<p>Any monetary expansion can be inflationary.</p>

<p>Inflationary pressures come about when there's more money chasing the same amount of goods and services; or the same money chasing fewer goods and services.</p>

<p>A monetary expansion means there's more money. If the amount of goods and services doesn't increase in proportion, then there will be inflation.</p>

<hr>

<p>I note that you've asked about inflation, but in your comments you've referred to the case of Zimbabwe, which wasn't just inflation, it was hyper-inflation.</p>

<p>As the velocity of money tends to stay within quite a narrow range, then monetary expansion from faster circulation of currency isn't, in practice, going to lead to hyper-inflation: so hyper-inflation would - in reality - only come about from a rapid and sustained expansion of the monetary base by the Central Bank.</p>

CC BY-SA 3.0
2016-08-28T16:31:50.783Z
"Any monetary expansion can be inflationary." Those are book words. If it is hard for you to pinpoint the general mechanism for inflation (because of monetary expansion) can you provide an elaborate answer on why money creating via debt creation (banks loans money to client but asks more money back than he lends him) creates inflation. I think since back creates 100 dollars but demands 110 bucks back causes value of money to increase hence prices to fall.
coobit
CC BY-SA 3.0
2016-08-29T14:22:33.713Z
"Those are book words." - thank you, that's kind of you to say so. As you'll see, my second sentence pinpoints the general mechanism for inflation, and why it happens regardless of the source of the monetary expansion.
410 gone
CC BY-SA 3.0
2016-08-30T01:24:04.800Z
So you're argument is that banks can manufacture deflation using interest on loans? That is silly, coobit. Expansionary policy is often enacted via financial intermediaries. What your describing is a normal thing. And yes, monetary expansion can cause inflation. No matter the mechanism used by the Fed.
123
CC BY-SA 3.0
2016-08-30T09:23:26.793Z
EnergyNumbers, please don't take it too personal. I could have put a smile there :) to soften the words but putting smiles everywhere freaks me out. About the metter: 1)"more money chasing the same amount of goods" well, I've read this phrase alot but still to this day I feel that smth is being said here (implicit axiom of some sort) that just too much for me to bear. WHAT IS this "chasing"? I've never seen operational definiton of chasing :) Only amout of money divided by about of goods = chasing. Nonsense to me. :) (see a smile face :)
coobit
CC BY-SA 3.0
2016-08-30T09:25:33.257Z
123, No, banks CAN manufacture deflation in case they buy their own debts (money for buy-back come from their profint and not "printing") on a huge scale. But we know this is seldom the case.
coobit
CC BY-SA 3.0
2016-08-30T14:23:18.930Z
@coobit if you are the expert on what banks can do then explain how buying their own debts causes deflation. Honestly, the effort that many people here have put to help you understand has been only met with nonsense and no gratitude. Good luck finding an answer because you seem like you already know the answer to your question!
user29568
CC BY-SA 3.0
2016-08-28T12:49:46.423Z
2016-08-28T12:56:26.600Z
2016-08-28T12:56:26.600Z
410 gone
<p>I will attempt to answer your question, but I feel like there is nothing left to answer. </p>

<p>Consider a mini-economy where the central bank loans 100USD to another bank B. Bank B will pay the central bank at a later stage 110 dollars-doesn't happen the next day it could take months. Now, the bank has more money so it is going to loan out that money for 99 in return and keeps 10. So, now another bank has 90 and loans out...process continues.(Loans have increased i.e. money creation) </p>

<p>Whoever is loaning out this money clearly has more money now, so they will buy more goods. Assume there is a bakery. At first, the bakery manager sees this as increased demand so he/she works harder and raises the prices, but when he/she goes elsewhere to buy goods like a supermarket, the prices have also increased because those other people bought from there and raised the price. Now at some point the bank has to pay back the $110 dollar(the other banks as well, but with inflation paying off loans becomes harder) but inflation has already struck. </p>

<p>Most prices are sticky especially when decreasing, so you are stuck. On top of that, inflation and expectations can affect the velocity and the real GDP which can perpetuate the inflation even more. So, yes inflation can happen even with debt creation as I mentioned before. While money in circulation at the end does seem like its the same as the beginning; so much happens in between that it is incomplete to look at just two points in time.</p>

