Topic: What impact of printing a lot of money on inflation and Bitcoin (Read 390 times)

The discrepancy is caused by how the government calculates inflation. They use something called consumer price index or CPI to measure how the price of things have increased over time. I will spare you the details and just say they fudge their numbers in variety of ways to make their official inflation statistic look good (3-4% annually). They do this in several different ways. One is by calculating inflation by taking the CPI and excluding volatile economic variables like real estate prices and student loans. There are other methods they use to lower their calculation of CPI and inflation but I won't get into that here, you can Google that on your own time if you wish. In a nutshell, the government understates their inflation statistic to look reasonable so that savers do not get spooked. A crude analogy to explain this would be that of a student that is allowed to write his own falsified report card to show his parents. In a similar way, the government writes their own report card when it comes to inflation.

The reason why inflation is not noticed by the majority of the population can be explained by the fact that it is not uniform across the board. While the price of groceries may have appreciated a small amount, everyone will acknowledge that housing prices or student loans have mooned over the past few decades. If the government inflation statistic of 3%/year is to be believed one must do mental gymnastics or adhere to contrived explanations to make sense of it.

I don't think that's quite the mechanism at work. It's more about the US dollar functioning as the global reserve currency during a period when investors need quick access to liquidity. When such events occur, even safe have assets come under pressure:


Due to the deflationary effects of the economic shutdowns, we also probably won't feel the dollar depreciation for a while, perhaps years.

Just look at China you will see how much money you can print without cause a lot of trouble. China used to have neglectable GDP comparing with USA, now it is the world second biggest GDP, and during the process, their money supply become the world biggest

Correct me if I am wrong:  I think increased productivity, more efficient business models, more demand of U.S. dollars from other countries have lowered the dollar inflation rates all these years to less than half those calculated based on new money printing rates.

There are at least three procedures for it, RPI, RPIH and CPI.  And, even then, the accuracy of each of those is still questioned in certain circles.  No one seems to be able to agree on which formula is most accurate.  Plus, as I mentioned earlier, whichever procedure they use, they can also change the items they choose to base price increases on.

But isn't there a standard procedure for it, something like an average price index for essential goods taken from the current rates, then compared to the rate taken from the year before?

Indeed, the calculation of inflation from the price value that is currently scarce so that the price of products may experience inflation, but from the other side the calculation of import and export calculations also determines because the calculation can be based on the dollar so that purchasing products from outside can be one of the triggers for inflation.

Because each government can pick and choose which products they deem "essential".

The list seems to change rather often, generating confusion and raising suspicions.

Printing so many bills will depreciate the value of dollars. This affects the value of bitcoins just the same as each bitcoins has a corresponding dollar value and when the value of the dollar drops, then the value of per bitcoin will drop as well.

Isn't the rate of inflation calculated based on the price of essential products compared to the price of last year? I don't know how they can fudge numbers if other economists can see that.

Good question, you can rarely see them. Personally, I think that an injection of such volumes in the future may lead to a slight weakening of the dollar, but now it may not be very noticeable, because money is being pumped from other countries to the United States, and these flows compensate for this.

It's also difficult sometimes to know what the real rate of inflation is.  Different governments use different formulae to calculate it, giving the impression that they prefer to fudge the numbers a little to make the situation appear less dangerous than it really is.

This might actually be a sad event for the lower-class. Yes immediate inflation won't be felt by the economy, BUT, the only people who have close-access to the newly-printed money, are mostly ONLY the upper-class.

Once the newly-injected money finally reaches the lower-class, inflation has already been felt.

Printing more money doesn’t increase economic output because it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, so that there’s a shortage in a product. And the price of the bitcoin will also go down. So that printing more money is not a solution for the economic growth.

As per my basic understanding of economy, one government and country could only print money based on their economy, their income, GDP, GNP, and other factors affecting it. They couldn't just print any amount they want because it can incur price inflation just like what happened to Venezuela and Zimbabwe wherein they encounter a hyper inflation because they tried to pay their wages by printing more money. As a result, people are buying groceries with lots of cash, they are sometimes called, poor millionaires.

