Printing money to soften the blow of an economic shock is akin to a person borrowing money to cover an unexpected medical bill. Borrowing this money allows the person to get healthy, but it comes at the cost of a few high interest payments.

This individual must adjust their spending habits for a period to pay off the principle. If they fail to pay their debts, they risk being caught in a debt spiral and losing everything. Yes, borrowing the money was necessary to ensure their long term physical and economic health, but this borrowing came with a cost.

Similarly, when the Federal Reserve prints money to stimulate the economy, they are borrowing to protect the economy against an acute shock in order to ensure its long-term health. The Fed is borrowing this money at the cost of future inflation.

Due to the lag between injecting capital into the economy and the adjustment of the price of goods and services, putting money in the hands of consumers and businesses temporarily increases demand and spending. It is important to remember, though, that the Federal Reserve does not create any value by printing money, just as borrowing money does not increase a person’s wealth. Sure, you can spend more in the short term, but eventually you will have to pay back your debts.

Printing money can be very helpful when there is a sudden shock to the economy and a country is looking down the barrel of a recession. Just as borrowing money to fund an emergency medical procedure is necessary, so is injecting capital into the economy at the time of an abrupt crisis.

The problem is that the government often has trouble remembering that printing money comes at the cost of inflation. This is not dissimilar to someone borrowing money to cover a medical expense, viewing the borrowed capital as a debt they do not have to repay, then going out and buying everything in sight on a credit card. While this person may have a fun couple of days racking up debts they cannot pay off, the party will be over the second their bank calls to inform them they must pay everything back.

The US is at that point. Yes, there are several confounding factors contributing to the dangerously high level of inflation we are experiencing (supply chain constraints, international conflict, etc.). The past few years of low interest rates and generous government subsidies have helped us through a few crises, but the party has gone on for too long. We’ve just now had the realization that we can’t keep printing money because we end up paying for it in the form of inflation. We have racked up too much credit card debt and the bank is calling. Our debts are due.

“Inflation is just like alcoholism. The good effects come first.” — Milton Friedman

Here are a few statistics and graphs pulled from the St. Louis Fed to illustrate the level of capital injection over past two years:

Money supply over the past 3 years:

Money supply over the past 70 years:

Price increases across common goods (February 2022):

“Prices for meats, poultry, fish, and eggs increased 13.0 percent for the year ended February 2022, the largest yearly increase since July 1979. From February 2021 to February 2022, fruits and vegetables prices rose 7.6 percent, and nonalcoholic beverages and beverage materials prices rose 6.7 percent. Prices for new vehicles increased 12.4 percent, marking the fifth consecutive month of the largest 12-month advance since May 1975 for this commodity. From February 2021 to February 2022, prices for apparel rose 6.6 percent, while prices for shelter rose 4.7 percent.”

*Free now, but paid for by future inflation.

- Bennie iii

Note: Originally published May 2022

Printing money to soften the blow of an economic shock is akin to a person borrowing money to cover an unexpected medical bill. Borrowing this money allows the person to get healthy, but it comes at the cost of a few high interest payments.

This individual must adjust their spending habits for a period to pay off the principle. If they fail to pay their debts, they risk being caught in a debt spiral and losing everything. Yes, borrowing the money was necessary to ensure their long term physical and economic health, but this borrowing came with a cost.

Similarly, when the Federal Reserve prints money to stimulate the economy, they are borrowing to protect the economy against an acute shock in order to ensure its long-term health. The Fed is borrowing this money at the cost of future inflation.

Due to the lag between injecting capital into the economy and the adjustment of the price of goods and services, putting money in the hands of consumers and businesses temporarily increases demand and spending. It is important to remember, though, that the Federal Reserve does not create any value by printing money, just as borrowing money does not increase a person’s wealth. Sure, you can spend more in the short term, but eventually you will have to pay back your debts.

Printing money can be very helpful when there is a sudden shock to the economy and a country is looking down the barrel of a recession. Just as borrowing money to fund an emergency medical procedure is necessary, so is injecting capital into the economy at the time of an abrupt crisis.

The problem is that the government often has trouble remembering that printing money comes at the cost of inflation. This is not dissimilar to someone borrowing money to cover a medical expense, viewing the borrowed capital as a debt they do not have to repay, then going out and buying everything in sight on a credit card. While this person may have a fun couple of days racking up debts they cannot pay off, the party will be over the second their bank calls to inform them they must pay everything back.

The US is at that point. Yes, there are several confounding factors contributing to the dangerously high level of inflation we are experiencing (supply chain constraints, international conflict, etc.). The past few years of low interest rates and generous government subsidies have helped us through a few crises, but the party has gone on for too long. We’ve just now had the realization that we can’t keep printing money because we end up paying for it in the form of inflation. We have racked up too much credit card debt and the bank is calling. Our debts are due.

“Inflation is just like alcoholism. The good effects come first.” — Milton Friedman

Here are a few statistics and graphs pulled from the St. Louis Fed to illustrate the level of capital injection over past two years:

Money supply over the past 3 years:

Money supply over the past 70 years:

Price increases across common goods (February 2022):

“Prices for meats, poultry, fish, and eggs increased 13.0 percent for the year ended February 2022, the largest yearly increase since July 1979. From February 2021 to February 2022, fruits and vegetables prices rose 7.6 percent, and nonalcoholic beverages and beverage materials prices rose 6.7 percent. Prices for new vehicles increased 12.4 percent, marking the fifth consecutive month of the largest 12-month advance since May 1975 for this commodity. From February 2021 to February 2022, prices for apparel rose 6.6 percent, while prices for shelter rose 4.7 percent.”

*Free now, but paid for by future inflation.

- Bennie iii

Note: Originally published May 2022