If you look back to the 1960’s, the price of a Big Mac hamburger sandwich from McDonalds was $0.45 (45 cents). In the 1970’s, a Big Mac cost $0.65 (65 cents). The 1980’s came and suddenly a Big Mac cost $1.60. This sudden jump in prices seems pretty huge, yet people still buy burgers. It is now in the 2020’s and the average Big Mac in the US costs $4.95. When you look back you might be wondering what has changed aside from the prices? You still get your all beef patties, special sauce, lettuce, cheese, pickles and onions on a sesame seed bun.
This is an example of the effects of inflation. When the money supply has no limits and the Central Bank or Federal Reserves print more money into circulation, the tendency is prices will go up. The rise in prices has been tolerated for such a long time, that companies are even factoring the price of inflation into their services now. When as asset is valued by an accountant, inflation is also taken into consideration.
Inflation itself is not a bad thing, especially for asset holders. When there is an inflation in the value of a stock, those can lead to profits for investors. What is bad about inflation are the rise in prices of basic commodities and items deemed essential for modern life. The price of gas is very much sensitive to inflation because it affects people in many ways. This can lead your average commuting worker paying more for gas. The cost of certain grocery items (e.g. lettuce) could suddenly spike because the rise in gas prices are factored into the transportation costs that producers incur. The cost is then passed onto the consumers as a form of inflation.
Why does too much money supply cause inflation? It is all about supply and demand in economics. When people have money they could overwhelm the supply of market goods and services. Having more money gives a false impression of having more spending power. When producers can only provide so much of a commodity, if more people can now afford to buy it then it can lead to shortages. When it comes to real estate, more demand for land can also lead to higher value since there is not enough land to meet everyone’s demand for it. The same goes for luxury goods, which will become even more expensive because more money allows people to purchase at the current price.
Stimulus programs are the government way of revitalizing the economy. It can come at tremendous cost, but the idea here is to stimulate businesses and generate economic growth. The money flows from the top (corporations and business) going down to the bottom (the workers and laborers). It seems though, that the money just stays at the top while the bottom barely get any benefits. Checks are sent directly to citizens in the US, but more of the money seems allocated for corporations. This can be described in the form of a Cantillon Effect, but benefiting those who are close to the source of the money supply. That would mean the hedge funds, private equity firms and bankers. There is also an outflow of capital to foreign manufacturing and investors.
Another problem with inflation is it can devalue currency to the point where it is worthless. This has happened in countries like Venezuela and Argentina, as the government enforces monetary controls to prevent capital flight while initiating policies for capital flow. It is unfortunate that when there is more of something it can also lead to less of many things since not every person can have an abundance of everything. It is due to the constraints of supply to meet demand. It would be nice if everyone can purchase all the bread they want, but bakers can only meet a certain amount. That is the case with more money in circulation. The problem is that nothing is infinite, especially when it comes to production.
The points made are just some of the many criticisms against the current financial system. Though the money printers can print as much money through quantitative easing practices, the levels are truly astounding. As much as 40% of the total amount of US dollars ever created were printed in 2020. That is the consequence of the COVID-19 pandemic, but also to bolster up an economy affected by lockdown policies to curb the spread of the disease.
If the money from stimulus just sits idle, it won’t contribute to GDP or inflation. Thus, the effects of inflation won’t set in and the economy may be stagnant, but at least prices won’t suddenly increase to higher levels. The money velocity won’t lead to drastic changes that will affect prices of basic goods. The levels of production for supply and demand will remain stable. That does not mean inflation won’t happen, because it can creep into other sectors where one price spike affects other prices. This will then be passed onto consumers. It will now become an economics balancing act to maintain stability. It seems the Feds can just print as much money as they like, but it is going to have consequences down the road (i.e. hyperinflation) if it goes unchecked.