CC BY-SA 3.0
2016-08-29T15:39:55.377Z
2016-08-30T07:33:05.070Z
2016-08-30T07:33:05.070Z
user29568
<p>I have a theory that monetary expansion by debt creation (banks loan money into existance in exchange for public debt) never leads to inflation. On the over hand any expansion (goverment buys back it's own debt) does indeed lead to inflation.</p>

<p>Am I right? Please, provide details about the parts where you feel mistake resides.</p>

<p>P.S. monetary expansion without debt creation (debt change is 0) leads to inflation too.</p>

CC BY-SA 3.0
2016-08-24T13:32:28.263Z
Whats your question? The fastest way to affect the monetary base is for the government to either buy or sell government bonds to banks. To pay for the T-bills, the government electronically increases the reserves of the seller.
user29568
CC BY-SA 3.0
2016-08-24T14:01:20.207Z
Added the question in the OP.
coobit
CC BY-SA 3.0
2016-08-25T19:17:54.593Z
Not really, expanding the monetary base can in the short run lead to inflation. Even in the long run, if the debts aren't paid it can also lead to inflation. A good example of the second case is Zimbabwe, you can google it.
user29568
CC BY-SA 3.0
2016-08-25T20:03:20.260Z
I'm sorry, but can you give a hint on WHY expansion (with debt creation) leads to inflation? I can understand why "empty" money printing as in Zimbabwe leads to inflation but I only guess about the true mechanism of such things.
coobit
CC BY-SA 3.0
2016-08-25T20:15:32.577Z
Until the debt is paid back, case 1 and case 2 are exactly the same thing.
user29568
CC BY-SA 3.0
2016-08-25T20:20:33.257Z
Hmm. Well in Zimbabwe the case was neither 1 nor 2. It was printing money to buy debt back (i.e. expansion with debt destruction). In this case the debt being destroyed immediately and this is different from just printing money with\without debt creation.
coobit
CC BY-SA 3.0
2016-08-25T20:35:38.313Z
You're confusing things. Expansionary monetary policy increases the monetary base. Having prior debt is besides the point! The government was printing money to pay for already existent government expenditures. More money in circulation means a tendency toward inflation. By lending, there is a promise of debt whereby the money is returned and the monetary base would return back to normal.
user29568
CC BY-SA 3.0
2016-08-25T20:38:46.143Z
The government can also purchase financial assets as a means of monetary policy with the promise that the financial assets like bonds will be paid back. Is it clear?
user29568
CC BY-SA 3.0
2016-08-25T21:33:31.163Z
Read the link in the comments of this question it will be helpful: http://economics.stackexchange.com/questions/6844/how-could-monetary-policy-be-affected-if-cash-gifts-to-consumers-were-more-fre?rq=1
user29568
CC BY-SA 3.0
2016-08-26T07:58:17.883Z
quote from your link: "However, if the monetary authority purchases that bond (swapping base money for the bond), then it is indeed inflationary, as the amount of money now in circulation has increased." Now I don't understand if the AUTHORITY buys it's OWN bonds or public bonds? I think this is vital point. In any case monetary base expands but in one case it expands without debt destruction and in other with destruction.
coobit
CC BY-SA 3.0
2016-08-26T20:46:30.743Z
If the authority issued bonds and then decided to buy them back ( what you call debt destruction) is unclear but lets assume sell price = buy price then nothing happens. Now that you have a good sense of what your question is, I think it would be helpful if you reask it with a clear question title and detailed description of what your looking for.
user29568
CC BY-SA 3.0
2016-08-27T07:25:40.257Z
How should I rephrase it? I'm not familiar with contemporary financial jargon and stuff.
coobit
CC BY-SA 3.0
2016-08-27T09:09:58.210Z
You don't need to use financial jargon. At this point, I don't know what question is left to answer. The interest that the authority makes from  lending or financial assets is a redistribution of wealth and doesn't affect the monetary base. What the authority does with that money is another story, use it for government spending/budgeting. The article I linked you to discusses the money multiplier, if your not familiar with it, I wont bother. Remember this: as long as money in the monetary base increases there is more inflationary pressure.
user29568
CC BY-SA 3.0
2016-08-27T09:11:02.163Z
Paying its own debts with increased money from the base, even though there is debt destruction, still causes inflation. Because the monetary base has increased and this time with no "promise" to decrease it.
user29568
CC BY-SA 3.0
2016-08-27T17:20:24.740Z
The question is this: Universally people think that monetary base expansion with buying back debt (destruction) leads to inflation. I belive that monetary expansion with debt creation (bank lends money to public) never leads to inflation (no one wants to go to jail). Can anyone debunk my view with an mechanical (details) example?
coobit
CC BY-SA 3.0
2016-08-27T22:04:08.787Z
In an new question titled: "can expansionary monetary policies with debt creation be inflationary?" And add the details. This should garner a better response from the community.
user29568
<money-supply>
Can expansionary monetary policies with debt creation be inflationary?
coobit
# Can expansionary monetary policies with debt creation be inflationary?

