Let’s say I have Â£5, I need five loaves of bread and bread is the only thing I ever buy. You are a baker and you have 5 loaves of bread to sell. You know that I have Â£5 and that I want five loaves of bread. Result? You charge me a Â£1 a loaf and sell all five loaves. You then go and spend that Â£5 elsewhere.
Now, pretend that I am not just a private individual but the government. I print another Â£5 but I tell you that I’ve done so. I then come to you and want to buy 5 loaves of bread. Because I’ve told you that I’ve printed an extra Â£5 you know that I hold Â£10 in my hand. Result? You double your prices and charge me Â£2 a loaf. You now have Â£10, but when you go to the fishmongers to buy fish, she knows that you’ve got twice as much money from me than normal. Result? She doubles her prices. And when the fishmonger goes to the butcher with the Â£10 she’s taken, he doubles his prices.
Nothing new gets made and everything costs more than before. And for those people on fixed incomes, they can only buy half as much.
It’s true – Quantitative Easing is for Dummies.