The frequently heard assertion that the Fed is “printing money” that will supposedly cause runaway inflation is grounded in the inapplicable quantity theory. In relation to the accounting identity, MV = PY, the assertion relies upon assumptions that: (i) the “money supply”, M, usually defined in this context as currency plus demand deposits, is exogenously controllable by the Fed; (ii) the velocity of money, V, is stable; (iii) prices, P, are determined under conditions of perfect competition; and (iv) output, Y, tends to its full-employment maximum.
The topic is highly relevant under current economic and political circumstances, and a source of confusion for many in the general community. In his latest Forbes blog, John T. Harvey provides an exceptionally clear and timely explanation of why none of the assumptions underpinning the quantity theory hold:
An obvious implication is that a change in the “money supply” can correspond to alterations in output and/or the velocity of money without any necessary change in prices. The endogeneity of the “money supply” further implies that causation runs from prices to money, not the other way round.
A couple of previous posts at heteconomist are related to this topic: Misplaced Faith in Quantitative Easing and Critique of Riedl on Government Spending. See also the first part of Questions and answers 1 at billy blog.