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Does money printing (even when hoarded) always raise prices?

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Maurizio Colucci posted on Mon, Apr 4 2011 10:11 AM

Hi, I am looking for an a-priori proof that money printing always raises overall prices (even if all the printed money is hoarded and not spent). (when I say "raises prices" I mean ceteribus paribus.) I don't know if this is even true, but I am trying to prove it.

I have an idea and I am looking for comments or improvements.

Suppose that the central bank prints new money and gives it to A. Only three cases are possible: 1) A spends the money; 2) A invests (lends) the money; 3) A hoards the money.

We want to prove that prices will increase in all cases, in particular in case 3.

Case 1) A spends the new money on some good X. This is the easy case: we all know why the price of X will increase. (Demand for X increased, and supply has not increased, so the price for X must increase.) Then the seller of X in turn will have more money, which he is going to spend on some other good Y, so the price of Y will increase too, and so on.

Case 2) A lends the new money to some other person B. Then B has the new money and is faced with the same problem: he can either spend it, lend it, or hoard it. So we can ignore this case, because it must eventually resolve to case (1) or (3). Eventually, someone must either spend or hoard the money.

Case 3) A hoards the money (e.g. he keeps it under the mattress). This is the difficult case. We want to prove that even in this case some price will increase. How can this be, since A is not buying anything with the money? My answer: Even though A does not spend the money, something important has changed: A now has more money. So, money has now become less attractive to A (because he has more of it, and nothing else has changed). This is like saying that everything other than money (including leisure) has become more attractive to A. (Another way to say it is that his demand for money has decreased). This means that, in order to get the same amount of money as before, A will be willing to work less than before. Or, equivalently, it means that, to work the same amount of time as before, he will ask for more money than he did before. But to me this means that the price of A's services has increased. In general, we can say that the overall price of labour has increased as a consequence of money printing. And since, as far as I can see, nothing else has changed, we seem to have proved that overall prices have increased, even in the case where all the money was hoarded and not spent.

If this analysis is correct, it seems we can state that money printing always increases prices. But is it correct? Are there other ways to get to the same conclusion? Thank you.

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xahrx replied on Mon, Apr 4 2011 10:36 AM

I think you'd have to seriously and specifically consider what your definition of hoarding is.  In reality it's just extreme saving, and saving is spending put off to later is all.  If the person's goal is to simply aquire money for no other purpose but to have money, it never gets into circulation as the money is the end itself, not the medium of exchange, therefore prices would not go up but down as the hoarder would be effectively contracting the money supply.  However, in every other case but this extreme, eventually the money will come back into circulation and be used for exchange, and raise prices.  I do not think however there is an a priori proof.  For example, what if the money is demonetized either through market forces or by fiat, and loses some or all of its value?  I don't think there's an a priori way to get where you want to go.

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C replied on Mon, Apr 4 2011 10:47 AM

The only thing you can say is that money printing in the face of an increased demand for money (hoarding) will make prices higher than they otherwise would have been.

Remember an increase in the demand for money should cause a fall in the price level.  If money is printed prices will fall by less then they otherwise would have.  So in that sense the price level will be higher.  If enough money is printed to account for the increase in money demand, the price level wont fall at all.  

Of course, if this new money enters through the loan markets, it will still distort interest rates and cause resource misallocation.  Even though prices have not risen.  

  At least he wasn't a Keynesian!

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I suspect that pretty much nobody hoards money - even if they say thay are doing so. Even if you just "leave your money in the bank", the bank will spend most of it on something - perhaps shares or bonds - or they will lend it to someone in order for that person to spend it on something.

I beleive that money is like a hot potato, nobody wants to hold on to it.

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@xahrx

If the person's goal is to simply aquire money for no other purpose but to have money, it never gets into circulation as the money is the end itself, not the medium of exchange, therefore prices would not go up but down

What I am arguing is that, even in that case, prices would not go down. (because the price of that person's services would go up.) If you think my point is wrong (which it probably is), could you please explain why.

 

as the hoarder would be effectively contracting the money supply. 

but he would ask for more money to sell his services...

 

...I do not think however there is an a priori proof.  For example, what if the money is demonetized either through market forces or by fiat, and loses some or all of its value? 

I'm not 100% sure what this means, however it seems to me that would violate the ceteribus paribus condition. When I say "prices rise" I mean "all else being equal". If productivity increases, or money demand increases, of course prices don't necessarily rise, but this violates the ceteribus paribus.

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@Chris Pacia

The only thing you can say is that money printing in the face of an increased demand for money (hoarding) will make prices higher than they otherwise would have been.

But do you think this holds even if the new money is never spent? i.e. hoarded indefinitely? Why?

