The rest of the story..... The government issues bond, the treasury auctions the bonds to private wealth funds and entities (eg banks,...). The FED buys (and can sell or hold) govt instruments in the secondary market (as well as other instruments (eg MBS) via the NY FED. The FED buys the instruments on the secondary market with cash that comes out of 'thin' air. Or they buy instruments and suck 'money' out of the system. This is all a simplification and is amplified by the fractional reserve banking system that exists (think money multipliers). How all of this 'creates' inflation I will leave to others. But a question...what does inflation look like with no monetary structure (think barter economy)? Then think about monetary versus non-monetary inflation and their impacts on real versus financial economy. Also remember 'money' in FED reserves is not necessarily 'money' (depends on definitions).
Of course someone could invent a new product, say hard apple cider, that causes the demand for apples to skyrocket. At that point the apple hoarder could come dump his apples and the price might not drop at all or might still actually increase. At that point, the apple dumper has actually increased stability in the apple market. Or, the decrease in the price of apples may enable an apple cider manufacturer to build a plant, causing a long-term increase in apple prices due to the long-term increase in demand. Or people who used to eat pears might switch to apples because they now cost less and are decent substitutes. Or thousands of other permutations of apple supply and demand, and that's talking about something as simple as apples. So dumping extra currency into a market may devalue the currency if all other factors impacting that market remain static. Of course in the real world that's never the case, and extra currency may or may not cause inflation even from a micro perspective. Switch to macro and start talking about reserve currencies and trade balances and dozens of other macro factors and the apple basket analogy is so oversimplified as to be flat out misleading.
I recommend this short paper on the topic: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy This paper is a bit longer, but is also often recommended: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 Both papers are pretty accessible, but inflation is a complex topic. Don't be discouraged when it doesn't seem to make a lot of sense at first.
Velocity of M2 Money Supply implies deflation not inflation is more of a risk. I'm more of the belief that additional Screwflation (Economist Doug Kass coined the term) will happen.
Why do you think inflation is raging now and it didn’t in 2008? Sure the fed printed a lot more $ than in 2008 but thats not relevant . The Fed could have printed $10 trillion in 2008 and we would still have had little inflation. The difference was this time the fed got money to the middle to low income people immediately . Poorer people spend their money instantly thus a greater surge of demand for goods and services .Why do you think as the mkt’s risen nonstop for 12 straight years we had little inflation ? Wether Bezo’s has $30 billion or $200 bil is meaningless . His level of spending never increases even though is wealth rose 6.5 times.
Could it be if you flood the market with apples…apples every where..apples in your nose..in your ears…under the car seat….etc that the value of apples will drop? And if you flood the WORLD with $$$$…..and also dollars in your nose..under your recliner…in your hat ….falling out of YOUR NOSE (i.e. as an American consumer) $$$ falling out of your pocket then the value of $$$$ will fall? If your $$$ are worth LESS to then it will cost you more to buy goods so the effect is the goods going up in price because more dollars chasing same goods (so shortage of goods) but dollars are worth LESS also because there too many on the market(supply)? Wages stay the same but goods cost more because your wages which are in $$$$ that are now worth LESS because there are so many (supply) floating around so it takes more of your hard earned dollars to buy those eggs and tomatoes?? PS has anyone noticed since all this stimulus money has been electronically created and added that everything is costing more? Gas….cars..used and new….groceries…things costing more than a year ago? Could it be that next step is Feds will raise interest rate to supposedly fight inflation? Then you got the velocity of money…$$$$$ chasing goods and and services (how many times over X amount of time) in effect creating shortages of goods and creating demand so prices of goods go up thus inflation?? Anyone notice hard to get new trucks at a good price? Over a year ago my son bought a new Dodge Ram 2500. Just the other day a dodge dealer offered to pay 13000 more than what he paid for the truck over a year ago. They would give him cash or that much on a trade in. They had one new truck left in their inventory. A diesel Dodge Ram 2500 so he opted to buy it. In a few days they had his old truck for sale for 12000 more than they gave him. Just a few days later it was gone! Sold. PS these are questions. I could be totally wrong.
Start with the definition: - the rising price level of the same basket of goods Then think about the components in the definition: - price level - quality of goods Let’s start with price levels, why do they rise? - more demand for a good (greater number of buyers or more purchases for the same amount of buyers) - a decrease in supply (fewer apples available to buy, or supply too slow to increase relative to rising demand) - an increase in the money supply (available money in the system rises) Largely, inflation is driven by shocks to the demand or supply side. For example, if there’s surge in unemployment, fewer people can afford to buy apples at prevailing prices, so suppliers will lower prices. Monetary driven inflation exists too, but has a much smaller impact if the country issues it’s own debt. The reason why is because they do not need to catch up to a moving exchange rate to meet debt obligations (so hyperinflation risk are low). Still, policy driven inflation can be a problem, especially if policy is exacerbated by a shock to demand/supply. I should note that the US Fed has a policy to keep pricing rising, on average, by about 2% per year. Going back to @gaussian and @Apologetik ’s discussion on the mechanism for inflation, keep in mind that the method the Fed trades with dealer banks has not been effective at spurring inflation. Treasury issues bonds -> Dealer banks (and investors) buy them -> Fed buys treasuries from dealer banks in exchange for reserves I would go so far as to say that “money printing” is not that useful in spurring inflation (and not a solution for economic issues) except when the Fed acts as a lender of last resort. What does spur inflation is tied to the interest rate and how the Fed communicates its rate outlook and decision making process. Fundamentally, the difference between the markets expectation of inflation and the Feds communicated strategy, will exacerbate inflation/deflation. It is a self fulfilling prophecy. Why doesn’t Fed money printing help? Because most of QE is the Fed buying treasuries in exchange for reserves to dealer banks. These reserves don’t enter the real economy directly. Helicopter drops work when the Fed buys assets directly from banks for cash, which is the lender of last resort function. The QE that the Fed does increases liquidity in theory, and is helpful when there’s a huge shock to the system, but the usefulness for it beyond that is still debated. Fed moves slow because there are no easy answers and it is sometimes better to use a marginally helpful program vs doing nothing.
Read Ludwig von mises on the credit cycle....inflation is a direct result of the fed... People's wages don't go up as fast as inflation this is where gov steals value and redistrubutes wealth...
While I appreciated Von Mises contributions to discourse on credit cycles, I think where his approach ultimately fails is that it does not properly understand the role of a currency (“money”) in an economy. Ideally (and how most governments structure their currency), money is of very little value in an of itself because it’s purpose is to be used as a medium of exchange. Asset prices, the wealth you store, should rise approx by at least the inflation rate. This enables there to be sufficient liquidity in an economy, while protecting the value of assets. This is how it plays out in real life — assets values are outstripping inflation, which is hurting workers because they cannot afford to purchase assets. The driver of this has been a persistent shock to demand, due to a glut of global savings (in usd and dev currencies), as the growing middle class in Asia sell their product in usd and park those dollars in treasuries and usd-denominated assets. Interest rates across the developed world have been low have been low because the influx of capital is occurring during a period of low investment and declining population growth.