The Missing Link

So I'm driving to work, thinking about this morning's post. Two points I made. First: Inflation isn't caused by printing money. Second: Without all that printing-of-money we'd be in deflation now.

Don't these two points conflict? I think they do. If inflation is not caused by printing money, then deflation is not caused by not-printing money. I'm guilty of the same error I find unacceptable in others.

So let me restate Point #2: Without that massive injection of emergency money, the decline in spending would have led to decisive deflation.

Policymakers use "printing money" as a way to encourage spending. They print money or hold it back to influence spending one way or the other, in order to restrain inflation or stimulate growth.

But it is a two-stage process: Printing money influences spending, and then spending influences prices. To say "printing money causes inflation" is a shortcut, the same way it was a shortcut when I said in the earlier post that failing to print money would have caused deflation. It's generally true, but that's because the money affects spending, and spending affects prices.

Some people seem to take these shortcuts a little too literally. They seem to think it's the printing that causes inflation, when really it's the spending. This misunderstanding creates a lot of unnecessary disagreement. And it impedes achievement of a solution to the economic problem.

The purpose of printing (or not printing) money is to influence prices. But there is no direct link between money and prices. Money and prices both link to spending.

Why is it important to distinguish the two separate stages? Because spenders have free will. Spenders make their own decisions. The government didn't force us to spend an extra trillion or two; they only gave us the chance to do so. Economic policy, when it is good, only induces; it never forces anyone's hand. That's why our policy manipulates the money supply and why it doesn't just administer prices.

The emergency-money printed by policymakers turned out to be barely enough to keep spending in a Neverland where we cannot tell if prices are going up or down.
But if they didn't print it, the fall in spending would surely have caused deflation.