The Case of the Missing Inflation

Money Printing Doesn't Lead to Inflation

This concept has come as a shock to many as it contradicts the economic teachings of most major universities. Many of whom predicted that the FED's printing of trillions of dollars would result in inflation. We now have 3 examples of this not being the case in Japan, United States, and the Euro Zone.

So what one might ask causes inflation. The answer is in the details. It is the spending of money and not the printing of money that results in inflation. This is a difference that was overlooked by previous economists that has a profound implication. That is, one can now consider national and international economics as 2 separate entities. Central banks have learned to hold currencies in international reserves that can't be spent directly into their own economies. Permitting international trade to settle when there are currency shortages without having a flood of currency locally.

This may not seem useful at first glance, but after further analysis it becomes clear that this provides central bankers an opportunity to diverge from the global path if one's economy is heading in a different direction. China has been fine tuning attempts at this for years, stock piling foreign reserves while their economy is in high gear to spend reserves when growth starts to dampen.

American economists have always feared that printing USD when global supplies were low would result in inflation in the USA. They now know they can use the international bond market to reflate international supplies of USD without having inflation as an unwanted consequence back home.

So the only remaining question, or at least the most pertinent one, is what's preventing the inflation from occurring. The answer is two fold. The first reason a country may not experience any inflation while printing their own currency is other countries may be stock piling the currency for expanding international trade. The second is that national players may be stock piling the currency. Another way to view this is that when the money supply flows from an entity that has a high tendency to spend it to an entity that has a low tendency to spend, deflationary pressures ensue. Permitting a country some space to expand the money supply.

We must now understand that there is grave danger of inflation occurring during the reflationary portion of an economic cycle. Maybe more importantly we must ensure that the redistribution of the newly printed currency must be distributed in a fashion that redistributes the wealth that was created as a result of the necessity of having an international economy in an equitable way. If left undone inflationary pressures will appear in an uneven way. The invisible hand tends to favour some more than others which leads to bubbles. Many examples of which are present today.

Some of my favorites of which are Crypto currencies, Marijuana stocks, Real Estate in international hubs/luxury, and Luxury Purses. If left up to the invisible hand, it seems bubbles will persist.

As always your thoughts are welcome.
Dahlsom