# 9 Will green US Money create runaway inflation?

(Editor’s note:  the short, simple answer)

No. When new money is used to create real wealth, such as goods and services and the $2.2 trillion worth of public infrastructure building and repair the engineers tell us is needed over the next 5 years, there need not be inflation because real things of real value are being created at the same time as the money, and the existence of those real values for living, keeps prices down.

If it goes into warfare or bubbles (real estate/Wall Street/etc.) it would create inflationary bubbles with no real production of goods and services. That is the history of banker control over money creation. Government tends to direct resources more into areas of concern for the whole nation, such as infrastructure, health care, education, etc.

Also the system eliminates ‘fractional reserve banking’ which has been one of the main causes of inflation. And remember new money must be introduced into circulation as the population and economy grow or is improved, or we’d have deflation.

(Editor’s note:  the long, complicated answer – 

I got a big headache trying to read this - good luck! I think the basic point is that there will be a legal limit on how much US Money can be issued in a given year.  The limit will by defined by the state of the economy in terms of GDP, Consumer Price Index, etc.)

Let us focus the goal of regulating green money injection into the existing economy in such a way as to provide simultaneously for deficit reduction and for job growth while maintaining stable prices, or at least keeping the inflation rate to within a small positive tolerance, which we denote Itol.  In this regard Fisher’s Money Exchange Equation is at the basis of the argument.  The macroeconomic equation (based on index numbers) states that

MV = PQ

where M is the aggregate money supply, V is monetary velocity (number of times each dollar is spent each year, on the average), P is the consumer price index relative to some “base” year, and Q is the real output of the economy (in base year prices) which is called “real GDP.”   The left hand side is the total amount of money spent by buyers over the year, and the right hand side is the total amount of money received by sellers over the year.  Since the amount spent and received is the same for each transaction, the totals must be the same as well.  So this is neither a theorem nor an empirical finding, it is more akin to an axiom.  Frequently Y = PQ is referred to as the nominal output in current year prices, or GDP.  Hence GDP = P*(real GDP).  Taking natural logarithms one gets

ln M + ln V = ln P + ln Q

Then taking time derivatives this becomes

M˙ / M V˙ /V  P˙ / P  Q˙ /Q

where the dot denotes differentiation with respect to time (i.e. rate of change).  It is customary to multiply each of these ratios by 100 to put everything in percentage rate of change units.  Hence we define m = 100M˙ /M , v = 100V˙ /V , p = 100P˙ / P , and x = 100^Q˙ /Q where we prefer to use x for the percentage rate of growth in the real output, then we can solve for p to obtain

p = m + v – x

If we then require that p < Itol, that implies that

m < x – v + Itol

This is what we call the Inflation Tolerance Inequality.  Recently, the Itol value used by the Federal Reserve Board has been about 2 (percent), but one could set it to various levels to see what the impact on the unemployment rate is.  Stable prices would correspond to setting Itol to 0, a zero tolerance policy.  Recent values for x and v have been 2.395 and -4.573 percent, so with Itol = 2 the limit on money supply growth (in percentage terms) would be 2.395 – (-4.573) + 2 or 9.5%, or with a zero tolerance policy, 7.5%.  Notice how the negative rate of change in the monetary velocity (we refer to the monetary velocity of M2, explained below) increases the rate at which money can be pumped into the economy without causing inflation.