Nobody’s ever taught you
How to live out on the streets
But now your gonna have to
Get used to it.
How does one make money? By working. In other words, you only have money if you have first produced something worthwhile, which is what working is. After you have done your share, being productive, then you get money. The money in your wallet then allows you to go out there and reap the rewards of your productivity, by consuming what you want.
The point of this obvious little exposition is that before you spent any money, you have contributed to the wealth of the nation by producing something. Otherwise you wouldn’t have the money to spend.
In short, having a dollar in your wallet is at once a Certificate of Productivity and a License to Consume. It is a Certificate of Productivity because you only get money after you have produced something. It is a License to Consume because you can spend your money and get goodies with it. It is important to note that your consumption will not reduce the wealth of the nation that existed without you in the picture, because you have already increased the wealth [by working for the money] before you ever took any wealth for yourself [by spending the money].
But what happens if the supply of money is increased? This means, in practice, that the govt prints new money for itself, either paper money or digital money. They are giving themselves a License to Consume with that new money, but it certainly is not a Certificate of Productivity. They did not contribute anything to the economy to get that money; they just printed it up for themselves.
Same with fractional reserve banking, in which a bank is legally allowed to hand out checks for money they do not have. That check is a License to Consume, but not a Certificate of Production.
From a purely economic point of view, fractional reserve banking and govt money printing is exactly the the same as counterfeiting, armed robbery, extortion, fraud, and other crimes where someone gets money for himself without being productive. In all these instances, the perpetrator gets hold of License to Consume that is not also a Certificate of Production. And the effects will be the same, as well.
250 years ago, a clever fellow named Richard Cantillon understood this, and the harmful effects of printing money are named Cantillon effects in his honor. In plain English, if everyone else has to work and be productive before they can go shopping, but the printer of money can just walk in straight off and take whatever he wants, that means he is the only one whose bottom line diminishes the stock of goodies when he takes some. Everyone else diminishes the stock, true, but they have first increased it by working. Their bottom line is that they have not hurt the community; the money printer has.
What will this do to granny? When she goes shopping, there will be less in the store, because the money printer took it. By the laws of supply and demand, that lesser amount left will be more expensive. If the money printing is extreme, as Ben Bernanke has declared it will be with QE3, things will be much more expensive. The price of everything will go up, but granny’s social security check will not. She will not be able to pay her rent, and will be forced to live out on the streets as a bag lady.