Is the problem that there is more to printing money than printing money? Is in fact the way printed money gets into circulation, that the fed buys bonds, and thus gets money into the economy? What is the logical rabbit trail that leads to inflation from printing money? Would solving deflation this way work with today's low interest rates? Why or why not?
A: Deflation has been a hot topic since about 2001 and the fear of deflation does not look like it will subside anytime soon. Thanks for the topic suggestion!
What is deflation?The Glossary of Economics Terms defines deflation as occurring "when prices are declining over time. This is the opposite of inflation; when the inflation rate (by some measure) is negative, the economy is in a deflationary period."
The article Why Does Money Have Value? explains that inflation occurs when money becomes relatively less valuable than goods. Then deflation is simply the opposite, that over time money is becoming relatively more valuable than the other goods in the economy. Following the logic of that article, deflation can occur because of a combination of four factors:
- The supply of money goes down.
- The supply of other goods goes up.
- Demand for money goes up.
- Demand for other goods goes down.
Before we decide that the Fed should increase the money supply, we have to determine how much of a problem deflation really is and how the Fed can influence the money supply. First we'll look at the problems caused by deflation.
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