(Asked by: username_0 on 2016-08-24)

I have a theory that monetary expansion by debt creation (banks loan money into existance in exchange for public debt) never leads to inflation. On the over hand any expansion (goverment buys back it's own debt) does indeed lead to inflation.

Am I right? Please, provide details about the parts where you feel mistake resides.

P.S. monetary expansion without debt creation (debt change is 0) leads to inflation too.

**Tags:** money-supply

> **Comments:**
> **username_1**: Whats your question? The fastest way to affect the monetary base is for the government to either buy or sell government bonds to banks. To pay for the T-bills, the government electronically increases the reserves of the seller.  
> **username_0**: Added the question in the OP.  
> **username_1**: Not really, expanding the monetary base can in the short run lead to inflation. Even in the long run, if the debts aren't paid it can also lead to inflation. A good example of the second case is Zimbabwe, you can google it.  
> **username_0**: I'm sorry, but can you give a hint on WHY expansion (with debt creation) leads to inflation? I can understand why "empty" money printing as in Zimbabwe leads to inflation but I only guess about the true mechanism of such things.  
> **username_1**: Until the debt is paid back, case 1 and case 2 are exactly the same thing.  
> **username_0**: Hmm. Well in Zimbabwe the case was neither 1 nor 2. It was printing money to buy debt back (i.e. expansion with debt destruction). In this case the debt being destroyed immediately and this is different from just printing money with\without debt creation.  
> **username_1**: You're confusing things. Expansionary monetary policy increases the monetary base. Having prior debt is besides the point! The government was printing money to pay for already existent government expenditures. More money in circulation means a tendency toward inflation. By lending, there is a promise of debt whereby the money is returned and the monetary base would return back to normal.  
> **username_1**: The government can also purchase financial assets as a means of monetary policy with the promise that the financial assets like bonds will be paid back. Is it clear?  
> **username_1**: Read the link in the comments of this question it will be helpful: http://economics.stackexchange.com/questions/6844/how-could-monetary-policy-be-affected-if-cash-gifts-to-consumers-were-more-fre?rq=1  
> **username_0**: quote from your link: "However, if the monetary authority purchases that bond (swapping base money for the bond), then it is indeed inflationary, as the amount of money now in circulation has increased." Now I don't understand if the AUTHORITY buys it's OWN bonds or public bonds? I think this is vital point. In any case monetary base expands but in one case it expands without debt destruction and in other with destruction.  
> **username_1**: If the authority issued bonds and then decided to buy them back ( what you call debt destruction) is unclear but lets assume sell price = buy price then nothing happens. Now that you have a good sense of what your question is, I think it would be helpful if you reask it with a clear question title and detailed description of what your looking for.  
> **username_0**: How should I rephrase it? I'm not familiar with contemporary financial jargon and stuff.  
> **username_1**: You don't need to use financial jargon. At this point, I don't know what question is left to answer. The interest that the authority makes from  lending or financial assets is a redistribution of wealth and doesn't affect the monetary base. What the authority does with that money is another story, use it for government spending/budgeting. The article I linked you to discusses the money multiplier, if your not familiar with it, I wont bother. Remember this: as long as money in the monetary base increases there is more inflationary pressure.  
> **username_1**: Paying its own debts with increased money from the base, even though there is debt destruction, still causes inflation. Because the monetary base has increased and this time with no "promise" to decrease it.  
> **username_0**: The question is this: Universally people think that monetary base expansion with buying back debt (destruction) leads to inflation. I belive that monetary expansion with debt creation (bank lends money to public) never leads to inflation (no one wants to go to jail). Can anyone debunk my view with an mechanical (details) example?  
> **username_1**: In an new question titled: "can expansionary monetary policies with debt creation be inflationary?" And add the details. This should garner a better response from the community.  

