There is a difference between currency and money in today's system. Issuing paper money is fine when it has the full backing of an actual store of value.
Paper currency does have to be tied to a value with the most logical standard being the income included in the gross domestic product. When the government prints substantially more money in order to spend substantially more money, it devalues all the money currently circulating in the system. We see it every time we go to the store and note a few extra cents on a head of lettuce or a can of peas. The fact that we have a totally dishonest and untrustworthy government who flat out lies to us about that in no way lessens the overall effect.
An increase in the supply of money isn't necessarily inflationary. We have to make a distinction between the monetary operations of the FED and government spending. The former isn’t “printing money”, but the latter is. When Uncle Sam confiscates more than it receives from us in taxes, we can technically say it’s “printing money”. New financial assets are creates which didn’t previously exist, so the supply of money has increased. I haven’t gotten into bank credit, which is also a form of money, but I want to delve into this notion of printing money, because the hard money types misconstrue this all 365 days per year, 24 hours a day, 7 days a week.
The hard money crowd views deficit spending as “printing money” , which it technically is, and it will create inflation. And to prove their case, they trot out the Quantity Theory of Money (MV=PV). It’s a concept which states that there’s a direct correlation between the quantity of money and the price level of real goods and services. The problem is, it’s incorrect, even Milton Friedman backed away from it later on in life.
Basically, M is the supply of $$$$, V is the velocity (how many time the $$$$ changes hands the economy, etc.), P is the price level, and Q is the net total amount of real goods and services produced. The hard money types insist, almost in a religious fervor, that increasing M (the supply of money) will increase the right side of the equation, which means inflation is upon us.
For example, let’s say I go to the store 10 times today and spend $20 dollars each time. If you plug that into the left side of the equation (V is 10, I went to the corner store 10 ten times, I spent $20.) This will tell us that $200 worth of stuff was sold. If I go 20 times, then $400 dollars’ worth of stuff is sold. The hard money types point to the increasing right hand side of the equation, then state as empirical fact that’s proof of rising prices. What they forgot is this equation has four components: M, V, P, and Q, and none of them are constants so to speak. M could increase, but V could decrease. What if I have $50 and only go to the store once? Only $50 worth of stuff is sold. Also, quantity on the right hand side can also change. Maybe we have an uptick in something which increases output and may actually cause falling prices. We could seem the money supply increase and see prices fall.
The Quantity Theory of Money tells us nothing, except that total amount of $$$$ spent equals total nominal output. It’s doesn’t give us totally accurate picture about prices. As a matter of fact, we see this playing out right before our eyes. The US has persistent record deficits, year after year, but prices are stable and even falling in some instances. The total velocity of $$$$ has substantially decreased, but the quantity remains high.
