As I’ve said before, I always enjoy going to zerohedge for the most intelligent, compelling, and engaging iteration of the sociopathic perspective on events, and today Tyler Durden does not disappoint:

In the past we have jokingly discussed the creation of a Death Star as the way the world can save itself by printing an almost infinite amount of money to support growth. As almost everyone, especially the MMT crowd it seems, can plainly see, if printing some money is good (well it must be, markets are up) then printing more money must be better, right? Well, no (as we discussed in detail here). There are unintended consequences and as we pointed out recently, we are already seeing less and less effervescence in the real economy from QE’s impact and the spectre of the inflationary pressures that implicitly limit the ‘benefit’ of this action is nowhere more painful than in energy prices (and in fact the price of anything in relative limited supply as opposed to cash which is printed daily). Professor Antony Davies, of Duquesne, takes this subtle concept to task in this exceptionally straightforward 206-second video on money as an IOU and its solution to the caveman’s ills providing the background for why money’s inherent value is relinquished once it becomes printed en masse. Printing more money doesn’t make more goods and services appear, simply spreads the value of the existing goods and services among a larger number of dollars – this is inflation. Our wealth comes not from money but from the goods and services that money buys. Q.E.D.


The thing that is both very right and very wrong about this is that it presumes a world that is totally supply-constrained. A thought experiment.

A man walks into Burger King. Buys a Whopper. Hands over $5, gets his burger, eats his burger. Nom.

The next day the Fed prints 10 $5 bills and gives them to other people who would like to go to Burger King. Eleven people walk into Burger King and each ask for a burger.

In the Econ 101 version of Burger King, the one in which there is but one Whopper per day, we are supply-constrained so the price of the Whopper immediately leaps in what would appear like a very amusing Whopper auction. But what happens the next day?

Well, Burger King says “hey, demand for burgers has increased. Let’s capture that demand by making more burgers!” So they order more buns from the bunnery, more beef from the beefery, more veggies from the veggery, more secret sauce from the week-old-mayo-in-the-sunnery, etc. And here is where the story begins to really unfold. Because those new dollars that Ben Bernake printed in a fit of stimulative whimsy are going to radiate out through the supply chain until they hit a place where they can’t actually create more supply. Let’s say there are simply not enough cows to produce that much beef and to breed more of them will take some time. That might temporarily increase the price of burgers. As would a shortage of trucks to ship all the newly-demanded Whopper ingredients to the Burger King. And so on.

So Tyler is, in his final flourish, completely correct – true wealth comes from goods and services. Money is just an extremely, extremely, extremely useful tool to quantify how we value those goods and services, facilitate their exchange, expand the possibilities of specialization in the economy and make possible higher levels of savings and investment. A moneyed economy has more capacity than a barter economy. But Tyler is right that money in-and-of-itself is not “true wealth.” But if the economy has excess capacity then that slack will absorb the new money and you won’t see inflation because there were unused or underutilized resources – empty buildings, unemployed people, unplanted fields, undriven trucks – and the money will circulate and that excess capacity will get utilized. If you have an economy that’s operate at full capacity, though, that’s when you’ll start to get something like Hume’s thought experiment where a doubling of the money supply creates a doubling of prices (though in reality it wouldn’t work quite like that, there would be distortions and debt economics really throw a wrench into it). To use the good-old-fashioned equation of exchange, if MV=PQ and you increase either M or V you don’t have to see an increase in P, it could all be on the Q side, so long as Q isn’t bounded somehow.

So for Tyler’s point to be correct he would have to point to somewhere in the economy that we are invariably supply-constrained. And it’s possible we are! A lot of people have stipulated that the energy supply is a binding constraint on global growth, in which case we’re in trouble. But seeing as how the unemployment rate in the United States was as low as 4.4% as recently as five years ago I personally don’t think we’re at the point where existing energy capacity can’t support the US economy operating at full or near-full capacity unless we decide to bomb Iran or something. But Tyler’s not arguing this, he’s just saying that an increase in M is always an increase in P regardless of circumstance, and V and Q don’t even exist.