---

## 2 answers

### Answer by username_2 on 2016-08-28. Score: 1

Any monetary expansion can be inflationary.

Inflationary pressures come about when there's more money chasing the same amount of goods and services; or the same money chasing fewer goods and services.

A monetary expansion means there's more money. If the amount of goods and services doesn't increase in proportion, then there will be inflation.

---

I note that you've asked about inflation, but in your comments you've referred to the case of Zimbabwe, which wasn't just inflation, it was hyper-inflation.

As the velocity of money tends to stay within quite a narrow range, then monetary expansion from faster circulation of currency isn't, in practice, going to lead to hyper-inflation: so hyper-inflation would - in reality - only come about from a rapid and sustained expansion of the monetary base by the Central Bank.

> **Comments:**
> **username_0**: "Any monetary expansion can be inflationary." Those are book words. If it is hard for you to pinpoint the general mechanism for inflation (because of monetary expansion) can you provide an elaborate answer on why money creating via debt creation (banks loans money to client but asks more money back than he lends him) creates inflation. I think since back creates 100 dollars but demands 110 bucks back causes value of money to increase hence prices to fall.  
> **username_2**: "Those are book words." - thank you, that's kind of you to say so. As you'll see, my second sentence pinpoints the general mechanism for inflation, and why it happens regardless of the source of the monetary expansion.  
> **username_3**: So you're argument is that banks can manufacture deflation using interest on loans? That is silly, username_0. Expansionary policy is often enacted via financial intermediaries. What your describing is a normal thing. And yes, monetary expansion can cause inflation. No matter the mechanism used by the Fed.  
> **username_0**: EnergyNumbers, please don't take it too personal. I could have put a smile there :) to soften the words but putting smiles everywhere freaks me out. About the metter: 1)"more money chasing the same amount of goods" well, I've read this phrase alot but still to this day I feel that smth is being said here (implicit axiom of some sort) that just too much for me to bear. WHAT IS this "chasing"? I've never seen operational definiton of chasing :) Only amout of money divided by about of goods = chasing. Nonsense to me. :) (see a smile face :)  
> **username_0**: 123, No, banks CAN manufacture deflation in case they buy their own debts (money for buy-back come from their profint and not "printing") on a huge scale. But we know this is seldom the case.  
> **username_1**: @username_0 if you are the expert on what banks can do then explain how buying their own debts causes deflation. Honestly, the effort that many people here have put to help you understand has been only met with nonsense and no gratitude. Good luck finding an answer because you seem like you already know the answer to your question!  

---

### Answer by username_1 on 2016-08-29. Score: 0

I will attempt to answer your question, but I feel like there is nothing left to answer.

Consider a mini-economy where the central bank loans 100USD to another bank B. Bank B will pay the central bank at a later stage 110 dollars-doesn't happen the next day it could take months. Now, the bank has more money so it is going to loan out that money for 99 in return and keeps 10. So, now another bank has 90 and loans out...process continues.(Loans have increased i.e. money creation)

Whoever is loaning out this money clearly has more money now, so they will buy more goods. Assume there is a bakery. At first, the bakery manager sees this as increased demand so he/she works harder and raises the prices, but when he/she goes elsewhere to buy goods like a supermarket, the prices have also increased because those other people bought from there and raised the price. Now at some point the bank has to pay back the $110 dollar(the other banks as well, but with inflation paying off loans becomes harder) but inflation has already struck.

Most prices are sticky especially when decreasing, so you are stuck. On top of that, inflation and expectations can affect the velocity and the real GDP which can perpetuate the inflation even more. So, yes inflation can happen even with debt creation as I mentioned before. While money in circulation at the end does seem like its the same as the beginning; so much happens in between that it is incomplete to look at just two points in time.


---

