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    Allen Farber's Avatar
    Allen Farber Posts: 191, Reputation: 1
    Junior Member

    Dec 25, 2018, 06:37 PM
    Why does printing more money cause inflation?
    Why does printing more money cause inflation? The explanation I always get is that "printing more money doesn't increase supply of goods & services; it just spreads the money supply over the existing goods & services". So what that implies to me is that it would be okay to print more money if the amount of goods/services/businesses increased. But how does the U.S. mint (or whoever prints the money) keep track of that with new services and businesses opening up every day. So should the money supply equal the total price of the amount of products produced by a country? How would that work for skills/non-physical commodities (like doing yardwork or teaching/tutoring). But then if there is more of a product, then the value decreases because there's more of it, so why would there need to be more money printed?

    So what is price based on? I know the typical answer is supply & demand but that doesn't really explain the grander context. There is a finite amount of money at any given time, so obviously you can't price your good or service at more than the money supply because obviously no one will be able to afford it. So what happens if the total amount of goods & services (including competition) totals up to over the money supply? So like, for simplicity sake... let's say there's only 2 businesses in a country (which at one point in early history had to have happened) and the supply of currency is 1,000. Let's say business A offers a service at 1,000 (after all, at this time, it's the only business so all the money can only go to that business), but then business B comes along and offers that same service at 900. now people are going to buy from there. The total cost of the 2 services (1,000 + 900) equals 1,900. Ideally, according to the economics textbooks I've read, the money supply should be able to buy all the country's output. In this country that only has 1,000 of their currency, how could it buy all the services, which, combined, cost 1,900?

    So is price based on scarcity, what people can afford, or is it a fraction of the money supply? I've heard all 3

    Thanks to anyone in advance who can help me figure this out!
    ma0641's Avatar
    ma0641 Posts: 15,681, Reputation: 1012
    Uber Member

    Dec 25, 2018, 07:08 PM
    Your math is fuzzy. Those who buy at 900, cause the # of people to vastly drop the 1000 so maybe it would be 900 and 100=1,000. Nobody printed more money or made more people. Look at mall stores-Sears is a good example. Revenue has substantially dropped but the e-trade has increased. Toys R Us-now it is Walmart and Target. The fed doesn't just print to give new businesses a leg up. Learn about GDP and inflation. Read about inflation and the Weimar Republic.
    In the first half of 1922, the mark stabilized at about 320 marks per US dollar, by November 1923, the US dollar was worth 4,210,500,000,000 German marks.
    Allen Farber's Avatar
    Allen Farber Posts: 191, Reputation: 1
    Junior Member

    Dec 26, 2018, 04:22 AM
    All right, but where did you get the 100 from in your equation?
    talaniman's Avatar
    talaniman Posts: 54,328, Reputation: 10855

    Dec 26, 2018, 04:43 PM
    Actually guy when the treasury prints money, it shreds an almost equal amount of money. Printing money is but a catch all phrase to describe the very complex way the Federal Reserve manages the money. Inflation is a condition of monetary policy and to be honest the scenario you describe has very little to do with what the fed does. Inflation is caused by many factors and conditions in the economy. Its measured by a price index.



    What I think makes your math fuzzy in your example is you added what two businesses charge together which is not accurate and has nothing to do with the final price of what the business is charging unless you divide by 2 (Two businesses prices) and get an average. Now consider what happens when Biz #2 sells all it's stuff at $900 then Biz #1 must lower prices to compete, or hope Biz #2 runs out of product (SUPPLY).

    I don't know if that helps you understand things any better, but few people outside of experts and those that study economic theory for a long time can understand economics either. I hope ma0641 comes back to explain his math too! 8].
    ma0641's Avatar
    ma0641 Posts: 15,681, Reputation: 1012
    Uber Member

    Dec 28, 2018, 06:53 PM
    My point was that the people paying $1000 would show a big drop if most of the people changed to the $900. I was assuming a fixed market of people, not a big growth increase of purchasers. For example, I just today dropped my current trash pickup company at $21/month to another at $14.
    Allen Farber's Avatar
    Allen Farber Posts: 191, Reputation: 1
    Junior Member

    Jan 6, 2019, 07:28 AM
    Why would averaging the prices of the two businesses not be just as inaccurate about the final price? If biz 1 is offering at 1,000 and biz 2 is offering at 900, averaging the prices makes it seem like they're both offering 950 (1,000 plus 900 divided by 2), which isn't what their prices are.

    And then about dropping one biz for another... I'm still not sure where you get the 100 from. If biz 2 is offering, say, a diamond at 900 and biz 1 is offering that same diamond at 1,000, then obviously 900 will go to biz 2 over 1,000 to biz 1. But then when biz 2 gets his 900 for the diamond, and there's still 100 out there that hasn't been spent, it's still not going to be able to afford biz 1's diamond, which is priced at 1,000
    talaniman's Avatar
    talaniman Posts: 54,328, Reputation: 10855

    Jan 6, 2019, 07:54 AM
    The simple answer is businesses make adjustments to get more market shares and pricing is but one way to do that. Wouldn't biz 1 be crazy not to drop their prices, or lose customers? Or offer something else for their $1000 dollar diamond that would entice the customer to buy their products. You may consider paying more if you get more bang for your buck right? That could be free settings, cleaning or discounts, or an easy pay plan.

    The consumer has to evaluate the value of what they are getting with the choices and options they have, just as the business owners have to evaluate their prices and strategy to compete with the guy who has lower prices for the same product. You can bet competitors keep a close eye on what each other is doing.

    Obviously I'm no expert Allen, but I do know the adjustments that make competitors of the same products have to make just to keep and get enough customers to stay in business. You would understand better perhaps if you KNEW that businesses make adjustments all the time to many factors and changing conditions.
    Allen Farber's Avatar
    Allen Farber Posts: 191, Reputation: 1
    Junior Member

    Jan 6, 2019, 11:26 AM
    I agree they would most likely lower their prices so they always balance out. But then you said if they wanted to keep it 1,000, they should offer more benefits along with the diamond. What would that matter? It doesn't matter how good it is after the diamond worth 900 has already been bought, and there's only 100 remaining when there's only 1,000 of the currency. So basically it couldn't be bought... which leads me to one more question: GDP is calculated by totaling the prices of every good and service in a given period, so what would the price of unsold items be? In the example I provided where the diamond worth 900 was produced and bought and there was 1,000 in circulation at that time, would the remaining unsold diamond be counted as 100 to fill the gap in the currency supply (900 + 100 = 1,000) even though the price tag says 1,000?

    I may have asked this before, so I apologize if I have, but does the money supply have to do with the amount of goods and services produced? I heard that printing more money causes inflation because it didn't produce more goods and services, it just spread more money over the existing goods and services. So what that implies to me is that it would be okay to print more money if there were more goods and services. But wouldn't that devalue the goods and services because there's more of a supply and they're not as scarce?

    btw, I know these figures aren't realistic. I know there isn't one guy who has the total money supply (1,000) in his pocket choosing between the only 2 goods/services in the country. I'm just using it for simplicity sake

    Thanks in advance for any answers

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