What if supply keeps pace with demand, why would there be inflation? I mean, I’m not saying that money creation can’t result in inflation, just that, as a rule, creating money does not cause inflation unless there is some limitation on supply.
For example. The economy needs widgets. Widgets are made with some combination of raw materials, equipment and labor.
If in the widget economy more money is introduced, do widget makers charge more?
Assuming there is competition in the widget market, let’s say that the government creates and spends money for more widgets. This not only results in demand driven by government, but the profits from selling widgets is earned by those that own and work at widget factories.
So demand for widgets has increased 10%. Does the widget factory increase prices or make more widgets?
That really depends on the supply chain for raw materials, the availability of labor and excess capacity of the widget factories to increase output without having to purchase more machines or lease new floor space.
So the next questions, can additional raw materials be sourced without reaching some real limit? Is there people who need jobs and can they be trained in a reasonable amount of time (or are there skilled widget makers at home looking for work?)? If machines and floor space are needed, are they available?
If the answer to all of these questions is yes, then any increases in price will be short term as the widget companies hire and train people, and the raw material suppliers increase output and widget making machines are delivered.
All of this is a good thing as it creates jobs assuming the economy needs more jobs.
Why might an economy need jobs?
Two main reasons.
The population of the nation in question is increasing meaning more people are competing for jobs.
Technology is making the creation of widgets more effective increasing output with less people needed to make the same quantity.
Most instances of run away inflation occur when those creating the money don’t pay attention to the REAL limitations on money creation, i.e. the real economies capacity to meet higher levels of demand.
If you double the money supply and double output, long term there will be little inflation and higher nominal employment.
All that said, we need to add wages in here.
Wages are a cost to business and when prices increase, so do wages. Wages have increased over 6000% in the last 100 years while relative dollar value has declined 95%, Of course, wages usually lag behind price increases but if the increases are small enough and people can save and invest, they can more than offset any losses due to inflation.
So to be clear, no one who understands the economy as I do would ever say that the government can spend as much money as it wants without consequences. Just that spending isn’t constrained by borrowing. Inflation is the constraint and I’ve just described how the constraint works.