Any amount of money in an economy is ‘abundant’ provided it can be divided and combined according to the needs of the economic actors. That’s not the kind of abundance I’m referring to in the title. I’m instead referring to monetary inflation. More than the absolute stock of money, what’s relevant is the rate at which it is increasing.
The Medium of Exchange Problem
As discussed in Price and Money, a price is simply the exchange rate between two goods/services. Money is a good that acts as a medium of exchange, negating the need for double coincidence of wants. Due to the prevalence of money, Adam can sell his service to ‘buy’ money, and then ‘sell’ the money to buy goods he wants. This renders unnecessary for the sellers of those goods to desire Adam’s service before Adam may have his wants met.
When the volume of money increases, if the stock of goods and services remains the same, we can expect the price levels to rise. Even with perfect information about how much the volume of money is increasing by, predicting how much the prices of each goods and services will increase by is impossible. Entrepreneurs become unable to planning production and expansion properly. Facing the prospect of growing input costs without a guaranteed increase in revenues, they hesitate to expand or cut back on production. Thus, the supply of goods and services fall, or do not grow at the rate they would if the money was more reliable.
(Note that obtaining such perfect information about monetary expansion is impossible too. While this inflation is taking place, we cannot know how much the inflation is. Only later do (estimates of) these numbers get published. Furthermore, predicting the inflation rate in the coming weeks and months is also impossible.)
This is what I’m calling the medium of exchange problem with inflationary money: Inflationary money causes the supply of goods and services to fall.
The Store of Value Problem
We expect money to be a decent store of value. A unit of money we have saved up through hard work should be able to buy in the proximate future roughly what it buys today. Inflation makes a joke out of this idea.
While the purchasing power of inflationary money drops, we note that things that are increasing in supply at lower rate than money hold on to their purchasing power better. They function as better ‘money’ than the canonical money itself! (Sure they bring frictions that a medium of exchange is designed to negate, but overall, due their better store of value function, they act as better monetary units.) Thus, the store of value problem with inflationary money: Inflationary money causes other things to act as money.
People who simply wish to save are forced to gamble on stocks, bonds, real estate, metals, and all manner of things. The problem is particularly apparent in real estate. People with money they would like to save buy second and third homes just to park their money there. Prices of homes bid up because they now have a monetary premium associated with them. Meanwhile, the young and the poor face a scarcity of housing.
The medium of exchange problem creates scarcity, while the store of value problem exacerbates it further.