Meaning to say that, if printing of money in US or other country is based on economy, and it is logically increasing over time, it has a positive impact to the market of bitcoin as more people have the chance to convert more fiat currency to BTC.

Injecting as huge as 6 trillion USD in the economy by way of stimulus is definitely a cause for a much higher inflation. But I guess monetary, economic, and financial experts could also put up mechanisms to curb the rising of prices especially in times of crisis or calamities. The current situation calls for it. There must be efforts to somehow balance out its effects. For sure, profiteering is a grave offense in times of disaster like we are right now. Sooner or later, when the dust of this crisis settles down, the government could also shrink the amount of circulating money to control inflation to a tolerable rate.

I am not sure what answer you are looking for, but inflation doesnt work that way. You see figures that you did mentioned cant be followed because there are politicians who trapped those supposedly used money on goods and services. Production level on different sector cant increase it as we are having a huge crisis here. Same like what happened before, as you mentioned there is a huge dollar injection during 911 attack but inflation doesnt increase than supposed to be needed. Corruption is the answer. The money has been shattered into dots of those selfless politicians instead boosting one's economy. Nice discussion OP.

Normally when you pump in lots of money, you should have corresponding increased products/services/assets that can be traded with those money. That is what happpened in China, their money were used to modernize their country that billions of people are living

But this time, due to the total lock down of the whole city and whole country, transport is disrupted world wide, there are less products, services and assets available to be traded. If the virus can not be controlled in a few weeks, then there will be shortage of many things in every shop. Even with purchase quota, those who simply double the price will have no problem to sell. Unless the whole country fall into a communist model that uses planned economy, there will be run away inflation, because now everyone have received some cash, unlike 2008 that only banks received the money

None of the replies or comments above has addressed my questions: According to "The Bitcoin Standard" book,  U.S. prints an average of about 7% more money per year and China prints an average of about 20% more money per year over many years or decades. Why the actual average yearly inflation rates seem to be less than half of those numbers? Why the huge injection of U.S. dollars after 911, 2008-2009 Great Financial Recession, and 2020 Health and Financial crisis don't seem to cause any jump in inflation but only the mild or steady inflation many or most people desire?

We need more experts' input!!! Thanks.

It remains to be seen what the inflation rate will look like in several years time. gmaxwell makes some good points as to why immediate inflation shouldn't be expected as a result of the stimulus, let alone hyperinflation.

Printing trillions of dollars from thin air is courting for trouble, but the people need a stimulus package but trillions of USD is huge and could crash the fiat based system of money. I watch a video by a Canadian billionnair last year that the USD may collapse this year but I don't know how this is going to happen.

When we are talking about the printed money and inflation they won't be changing the price of Bitcoins directly.
The outcome of printing more money will do so.
That is inflation .

Inflation will affect every part of the society and therefore Bitcoins will also be the one getting hanged in the system.
The more the government prints , the lesser will be the value of their money .
If they increase the printing of money by the percentage you stated then in less than15 years , their money will be less than half of the value and the people will be affected a lot worse .
I

The American system has a way of regulation to avoid inflation. I guess if they have pumped in money to the system, they are looking for stimuli to drive the economy again and if that starts happening and the economy gets to respond, they are likely to increase interest rate which will enable the system to suck back the money pumped in form of interest. I think pumping in money is a way to regulate and control the economy.

Let me analyze it little for you. Printing free money is not a great step at all because it reduces the purchasing power of a currency. Every government prints money to deal with the inflation rate and to align the economy accordingly.

Let's assume a government has $100 in its treasury with this amount they can buy a bag of rice in 2019. Now the central bank of that country calculates the inflation rate as 7%. So the government will have to print $7 to be able to buy that same bag of rice in 2020. There are other factors as well, but largely it is the main concept. This is called purchasing power.

Now when a country prints money without looking at the inflation rate, it decreased the purchasing power of that currency which in turn creates hyper-inflation. We have two classic examples available, Zimbabwe and Venezuela. You can Google about it to know more.

