Printing more money = inflation - how?

archilles · 16 February 2009

At what point do the effects of printing more money ( out of thin air so to speak ) create inflation ?

Peter Schiff tells us that by allowing the government to print more money
( to prop up failing business and stimulate the economy ) we are potentially allowing inflation to spiral out of control - AND PRICES ACROSS THE BOARD WILL RISE!

What i don't understand is at what point do prices start to rise ? and what are the direct causes ? No one seems to know the answers to these questions. Schiffy tells us prices will rise, but why and how ?

Ladies and gents, please correct me if i'm wrong - but this is my take on it -

IF the government(s) keep doing what they're doing our wages will stay the same ( provided we even have a job ) tip top bread will go from $3.80 per loaf to $ 300 per loaf, your house with a $ 500,000 mortgage will be worth $120,000 and to top it off if you lose your job, you'll be broke.

As a young aussie battler i want to know what is going to cause the above scenario, and what to bloody do about it...

Growing vegetables and eating off the fat off the land is a nice idea, but surely i can salvage what's left of my savings/equity before they become worthless.

P.S. Please don't tell me i'm taking this too seriously, i just want some form of insurance lol

Wysiwyg · 16 February 2009

Re: Printing more money = inflation - how ?

archilles said:
At what point do the effects of printing more money ( out of thin air so to speak ) create inflation ?

Peter Schiff tells us that by allowing the government to print more money
( to prop up failing business and stimulate the economy ) we are potentially allowing inflation to spiral out of control - AND PRICES ACROSS THE BOARD WILL RISE!

Are you absolutely sure money is being printed to prop up failing business and stimulate the economy?

If so please provide some evidence.Thanks.

archilles · 16 February 2009

Re: Printing more money = inflation - how ?

According to Schiff, that's is where is all going or better yet Rudd is planning on giving us up to $950 smachos to do what we like with.. My question is where the hell do they get this money from ?

Surely someone has to foot the bill - isn't it going to be us ?

shaunQ · 16 February 2009

Re: Printing more money = inflation - how ?

Just a couple of things till someone smarter comes along. Inflation is technically your money being worth-less, prices going up is a symptom. Australia isn't printing money madly (unlike the US) and has borrowed which is different. But if hyperinflation were to take place in the US like your suggesting we'd have to be affected. Your only real hedge against it would be buying gold but I would be careful with that as well as your just as likely to get burnt in my opinion (if it doesn't appear).

My view is deflation will win this, with possible high inflation coming much later. If a loaf of bread becomes $300 without a real-wage increase your screwed regardless - you may have a job but may well get killed for that loaf of bread on your way back from the shop.

Also, If a loaf of bread is $300, I doubt your house will be only $120,000. Your house would probably be worth several million.

Beej · 16 February 2009

Re: Printing more money = inflation - how ?

shaunQ said:
Also, If a loaf of bread is $300, I doubt your house will be only $120,000. Your house would probably be worth several million.

Correct - property and other hard assets would go up in line with inflation just as a baseline - maybe more due to their perceived role as an inflation hedge (eg gold).

Also, if a loaf of bread was $300, then some people are getting a lot of raw $$$ for:

* Growing the wheat to make the bread
* Storing and transporting the wheat to a bakery
* Making and baling the bread
* Transporting the bread to the shops
* Storing the bread on a shelf in the shops and then selling it to you at a cash register

If you think about the people involved in just the above (farmers, farm workers, truck/train drivers, bakers, owners of bakers premises, more drivers, shop assistants, shelf stackers, managers etc at Woolies and Coles and so on, shareholders of transport, bakeries, and supermarket companies etc), then just for bread to be $300 that's a LOT of people who would be getting (in pure $$$ amounts) much higher wages (and dividends etc) than they currently do. Ie, if bread was $300, wages MUST also be correspondingly higher as they are all related in the price chain.

That's how inflation works - but at the end of the day it's mostly a zero sum game - all you can do pretty much is hedge against it and cash is the worse thing to keep around in an inflationary environment.

PS: I do not mean to imply any prediction as to whether high inflation is a likely outcome of current conditions and policy in my comments above - just illustrating how inflation actually works.

Cheers,

Beej

archilles · 16 February 2009

i see what you mean ShaunQ, by why do you think high inflation follows a deflationary period..

Also, if you knew we were heading in that direction what would you do ? Say i had a crystal ball

Everyone keeps telling me we wold be screwed, i know that - but surely we could combat this somehow ?

waz · 16 February 2009

You pretty much answered your own question there Archilles.

We dont know at what point and by how much inflation will rise if we print money. Which is why it is rarely used.

Keep in mind that money is a scare resource, it is a store of value, if you start printing more money, then the value of existing money falls.

Also keep in mind it lowers the value of your currency. With the US dollar appreciating, they can happily print more money and they wont mind a little depreciation.

Whereas if Australia where to print more money, our currency would depreciate by even more (making our interest payments on previous borrowings even more expensive). If both countries do it at the same rate. Exchange rates will not be affected so much.

