Note that this was done in response to the velocity going down for reasons unrelated to the money supply, and largely because the government completely dropped the ball on fiscal stimulus so the central bank was left pushing the one lever it has, even though the circumstances were such that that lever was obviously not well suited to move the economy in the intended direction.
Less obvious is the strong dampening effect that industrial slack has on inflation. Printing more dollars can mean more cars get shifted off the lot instead of the same cars going for a higher price.
Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
1) Nominal GDP = Money Spent
2) Nominal GDP = Price Level * Real GDP
3) Money Spent = Money Supply * Velocity
Therefore
4) Price Level * Real GDP = Money Supply * Velocity
So if supply doubles but velocity halves while real GDP remains constant, then there's no effect on prices.
Economists call this "pushing on a string".
The Federal Reserve increases the money supply when it buys securities like Treasury bonds and collateralized mortgages.
This puts more money in the hands of banks, brokers, and wealthy investors who used to own Treasury bonds and collateralized mortgages and now they own money instead.
Banks, brokerages and wealthy investors don't spend money as fast as regular people do. The money sits idle in savings and bank reserves.
That drives the velocity of money down as supply increases, and it's exactly what happened over the last 10 years: https://imgur.com/a/dtVJq
As M2 supply doubled, velocity dropped a lot. That's why the value of a dollar didn't halve even though the supply doubled, tripled, or quadrupled depending how you measure it.
EDIT: oops didn't see OP already clarified.
Monetary policy increases the money supply itself through the exchange of money for treasury bonds and relies on banks to distribute this "new" money, while fiscal policy redistributes money that already exists (previously collected through taxes) and gives it to active businesses through government purchases rather than to bond holding institutions.
That's basically fiscal policy, and was not implemented much after the initial Obama stimulus (or not at all in Europe, really, due to all the austerity rhetoric by very serious people).
if they doubled the money supply, evenly distributed it AND those new dollars were all spent at the same velocity then the expected price increase would certainly happen.
distribution & velocity are huge.
the ability of the new dollars to debase the old dollars only happens when they are spent into the economy.
the first parties to get and spend the new dollars receive the benefit side of inflation/price increases.
these bankers and economists will try to take credit for anything that has a positive twist to it, statistically speaking, but dont be fooled the central banks have very few tools and common sense + gut instinct is your friend when you're living underneath a government instituting financial repression (macroprudental policy).
Yes. We all know a lot of people with mortgages, student debt, and credit card debt, who if suddenly given a government handout that would double their savings, would immediately pay off their debts. But I can't claim that all debts would be paid.
> Would people be able to, considering the overall price increases?
Of course people would be able to pay off their current balance if you hand them money. What do price increases have to do with this? Prices may go up (or may not), but your current balance on your mortgage and your credit card bill do not. And if people anticipate interest rates going up, that motivates them to pay it off sooner rather than later. But note that there is a lot of fixed-rate debt out there (like mortgages) not affected by interest rate hikes.
> And if so, how long until they’re in debt again because they can’t keep up with increased prices (since they spent their printed money to pay their debt?)
You keep assuming that prices would go up. Prices are determined by supply and demand. It has been claimed on this thread that prices will go up exactly 2x, but this claim has not been substantiated whatsoever. One potential mechanism for this would be a substantial increase in aggregate demand, as a result of the handout, but much of the money would go into paying off debt instead. This is called "debt deflation". So prices might not go up nearly as much as you are claiming they would.
M0 doubling over ten years is not surprising if the underlying wealth that it measures also doubled, and doubling in ten years is on the right order of magnitude.
Of course, there are also other factors at play, so it would be unlikely to map exactly to the inverse of supply, but as a good rough first order approximation, it works OK.
Implying ceteris paribus -- all else held constant. Historical observations are generally not controlled experiments, as we only have one path through time.
OK, so walk us through it. What are the mechanics that transmit the money supply increase to wages and prices?
If the money supply instantly doubled by magically changing Treasury bonds and collateralized mortgages into cash, what would happen?
Cash balances would go up for banks, brokerages and wealthy investors but cash balances would stay the same for most people who don't own these securities.
Would that cause an instant doubling of wages and prices throughout the economy? Or would banks, brokerages and wealthy investors just hold on to their new, bigger balances?
This isn't really about timing, since even if the money supply instantly doubled, you'd probably see velocity instantly cut nearly in half.
You read the original comment differently than I did. I assumed some magical doubling, as if every dollar bill in someone's pocket duplicated itself.
If you want to play "What If?" I guess we need to figure out if we're magically erasing everyone's memory of their previous holdings. If not, the world would go a bit crazy. Journalists would report it, we'd learn about the existence of magic, etc. So, I guess we'll need to assume that the magic doubling also makes people forget what they had before.
Let's see ... there might be a bit of a wealth effect [0], but if we're saying people don't remember their old balances, would they really perceive themselves as wealthier? This question is just too nonsensical to really pursue. It could be a fun thought experiment, but it's hit the point where I'd rather get some work done instead.
In any case -- what matters is that the inflation index of note is wrong in the same exact way every week.
This isn't the nature of economics, it's the nature of numbers. My masters' thesis is about simulating certain physical systems. There we stipulate G=1 and get the fuck on with the real work.
Just because it's easy to understand doesn't mean it's correct.
For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved.
M0 quadrupled in 10 years: https://imgur.com/a/L9mDx
M1 tripled: https://imgur.com/a/AaLNS
M2 doubled: https://imgur.com/a/0RGeQ
Money doesn't work like shares of stock, where a two-for-one split makes each share worth half as much.
Velocity, yield curves, economic growth and exchange rates all get to vote.
If you double the number of dollars "in circulation", it also matters which economic actors hold those extra dollars.
US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who didn't spend it, driving velocity down.
This stuff is complicated with many variables. Unfortunately the "easy to understand" version doesn't explain what happens in the real world.