More money in circulation
- Putting more money in to circulation by printing it or monetizing debt (this is where governments buy their own debt using newly created money) will cause the relative value of each unit of money to go down. Each unit will have less and less buying power.
Metric DC tightly controls this so that the relative value of money remains more stable over the long term. Of course, there will always be fluctuations due to other factors, but Metric DC makes it easier to understand the value of money.
Velocity of money
- How fast money goes from one person to another also increases inflation because it makes the money supply seem larger. For instance, if from one year to the next, the number of times money changes hands goes from 5 times to 10 times, the amount of money will seem to have doubled, even though there are the same number of monetary units. This causes demand inflation, which can be good. It’s usually a sign of a strong economy, but this scenario can also happen when major emergencies and disasters happen, which isn’t good.
More bank loans
- When you and I lend people money, we have to use the money that we’ve saved to do it. But when a bank lends out money, they get to use money that never existed before, which is sometimes on the order of 10 times more than they have in their bank. In other words, if you lend 10 dollars to a friend, then you have to wait for the money to come back to you before you can lend more. But if you put that 10 dollars in a bank account, now the bank can make 80 to 100 dollars in loans, all from that 10 dollar deposit.
Because this makes the money supply grow (exponentially!) Metric DC doesn’t follow this common practice.
Increased demand for goods and services
- Simply having more people consume more and more goods will cause prices to increase when supply cannot keep up.
- When the number of goods and services become fewer and fewer, prices will rise, unless demand shrinks. We’ve seen this due to supply shocks from the recent COVID-19 pandemic, where people want to buy things, such as cars and computers, but there are simply fewer of them available because they can’t be manufactured as quickly.