So one solution for Australia is to print money once we know every other country is doing it.

kincella · 16 February 2009

for those who want proof...just google it...saw last week again..US printing money press has been going at it 24/7 since Sep 08...I would get it for you but a bit too busy now
cheers

Beej · 16 February 2009

kincella said:
for those who want proof...just google it...saw last week again..US printing money press has been going at it 24/7 since Sep 08...I would get it for you but a bit too busy now
cheers

I don't take a hard position on this either way, and don't claim to be an expert, but there is an argument floating around that because of the destruction of value brought about in the US economy by the sub-prime/credit crisis, their "printing of money" will not be inflationary as it is replacing that lost value, and therefore just kind of "canceling out" the real and potential deflation. It would only create inflation if it got out of hand.... which of course it might.

Cheers,

Beej

explod · 16 February 2009

Good question and good thread all.

There is a philosphy to economics that can be hard to quantify and explain. Have been reading books on the subject for years and still find it as clear as mud sometimes. This question is one of them.

However I have formed a view for myself that I have had to batten down the hatches to protect against those very concerns that you put up Archilles.

In short, I got rid of residential property. Still have a good interest in a commercial property (which has a supermarket as main tennant, inner Sydney area) Some gold shares, some physical gold and silver stored away. Someone said they would not have gold, I have some and consider myself diversified.

Agree with the property scenario later on (and I will be in again then). My studies leads ME to think inflation will rare its head strongly after the deflation plays out.

How do I know this, I DONT;' but the trends and the best information I can turn up tells me this is the way at the moment.

I would no sooner have a mortgage on a house as a place in hell, but that's just me.

cheers explod

juw177 · 16 February 2009

The rate of destruction of money through bad debts is far greater than the rate the government can print money. So deflation it is.

kincella · 16 February 2009

explod...my understanding with inflation...and all the stuff on the net refers to germany as an example...apart from zimbabwe...
is that with hyperinflation..if only for a short period...months not years...you wipe out any debt easily...
so in my case..houses would become very very expensive....hence I hold...
regarding the debt...well sell one house and wipe out the total debt combined of all the others....just need someone to buy the one very expensive prop...but mine would be cheap compared to all the others....
and sufficient funds to cover the higher interes rates
so in the eg; if bread is 300 a loaf, then houses would be ???
and the german example,,,,said people with the debt were the biggest winners...it was virtually wiped out overnight....thats the bit I like...not that I have much..spread over 5 props

shaunQ · 16 February 2009

archilles said:
i see what you mean ShaunQ, by why do you think high inflation follows a deflationary period..

Also, if you knew we were heading in that direction what would you do ? Say i had a crystal ball

Everyone keeps telling me we wold be screwed, i know that - but surely we could combat this somehow ?

As Beej said,

[there's] an argument floating around that because of the destruction of value brought about in the US economy by the sub-prime/credit crisis, their "printing of money" will not be inflationary as it is replacing that lost value, and therefore just kind of "canceling out" the real and potential deflation.

But there is also many opposing views. My view is just based on who I believe out of all the claims. You really just need to look around at some articles giving reasons why they think inflation, deflation, stagflation or nothing will happen then make your own judgement.

This site always updates with many different theories from everywhere,
http://www.marketoracle.co.uk/ but is probably not reputable.

Personally I am thinking of buying a little silver bullion from Perth Mint, simply because gold is historically expensive at the moment where as silver is historically cheap, but not much, and doing it just as much to collect as anything.

But seriously, don't take any advice from me. I'm just an amateur, but by reading up on it you can a least feel a little more confident your more aware than most - even if it is false.

gfresh · 16 February 2009

I think it should be noted that cases of "Hyperinflation" or extreme cases, where the price of everyday objects such as bread can double, triple, or more in say a week have only occurred throughout history in extreme basket-case situations where Government (usually a Dictatorship) action has in fact contributed to such a situation occurring. These periods also tend to take place during periods of extreme societal breakdown. Looking at places such as Zimbabwe, South American countries in past periods, the (German) Weimar Republic example, hardly esteemed company.

So unless things really go to pot, I think the chances of "hyperinflation" happening in Western countries seems remote. That is not to say high inflation (say 5-10% in a year) could not occur, and that would be painful for many, but that's a little different to hyperinflation.

As I've said previously, I think Australia would actually be better off than many countries if inflation were to run out of control.. causing the price of coal, iron ore, copper, nickel, etc (our major exports) to run up very high, giving large profit to our miners, and the trickledown effect cushioning our economy somewhat. Although I guess you'd need demand also, may be difficult if there was also a global stagflation phenomenon.

explod · 16 February 2009

gfresh said:
I think it should be noted that cases of "Hyperinflation" or extreme cases, where the price of everyday objects such as bread can double, triple, or more in say a week have only occurred throughout history in extreme basket-case situations where Government (usually a Dictatorship) action has in fact contributed to such a situation occurring. These periods also tend to take place during periods of extreme societal breakdown. Looking at places such as Zimbabwe, South American countries in past periods, the (German) Weimar Republic example, hardly esteemed company.

So unless things really go to pot, I think the chances of "hyperinflation" happening in Western countries seems remote. That is not to say high inflation (say 5-10% in a year) could not occur, and that would be painful for many, but that's a little different to hyperinflation.

