I wrote a blog awhile back basically making fun of the fact the government was simply trying to “print more money” as a way to get us out of this financial crisis. The writing was a take on my childhood misconceptions.
The odd part was the blog also prompted a lot of viewings from people that really didn’t understand why printing more money was not a legitimate way to work our way out of this. So, in order to clear this up…
Imagine the government printed more money and sent every man, women, and child $5,000. Sounds good right? Some people would save it, but the bulk would run out and buy a flat screen television, go out for dinners, or even pool some money and buy a new Harley-Davidson (my personal choice).
The issue is everyone now has more money – equally. So now the value of the dollar has decreased (there are more of them out there). Think of trading cards or collectables – they are worth more when there are less of them available.
Prices are determined by supply and demand (yes, there are some other factors but let’s not bother with those right now) which is also a way of saying “ability” to pay in some cases.
Back to the store; Let’s say only 100 people could (normally) afford the flat screen television at your local Best Buy. But now more people have money and more people go to the store to buy one.
The first week the television sells out. Well, we can’t have that in a store (and the demand has gone up) so now the prices will as well. Basically what you have now is inflation.
Inflation would not be limited to the television. It would occur on everything. Bread, Milk, Gas, Electronics, etc, etc.
So, in a nutshell, printing more money simply raises the prices of everything but the net effect is still the same. If you can’t afford it now, you won’t be able to afford it then!
For the thoughts on the stimulus package, check out this post.