The "value" of the dollar is based on nothing other than the promise of the government. When the economy expands, you can put more money into circulation within proportion. Too little and the value increases. To much and the value decreases. Our economy has not expanded NEARLY enough to cover the additional currency in circulation.(debt)
A correction WILL happen sooner or later unless the economy suddenly takes off like a rocket. It is a mathematical certainty.
That's the condensed version...
Inflation is caused by too much money chasing too few goods. Don't concentrate on the "too much money" part very much, that part is relative, what you should concentrate on is "chasing" and "too few goods".
the vast majority of the increase in money supply that we have had since the beggining of the recession is not in active circulation. Thats why we aren't having excessive inflation.
the federal reserve can increase our money supply, but it has no power to distribute money to consumers, other than indirectly through lending, and even then banks are generally on the hook for any defaults from consumers (assuming that we don't have massive bailouts), so consumer banks act as buffers, and generally do their best in selecting loan customers who are highly likely not to default.
Anyhow, the increase in money supply which was created by the fed can't really cause inflation. Not even when they lend to consumers, and certainly not during a period of time that we have unemployment north of 7%. When a consumer gets a loan from a bank, generally it's for a big ticket item. So say I get a loan for a new truck, then that increases demand and creates an inflationary pressure right? Nope, not really. The truck company simply makes another one.
The only way that such lending would be inflationary, is if the truck manufacturing company had some sort of restriction in the number of trucks that it can make. In our economy, with a very high unemployment rate, and keeping in mind that we are in a global economy, where we can purchase goods and even services from people all over the world, we have no current limitations on how much we can produce. And even if there was a restriction on one particular type of goods, we have the largest variety of substitution goods that have ever existed. So maybe that truck that I wanted to purchase was a Chevy, and maybe GM had some sort of issue that prevented them from making any more trucks, I'm quite sure that another truck company, maybe even a foreign one, would be glad to make a truck for me.
Hyper inflation has never existed in history, except when it is accompanied by some sort of restriction in the production of goods. Even the high inflation rate that we had during the early '80's was the result of restrictions in oil (and thus higher prices) placed upon us by OPEC.
Also, there is an automatic system to reduce any excess money in our economy if inflation did start to become excessive. The fed could stop lending, and as debts to the fed were repaid, the money disappear exactly like it was "appeared" to begin with.
And yes, "sooner or later" bad things may happen. Hyperinflation nuts have been saying that forever. I'm still waiting, tick tock tic tock.
