages. Since more people can buy houses, supply dwindles, housing prices goes up. Now expand this to every industry. Let mortgages be 10 net 30 purchase orders instead. The same logic applies. Money gets into the hands of companies, more companies can buy supplies, the market can't respond fast enough, so prices of goods goes up. This gets passed onto the consumer.
sorry for my ignorance.but i would say that selling the bonds back to the goverment is what causes there to be more cash, not buying bonds? am i wrong on this?
That's wrong. The cash is created because the government writes the big ole IOU (a bond) and the treasury buys it with freshly printed money (creating the cash). Inflation is controlled by the government buying the bonds back from the fed. The government buys with cash-in-circulation, giving it back to the fed which is then (theoretically) destroyed. When YOU buy a bond from the government you are not creating money. The money creation comes from the fact the fed buys the bond with money that didn't exist before. Right where we started above. Money creation in a fiat economy begins by the government selling a debt obligation to the fed. In exchange for that debt obligation the fed prints the new money. The money is then issued to banks through *magic* (not important). The money reaches people and companies through the same process. Banks buy a debt obligation from people/companies and the result is cash enters the market. This cash is used to buy supplies/goods/etc. This could be a car loan, credit card, mortgage, business loan, etc. It helps to think about everything as powered by debt. Inflation = more debt, deflation = less debt.