03 June 2013

Printing Money

Why the printing of euro and dollar doesn’t cause inflation but deflation

In the world today due to the more restrictive monetary policy interest rates are on the floor and yet prices do not rise.

In the U.S., EU, UK or Japan, the central bank prints money and yet unconsciously consumer prices do not increase. That makes the supporters of money printing economy to say that they produce a magic thing: printing money without inflation.

In reality, inflation is alive and well. The only reason that bread is not more expensive it is only because that money never come to those who buy bread. Instead they go to those who buy government securities (banks) or on the stock shares (vehicles with all data access to cheap loans for banks).

The stock exchange it is high and interest on government securities to a minimum. Low-interest means high price and financiers have even a formula that would determine exactly how high. And like the Greece already suggested, the price is huge.

What are the consequences? First, the rise of price for goods and services will not occur - neither now nor later, as long as it does not reach into the hands of citizens. Actually, over time, you may see deflation.

Why? Companies are not interested in producing more and more efficient, because they can not sell the production. So they choose to be "efficient" in balance, eliminating activities which are below the average profitability, to keep pace with the market. Governments continue to spend discretionary (but not on salaries – cause’ it's "austerity") inflating the companies' balances sheets and further reducing the real resources from the productive sector.

For these reasons, expansionary monetary policy does not produce inflation but unemployment: Spain and Greece have already reached 25%. Unemployed people buy less, thus giving voice to a new round of "efficiencies" and so on. Finally, as the demand will fall to zero, this will also happen to prices.

Money from the bank balance sheets and from the governments remains sterile, as if they never existed. Which is not at all far from the truth…

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