I’m more just writing down thoughts here… I was going to respond in the comments to Paul Cotterill but turning it into a blog post might be better. He says:
Now, what causes demand to outstrip supply to create rampant inflation? Well, mostly it’s when supply is constrained in some way.
Why was there huge inflation in Weimar Germany? Not because the government printed money, but because production in the Ruhr suddenly collapsed when the French and Belgian armies took over the area, after the Germans defaulted on the massively punitive reparations payments, and production collapsed.
Paul can take example of hyper-inflation to justify his point, but that doesn’t mean expanding the money supply endlessly has no impact on the economy. Let’s say supply of products in an economy doesn’t collapse. But if the government prints lots more money, it will eventually end up in the pockets of people. They will spend that extra money and suddenly demand will outstrip supply.
If you just keep it within the domestic economy, then it’s obvious why inflation will rise then. If however you’re importing a lot of good then it’s arguable that you could import more to fill that demand. But that would mean a trade deficit (you’re importing much more than you’re exporting) – which puts pressure on the currency, causing it to rise and hence inflation. Am I missing something here Paul?
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