So Nick Rowe has a post - if you want to get the specifics you should read his blog. I mean honestly if you aren't related to me and simply trying to monitor my mental health state surreptitiously (I am on to you!) you shouldn't be reading this blog unless are already reading his. So let me skip beyond a summary and get to a point already.
But that's not all there is to it. Because the demand for my autographs will also depend on whether people expect they will appreciate or depreciate in value.And then later
Suppose the current total market value of my autographs is $100 (10 autographs at $10 each). If I want to shrink it to $50, all I need do is threaten to produce autographs in unlimited amounts if the total market value ever rises above $50. And I must be prepared to carry out my threat, to make it credible. By printing autographs at a faster rate I make them depreciate in value at a faster rate, which reduces the demand for my autographs, which reduces the total market value of my autographs.
Bits of paper with my signature are just like bits of paper plastic or silicon with the signatures of Stephen Poloz and Carolyn Wilkins (Governor and Deputy Governor of the Bank of Canada). Except we measure prices of everything else in the latter and not in the former, so a fall in the price of my autographs is equivalent to a rise in the price of everything else in terms of their autographs. And we use the latter but not the former as a medium of exchange (which is why the latter have a demand curve where quantity and price are inversely proportional).As it happens I was recently talking to someone who was concerned with high inflation in the future, and his reaction to this worry is to increase his demand for money right now. Crazy, right? No, because he is on the verge of retiring and in his view dying with a million dollars in the bank is a far better outcome than living for 5 years broke, struggling and feeling like a burden on his family. In financial terms he has asymmetrical risk.
Much of our modern economy is exposed to asymmetrical risk, banks in particular are heavily exposed to the risk of future inflation. Lets say as CEO of a bank you are hosting a huge party to celebrate $100 billion dollars in loans, when a top financial analyst run into the room and whispers in your ear that he has crunched the numbers and, gasp, inflation is going to be 2 percentage points per year higher than you thought over the next 10 years. What, besides snide remarks about run on sentences, is your plan for future loans? Obviously making more loans at the current rate is out of the question since you are just increasing your exposure, and you will need a healthy cushion so you can maintain your reserve ratio, and finally you want a large cash hoard to loan out after inflation has hit (and interest rates have gone up) to rebuild the portfolio and cover the losses on loans made recently.
What does this look like from a CBs point of view? Demand for money seems to have risen, so now the CB prints (or promises to) more money, which should push our bank to expect even more inflation, so it hoards more.
What happens in the economy? Mortgages are harder to come by, either they have higher interest rates or they are simply unavailable. Either way home prices decline and people who are selling homes either have to pay for two places to live or take a lower price, so their consumption is likely to be cut back to compensate (people buying at "lower" prices but higher interest rates aren't gaining much, if any, purchasing power, and those that want to buy but can't- its difficult to say). Now we have a liquidity crisis because the bank is hoarding and we have lower measured inflation due to lower consumption (and possibly just through lower housing prices depending on how housing is included), so what is a CB to do? Why, print more! Promise more inflation! Scare the bank more! Make the bank hoard more!
I put an unstated assumption in here to make it work- that inflation can happen with a lag. Nick Rowe puts the opposite assumption- that inflation is close to immediate (we both simplified a lot as well). The point here isn't to aruge that my scenario is correct and his isn't, it is to identify that Nick's is dependent on simplification, that there isn't a lag in inflation, that there aren't third parties exposed to moves in the prices of his autographs and a whole bunch of other (likely) things.