As I've said previously, I think Australia would actually be better off than many countries if inflation were to run out of control.. causing the price of coal, iron ore, copper, nickel, etc (our major exports) to run up very high, giving large profit to our miners, and the trickledown effect cushioning our economy somewhat. Although I guess you'd need demand also, may be difficult if there was also a global stagflation phenomenon.

Agree to a point. I think the US is heading toward the situation in Germany. (Problem is when tipping point occurs, history has shown that it accellerates exponentially) On current available, OFFICIAL figures the US require, just to service their debt (forget about the amount they owe) more than their current Gross Domestic Product. They are printing money to pay the debtors. Germany printed money to pay its debtor back then, ironically,,, the US. It is actually the main reason the US got very interested as WW11 progressed, to mop up and take command of all the new stuff they owned by default. China have huge holdings of US debt which to me is omminous. Japan is in with a lot too and they were once our enemies. There are still some WW11 veterans around who will put the wind up you about this situation. Worth seeking some out as they can relate a tale or two on the great depression also.

Temjin · 16 February 2009

Here is my attempt.

Inflation is caused by an increase in the volumn of money (money supply) and velocity of money existed in the system. What you hear from the news about inflation has dropped or increased because of various things like commodity price crashed or wage stagnant are merely the consequences, not the cause.

This is an Austrian economic explanation.

We are still in a deflationary phase because while governments around the world have been busy with "printing" money (in real practical term, they haven't really printed anything from thin air yet), there were little inflationary effect because the cash were being hoarded byt the banks to maintain their capital reserve ratio. (maintain solvency) Another reason that was pointed out by others are that the speed and amount of financial losses from bad debts are occuring much faster and higher than the amount of money being put back in.

So do we continue to expect the deflationary spiral to continue and end up in a global depression or do we expect a hyperinflation scenario? It depends on two things. To stop deflation, there is a need for having ALL bad debts to be written down and that asset prices (of everything) to stabilise. We are not in that stage yet and I do not think the governments will allow such a thing to occur. (will create massive public outcry)

What about an inflation scenario? (not necessary a hyperinflation) Then we need to have faith in the world governments to continue to follow their keynesian economic teachings and do ABSOLUTELY EVERYTHING in their power to reinflate the economy and prevent the greater depression II from occuring. This is a more likely scenario because most central bankers around the world are devote researchers of the great depression and they know it is something they must avoid at ALL cost. Looking at it from the US perspective, a few tens of trillion of dollar public and private debt can be easily fixed by inflating the currency than repaying it.

And if people think inflation will make you rich because you own assets like houses, you better think twice. It's a naive thinking.

explod · 16 February 2009

Temjin said:
And if people think inflation will make you rich because you own assets like houses, you better think twice. It's a naive thinking.

Can you explain why this is so?

___________________________________________________
My views are just that, views and the picture, often cloudy

waz · 16 February 2009

What makes you rich is the value of your assets (cash, property, gold, your apple tree in your backyard) RELATIVE to the value of assets that everyone else in society holds.

So if the average price of a property is 500k and the value of your property is 2mil (1.5 mil and 400% times more). Then yes, you can call youself rich.

But if the value of the average property were to goto 5mil, and the value of your property is 6.5 mil (You're still 1.5 mil ahead of everyone else, but the value of your asset is only 30% more).

Another way of looking at it is the person in Sierre Leone who earns $500 a year is rich relative to his countrymen in the same country who earn $50. But compared to you in Australia he is poor.

Its all relative.

Economics is all about allocating scarce resources. Those with a larger share of the resources are the rich ones.

Another thing to keep in mind is that not all assests have a dollar value.
A person who earns 50k a year with a good education, healthy body, and is well loved is in my opinion richer than a multi millionare who won the lotto and is about to have a heart attack.

kincella · 16 February 2009

I do not normally wade into the 'tit for tat'...not when online and you are communicating with an unknown audience...but I do take offence when another suggests one might be..or is..naive to think a certain way....

my answer is 'you may also be very naive....to think another way'

....you have no idea of the depth of knowledge I , or other posters /bloggers hold on a certain subject.....so hurling insults around will not get any friends...and on some forums you would be suspended...or put on the ignore list...
one needs to have good manners...and decorum...if you wish to be taken seriously

waz · 16 February 2009

Relax kincella. Temjin was not insulting anyone.
You said it yourself, the audience is unkown.

Insults are in the eye of the beholder. If you feel you were insulted, ignore it and move on.

Personally if someone commented on my post telling me that I need to have good manners if I want to be taken seriously, then I would take it as an insult.
You have no idea of the depth of knowledge I , or other posters /bloggers hold on a certain subject.

What you wrote was in reply to a certain post which means it was directed at a certain person.

Printing more money = inflation - how?

archilles

Wysiwyg

Everyone wants money

archilles

shaunQ

Beej

archilles

waz

kincella

Beej

explod

explod

juw177

kincella

shaunQ

gfresh

explod

explod

Temjin

explod

explod

waz

kincella

waz

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