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Inflation and money supply

By Tyler Koch
web posted November 7, 2022

In our modern society, the value of money is key. It can be the deciding factor in many important governmental decisions, as well as personal financial decisions. In “printing” too much money, the economy may experience a period of growth and flourishment, though it will later face the repercussions of inflation. Nobel Prize winning economist Milton Friedman gives his explanation of its effects in his series Inflation and Money Supply. He states, “Inflation is just like alcoholism, when you start drinking or printing too much money, the good effects come first, the bad effects only come later, which makes a strong temptation to over print… For the cure it’s the other way around, when you stop drinking or printing money, the bad effects come first and the good effects later.” In my opinion, I strongly agree with Mr. Friedman’s points, as there is much historical evidence supporting his statements on the causes and effects of inflation.

First off, my first point of agreement is that though an economy may flourish for some time because of inflation, it will later suffer from it. Though the period of enjoyment and the later consequences of inflation apply to the overall economy, these same effects also apply to the people, as individuals. For example, when interest rates are lowered too much and money is “overprinted”, this may prompt people to irresponsibly borrow and spend too much money. Although those borrowing too much may have a feeling of financial prosperity, as they buy new homes, cars, and other expenses, their irresponsible decision to borrow and spend too much will come back to bite them. Eventually, they may not be able to pay off their debt, which may put them into financial trouble. Following this, people may start cutting back on their spending in order to pay off their debt, which in turn, forces economic growth down even more. In times of recession, this has proven to be a very destructive pattern.

Similarly, I also agree on how disastrous inflation can be to businesses and employment of an individual. For example, as inflation rises, the purchasing power of the dollar falls. If per say, before inflation, $15 could buy you a nice salmon dinner, that same meal could cost $25 or even more due to inflation and the devaluation of the dollar. These effects can be clearly seen today in the insanely high prices of gas due to inflation. Following this, if people’s wages don’t increase accordingly, this could be harmful as people require a certain amount of money just to survive following an increase in the cost of living. Due to this, people may go on strike for higher wages to pay for the higher cost of living. Not only can strikes be dire for the employer, but also for the employee. When businesses experience a strike, they basically shut down as they have no employees, which means no revenue for the company. On the other hand, though the business itself struggles during a strike, employees do too, as they too receive no pay, making it a battle of who can hold out the longest.

Overall, the temptation to print too much money can be detrimental to an economy, as proven by the many difficult times caused by inflation. Regardless of the benefits an economy may experience for a time, overprinting money and lowering interest rates too far is very dangerous for individual people, as they may be tempted to borrow and spend more money than they can repay. On top of that, inflation can also lead to strikes, which damages both the company and the individual’s financial wellbeing. In my opinion, its best to avoid the temptation of printing too much money in the best interest of the people, and to focus on the growth of the economy while keeping inflation low. ESR

This is Tyler Koch’s first contribution to Enter Stage Right. (c) Tyler Koch

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