if it was distributed “evenly” as you said, it would lead to a great increase in spending and very high inflation, this didn’t happen.
This is how money is created. Money is created by the fed buying treasury bonds from people who had already purchased them form the treasury.
two things there, first the person who sold the treasury bonds to the fed, already had the money to buy the bond, and just put it intp a bond. They didnt need to spend that money. Second when they sold the bond, their wealth didnt increase, All that happened is the bond was no longer owned and they had cash instead. They might have sold it for a little more than they bought it for , but its not like they increased their wealth by the total amount they sold the bond for
so now the bond seller has cash not getting a return, instead of a bond getting a return
what do you think they are going to do with that cash?
they are likely to look for a different investment opportunity to gain a return
they might spend it to get a share in a jobs creating venture,and this could increase employment and some regualr peoples income, or they might buy another bond.
thing is, its not like fhe fed just gave a bunch of people free money and they went out and immediately spent it.
Inflation is not the expansion of the money supply, no matter how many times people say it, it is not true.
Inflation occurs when the amount of spending increases for the same amount of things sold. Inflation may or may not occur if the amount of money increases for the same amount of things sold. The statement “Inflation is the expansion of the money supply” is incorrect.
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We are talking direct spending to purchase goods, services, labor or any other desired outcome. except that we are not talking about spending to purchase purely financial assets whose value is totally based on someone else agreeing to a debt obligation. Direct spending is not buying a bond or a loan. Direct spending is not buying a bank deposit, which is an asset for the depositor and a debt obligation for the bank.
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But this spending, this direct spending is not equal to “the money supply”. Spending is “the money supply” times “the velocity of money”,
The money supply, M, is the total face value of the money existing, of the given denomination.
The Velocity of money, V, is the average number of times each unit of the money supply is used for direct spending, in a given time period.
Total direct spending is V times M.
Other answerers to this question are making the assumption that V stays constant.
Other answerers to this question are making the assumption that this “new money” gets distributed in such a way that the amount of Direct Spending increases in proprortion to M.
Actually I think most people who ascribe to that theory understand it to mean that the amount of spending IS EQUAL to the money supply, and prices are totally determined by the amount of money divided by the amount of items sold. That is, they understand prices to be totally determined by the ratio of M to the amount of items sold.
That way of putting it is really saying that the money can only be spent once, in the given time period. Actually it is not only implying that it CAN only be spent once but that it WILL be spent once, and only once.
This is ignoring the fact that when someone sells something, the sellers are paid money which they can then use for further spending, and that the recipient of that further spending can use that same money again for even more spending, and so on.
But let us assume that when these answerers using the argument that inflation is “more money chasing the same amount of goods” they do not preclude money being spent more than once, or they do not preclude a quantity of money not being spent at all, But that they DO believe that the inflation rate equals the percent increase in the money supply. That being the case, they would ABSOLUTELY be saying the Velocity of money will remain, and always remain, a constant.
The reality is that prices are not determined solely by M divided by the amount of things sold, nor is the velocity of money constant.
But in either case, it IS always true that prices are determined by the ratio of the amount of spending, (M times V), to the amount of things sold.
GDP is interpreted by most economist to be the amount of spending that occurs in an economy.
In 2007, in the United States, the GDP was about 20 Trillion and the money supply about 800 Billion, V would be about 25.
And about 10 years later GDP was 22 trillion and, due to Quantitative Easing (QE), M was about 4 Trillion. So V was about 5 and 1/2.
V can vary and vary widely.
QE did not cause much increased spending and therefore prices did not change much.
Production presumably increased some, and this has been left out of the discussion. If more items are being sold for the same amount of spending that factor will reduce prices compared to what they otherwise would be. In other words, production increases reduce the effect of spending increases on inflation. And it is possible, even probable, if our economy has un or underutilized resources including unemployed workers, that spending increases could lead to production increases, negating some or even all of the effect of increased spending on prices.
I am not a fan of QE, I think it is just a desperate measure implemented by a Central Bank because they do not have the option of implementing fiscal policy during depressions. And QE being utilized along with interest being paid on excess reserves seems to be just a bad idea all around, since this has caused an enormous increase in commercial bank reserves, which has basically destroyed the ability of standard monetary policy to affect the economy. And we are in a position where we can expect this situation to be very difficult to change since now the commercial banks will strongly resist attempts to decrease the money supply, because to do so would decrease the amount of interest the banks receive on those excess reserves.
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