Let there be a simple society with just three people. Alice harvests apples, Ben builds and repairs houses, and Carlos makes shoes.

People trade their goods and services using money.

Suddenly, Carlos finds a money printer. He starts printing money for himself, and starts acquiring more and more houses and apples. Heck, he even stops making shoes for others, as he doesn’t need to give shoes away in order to get either apples or houses.

Alice and Ben notice higher demand from Carlos, and therefore raise their prices. This is what we call inflation. And there are several tragedies that come with it:

Alice and Ben both need to work harder to acquire goods and services.
Carlos is getting apples and houses without giving shoes in exchange, which in other words, is theft.
Carlos’ craft—making shoes—will probably worsen dramatically, as he’s much less incentivized to make great shoes—he now doesn’t need to.

We can all agree that Carlos is stealing from Alice and Ben, and that the monetary system in this society is degraded.

Somehow, if we add more people to the society, and give the money printer to the State, then money printing is fine? But let’s keep moving. We can agree that money printing is bad; at least in our little, three-person society.

For real societies, the status quo is to believe that “some printing of money is part of a functioning economy”. Why do people claim this? It sounds stupid.

First, let’s clear out an obvious use case for printing money: to create the initial supply of money. This is fair: someone prints the money and creates the rules; then people voluntarily agree to participate within that paradigm. Fine.

“Demand needs to be stimulated”

Beyond that basic common ground, the most popular argument in favour of printing money is to “stimulate demand”. The keynsian view of economics is that if there’s surplus capacity in a society, then demand needs to be stimulated.

By injecting money into society, people will naturally go out and buy more things, and the economy will avoid a recession.

The problem is, there are countless reasons that could explain capacity surplus. Maybe society is building the wrong things, and resources should be allocated elsewhere. Maybe people are saving more in preparation for a risky situation. It’s just so complex. People are complex, and are non-deterministic; and a complex economy has lots of people!

On top of that, it’s highly unlikely that, at any given point, capacity surplus is due to demand being under-stimulated. The fact of the matter is that humans don’t need artificial stimulus to buy stuff. Humans will always want more stuff, but they “economize”, based on the resources they have. Overstimulating will create inflation, and inflation forces people into making shorter-term decisions; i.e, “I better spend all my money now, as it’ll be worth nothing tomorrow.“

So, it’s incorrect to assume that capacity surplus = bad. It’s just a wrong assumption, and the solution to it, inflation, is much worse than the “problem”.

“Deflation is bad”

An argument in favour of mild inflation revolves around attacking deflation.

Modern economists think that deflation can lead to people saving more money, leading to reduced economic activity. But again, modern economists seem to ignore a fact about human nature: needs are infinite. Nobody will ever die of hunger because they want to save their money.

Deflation will cause an increase in savings, and why is that a bad thing? Maybe that’s a key ingredient for people to invest in more ambitious things in the future?

Deflation is the natural course of currency in a society that’s getting more efficient over time. Let’s go back to our three-person society. If people find more efficient ways of producing goods, then it follows that stuff will get cheaper over time. Alice, Ben, and Carlos will enjoy the benefits of technology by being able to buy more stuff, or save money and invest it in ambitious projects—as it should be!

“A bit of inflation is fine”

Why is lots of inflation bad, but then “a bit” of inflation is fine? If inflation is a form of theft, or scam, then why just a bit should be fine? Answering this question requires way too many mental gymnastics. Sounds like State propaganda to justify money printing to me!

Inflation is fine when it isn’t artificially created (by money printing). It’s rare to see this, but if a society becomes less efficient at producing stuff, then prices will tend to rise. In that case, inflation is a clear signal to spend more, as stuff is getting less and less efficient. This is not a society you want to live in.

Optimal State

As with everything that involves supply and demand, there are optimal states. The catch is that no one know where that is. You just need to let the program run, with all the thousands of variables, and you can only watch the result. If you attempt to control it, you’ll mess up with it.

Closing Commentary

This post sparks from an All-In Podcast episode I recently listened, with Reid Hoffman as a guest. David Sacks asked a great question, "Reid, you know why inflation occurs, right? And why it isn't about companies artificially raising their prices, but rather the money printing." To what Reid responded, "Yeah, I agree that having a good monetary policy is important and that some printing of money is part of a functioning economy, […]"

I decided to write this post.

It's such a fun topic to discuss because intuitively, printing money seems like a bad thing (no matter the amount), but the status quo takes the counterintuitive position by saying that “some amount is fine and actually healthy.“ I like when my position is the intuitive one and the contrarian one at the same time.

References:

“What is Money“, Frederic Bastiat.
“Inflation is a government scam”, Saifedean Ammous and Lex Fridman (YouTube).