Does money printing really causes inflation? How much more (hyper) inflation to come?

Updated: Nov 24, 2021

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Instinctively, we know that money printing causes inflation because with more money supply, demand for goods/services will be higher as people are able to afford more (money is so cheap!). With the higher demand, prices for goods/services will be higher.

According to investment guru, Cathie Wood, quantitative easing (money printing) is supposed to bring more inflation. However, with more money printing, money velocity drops, taking away the "inflationary sting." She also believe in deflation - prices of goods are going to be cheaper in the future, thanks for innovation (ability to scale up / manufacture cheaper and cheaper with better technology)

To prove her theory on money velocity, below are some of the calculations on Money Velocity to calculate the impact of quantitative easing on inflation.

Money Velocity is the rate at which money turns over per year. The higher the velocity, the more the inflation and vice versa. What does it mean by that?

Basically if you buy a hotdog bun for $2 - > and the hotdog seller uses the $2 to pay rent - > landlord uses the $2 to repay mortgage loan - > and bank uses the $2 to create more loans

the $2 has circulated 4 times and created 4 x $2 = $8 value

So if the money velocity is higher, ie. 10 times instead of 4 times, the "value creation" of your $2 would have increase to $20.

Size of economy (GDP) : ie. 21 Trillion divided by

Money supply*: ie. 7 Trillion

(Money supply* = this is the amount of money that is in circulation/floating out there)

Average money velocity = 3 (21/7)

If Fed print an additional 3 Trillion more,

Size of economy (GDP) : ie. 21 Trillion divided by

Money supply: ie. 7+ 3 = 10 Trillion,

Average money velocity reduce to 2.1 (21/10)

It brings us back to the money velocity vs inflation concept. Looking at the maths above - isn't inflation supposed to go up with more money printing? Cathie wood theory of money velocity relating to inflation does not seem to be too accurate.

In my opinion, unless the Fed raises rates to stop people from spending (cheap) money, (hyper)inflation will continue. Although the Fed has started tapering this month (only $15 billion monthly reduction from the $120 billion bond purchases, which works out to be 13%), it has not stop printing. Neither has Fed raise rates. All the current tapering measure is just a slowing down of the quantitative easing.

Also, it is said from a study that it takes approximately 20 months to see the true impact of money printing on the economy. What we are seeing now is the impact of the amount of money printed 20 months ago. It remains to be seen as to the true extent of inflation from all the money printing right now.

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#inflation #tapering #cathiewood #notfinancialadvice #investments

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