A persistent conservative trope during the Obama years runs like this: printing money necessarily causes inflation. Dredged out of the swamps of Austrian economics, it gained wide conservative credence when Obama took office in early 2009 and continues to this day.
This is not the case. But the idea does have a certain surface plausibility. More dollars means each dollar is a little less valuable, right? And that means prices of things should rise. The intuitive appeal of this idea probably accounts for why the online show Extra Creditz invoked it in its analysis of the inflation economics of massively multiplayer online (MMO) games:
"As you probably know," says narrator Daniel Floyd, "whenever you print money in a real world economy, you inflate the currency. Print too much money and you hit hyperinflation, an economic state where the currency effectively becomes worthless."
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Compare that statement to recent history. The Federal Reserve has nearly quintupled the monetary base from its 2008 level, while inflation has been low and may actually be trending downwards. In other words, here in real-world America, we've been printing money like it's going out of style, and inflation has gone the opposite direction.
On the other hand, the Extra Creditz folks are definitely right when it comes to MMOs. More money "printed" in such a game means higher prices.
What gives?
The answer lies in how the money is distributed. The Federal Reserve's money-printing program, obscurely called quantitative easing, involves the central bank buying financial assets like government bonds or mortgage-backed securities with fresh new money. Roughly speaking, the idea is to push down interest rates and flood the economy with money. But this firehose mechanism is highly indirect at best.
In an MMO, by contrast, new money comes in the form of monsters (again, roughly speaking) that provide adventuring objectives for players. The new money, in this case, is easily available to everyone playing the game. It's not quite automatically deposited into everyone's account, but it's the next best thing.
In other words, the money goes straight into the hands of people who will spend it. Players buy stuff at auction with their new cash, thus creating the economy-wide bidding wars that result in general price increases (as well as the fascinating strategies that MMO economic managers dream up to drain off the cash and forestall inflation). Now, this situation can get way out of hand in an MMO, rendering the currency useless. But within reason, this is the kind of activity we'd like to see from a stimulus program.
Ignoring spending is the big error in the printing money = instant inflation thesis. Suppose, for example, that the Fed secretly printed up $100 trillion and gave it to me, and I hid the money in my garage and left it there. Nothing whatsoever would happen to inflation, because nobody would be spending that money.
All of this points to the great weakness of the Federal Reserve's attempts at monetary stimulus: hardly any of the money actually leaks out into the real economy. The central bank has forestalled deflation and engineered a tepid recovery, but its performance has been severely disappointing overall. Most of the benefits of quantitative easing have been captured by the rich. Real median income, by contrast, is down 8 percent since 2007, and shows zero signs of increasing.
As the grinding slog of this "recovery" continues, simpler stimulus strategies — such as straight-up handing new money to every citizen, or establishing a universal basic income — will become ever more appealing. It is, of course, possible to overdo it, and get too much inflation, as Extra Creditz detailed. But in a nation that has been consistently struggling with below-target inflation and declining incomes, we don't have to worry about that as much.
To fix what ails our economy, we might want to implement the monetary policy of World of Warcraft.