 

 

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xahrx replied on Mon, Apr 4 2011 12:09 PM

"What I am arguing is that, even in that case, prices would not go down. (because the price of that person's services would go up.) If you think my point is wrong (which it probably is), could you please explain why."

I know what you're saying, I'm saying it's wrong.  One, why would he charge more for his services unbless his preferences have changed?  Two, why would people necessarily pay more for his services?  To be in a position to charge more people must be willing and able to pay more.  Three, the hoarder is in a state of barter; he's taking money not to buy stuff but just to have.  There's no reason for him to charge more merely based on this fact alone.

What you are trying to say would only be correct with a bunch of ceteris paribi included and then only in relative terms; ie prices would be higher than they otherwise would have been.  But there is no way that I can see to prove a priori that prices will increase nominally because it isn't the case.

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Maurizio Colucci:

@Chris Pacia

The only thing you can say is that money printing in the face of an increased demand for money (hoarding) will make prices higher than they otherwise would have been.

But do you think this holds even if the new money is never spent? i.e. hoarded indefinitely? Why?

Why would anyone (let alone everyone) ever indefinitely hoard money? The only purpose of acquiring money in the first place is so that it can be spent at some future time.

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@xahrx

One, why would he charge more for his services ? 

because he is now richer, so money is worth less to him, i.e. leisure is worth more.

Two, why would people necessarily pay more for his services? 

they don't need to. All I am trying to prove is that his supply curve has shifted left. At each price, he is offering fewer hours of his services than before. So the price increases, even if demand for his services is constant.

Three, the hoarder is in a state of barter; he's taking money not to buy stuff but just to have.  There's no reason for him to charge more merely based on this fact alone.

I think there is. When you have more of X, the value of an additional unit of X to you decreases. This means that getting one more X is now less attractive to you. So you will offer less than before in exchange for X. But this means you are charging more.

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Why would anyone (let alone everyone) ever indefinitely hoard money? The only purpose of acquiring money in the first place is so that it can be spent at some future time.

Good point. I don't know. Maybe to face a disaster that never happens. :)

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C replied on Mon, Apr 4 2011 1:34 PM

Maurizio Colucci:

 

as the hoarder would be effectively contracting the money supply. 

but he would ask for more money to sell his services...

There's no reason to assume that. Why would the supply curve for labor shift as a result of an increase cash holding?  All the horder does is reduce his present consumption.  

Maurizio Colucci:

But do you think this holds even if the new money is never spent? i.e. hoarded indefinitely? Why

The point has been made already that its illogical to hord indefinately.  But if that were the case they overall price level would be at a permanently lower level.  Until he finally decides to spend it, of course, then it would go back up.  

 

  At least he wasn't a Keynesian!

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Well, people save money for disasters, sure, but they don't save money for disasters that never happen.

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Increasing the money supply does not ever apodictically raise prices. Only ceteris paribus, an increase in the money supply with raise prices.An a priori theory that states an increase in the supply of money will always, regardless of the demand for money raise prices is akin to saying an increase in the demand for apples, will always regardless of shifts in supply raise its price.

There are two demands for money, exchange demand and reservation demand. Exchange demand is the pre income demand for money, it occurs when an actor is going to sell his supply of goods/labor services. This is another way of representing supply curves for goods. Reservation demand is the more commonly understood demand for money, it is the post income demand and occurs when an actor decides to allocate his money stock he earned in previous exchanges. It is hoarding.

If there is an increase in the money supply, then ceteris paribus prices will rise, this however can be counteracted with an increase in hoarding (as you mention above). If hoarding increases exactly enough, or if all agents just hoard the money and it never gets spent, then the price of money will not change and only its quantity will. If the price does not change, then the overall level of prices have not changed. And labor services certainly does not need to change as well.

An increase in hoarding  occurs precisely because there is a shift in value scales and money is valued more highly now, post income. The demand for goods has decreased, but the supply curves  remain constant. Additional units of money are always valued more lowly, but this does not mean actors will decrease their labor supply. With the increase in the money supply, the actors have hoarded it. The still will be supplying the same amount of labor services, ceteris paribus, to buy the goods they bought before the hoarding. Meaning that unless their exchange demand has decreased, they will still continue to have the same labor curve. If your idea were always true, than an increase in the reservation demand for money would always be followed by a decrease in the exchange demand for money, and demand for money would never change.

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Prime replied on Mon, Apr 4 2011 6:02 PM

"to work the same amount of time as before, he will ask for more money than he did before "

Is this true? Do all lottery winners who choose to continue working at their jobs always demand a raise?

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What BlackNumero said with the slight caveat that in a natural money economy, there is a connection between interest rates and changes in the money supply, as Hulsmann explains here.

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