So I expect bitcoin to see a huge increase in coming future because bitcoin is deflationary by nature, while the purchasing power of US will certainly go down at the same time. Hope this makes sense! 

This was a situation we already knew for a long time. All FIAT currencies are assets that are designed to be playable at any time. The US government can steer the market as it wishes by increasing or decreasing money emissions. As long as the export advantage is in hand, this will continue like this. This increase in money supply has a chance to reflect positively on Bitcoin price. But nobody knows what will happen in the future.

The numbers are very scary indeed. I bet there are unofficial numbers too besides those you've mentioned.. I guess the impact overall is diminished through various ways so we don't feel it, when in fact the truth is horror.. hence the inevitable recession.

Bitcoin will most likely show the true change months after we're buried in this situation. Everything is too uncertain right now to know for sure which way we're going, but one thing is sure: the economy is collapsing. If Bitcoin gets to pass this first stage of the recession successfully, I'd personally expect a big positive change of Bitcoin's price.

On the other markets, I'm expecting exactly what happened to the Hungarian Pengo. Those who have missed buying some toilet paper will probably be able to use the dollar bills to wipe their ass because it's gonna be worthless. They're still trying to hide the real face of the economy, but you can already see it won't last much longer.

I am pretty sure that all this financial aid money will come from overprinting banknotes and hoping that hyperinflation does not come. And maybe it won't, but the US is definitely playing with fire here. Even before the pandemic, I've been writing about my concerns that the next global economic crisis which would hit Earth around 2020 is going to result in the collapse of the most trusted fiat, such as USD and EUR. With what's happening in the world right now, this is even more likely to happen. Especially with USD because Trump's reaction to the pandemic is still ridiculous, and the US is now the country with the largest amount of active cases. They've been thinking about the economy, but they'll have to think about healthcare very soon.

Technically since the fed is doing so much printing, we would expect the USD's value to somewhat drop. But actually, the USD has gained value recently(against SGD, AUD, etc) due to I assume people moving their funds to USD because of the USD being stronger than currencies of most countries. As for long term, ones the epidemic dies down, I have zero idea.

As for bitcoin, currencies of some countries doing more and more quantitative easing should theoretically be a good thing. But let's don't forget that most people today are still holding bitcoin as a speculative investment rather than a hedge.

Thanks for the quick reply and education on Econ 101. I am still very much puzzled why the inflation rate has been so low for so long (decades) in the U.S. (~3%? per year), China etc in apparent big conflict with what economic theories prescribe, and what trigger the supper inflation in other countries. If printing huge amount of money periodically (e.g., after 911, 2008-2009, currently) will not cause big inflation over the long run (years or decades as in the U.S.), we should welcome more such money pumping, Econ 101 needs to be revised and most people's understanding or faith in Bitcoin's superior advantage over fiat currency (or at least U.S. dollar) may be wrong.

Would appreciate any input from any angle

The relationship between the change in prices and the supply of money is complicated.  The classic econ-101 equation is MV=PQ-- you can inject arbitrarily large amounts of money without increasing prices, so long as the money doesn't circulate (or offsets a loss of circulation elsewhere).

Personally I wouldn't expect immediate inflation from the stimulus as it's being injected into a massively slowed economy. Longer term? interesting question.

There is just as much to ask about the effect of low interest rates on velocity... An additional 6 trillion dollars has an additive effect on the MV side of the equation, interest rates have an inversely multiplicative effect.

 

6 trillion U.S. dollars will be pumped into the U.S. system alone, that is about $48,000 per family if distributed evenly (definitely not). What is your estimated impact on inflation in half year, 1 year, 3 years etc, and on Bitcoin?

I read from the great book "The Bitcoin Standard" that U.S. prints an average of about 7% more money per year and China prints an average of about 20% more money per year over many years., but the actual average yearly inflation seems to me like about half of those numbers. Is it false or something like improved productivity due to improved technologies, more efficient business models, or profits/wealth taken from other countries that keep the inflation much lower than printing money?

Thanks for any comment and discussion.