I don't like where he takes his theory. But they go together. GDP goes up more money is printed. You need to have more money for a bigger GDP.
You can have a 15 trillion dollar economy with only 14 trillion in money.
Right, it's just that as the economy grows from 15 trillion to 18T, if you keep the money supply at $14T, that's all credit based, and you cause deflation.
A car that costed $10,000 will now cost $8000. Say you had $20,000 when the car was $10,000.
Had you purchased the car, but done absolutley nothing with it (no wear and tear, no degradation. The only thing that has changed is that you can claim the car is yours), you would now have $10,000 and a car worth $8000, or $18,000.
Had you not purchased the car, you would now have $20,000. Buying the car now would STILL result in you having $20,000 ($12,000 in cash, $8000 in a car)
Where did the extra $2000 go? Answer: It was lost due to deflation. The monetary value of your car dropped. You bought it at $10,000, but it now costs only $8000, not because the car became less useful, but because the universal standard through which goods and services are valued is supply constrained.
Since money is the universal standard through which goods and services are traded (otherwise a bartering system would be used), do you know what happens when deflation occurs? The economy contracts as activity comes to a halt. Why? Look at the numbers. $20,000 by doing nothing vs $18,000 by doing something.
( Problem: Money has no inherent value, but is the universal standard of valuation. Using money on goods and services during deflation results in a loss of wealth due to deflationary effects over time on the goods and services. Getting rid of goods and services becomes more impertaive to preserve wealth but more difficult to do because of deflationary effects. Sine the economy contracts people lose their jobs and are left dipping into their savings to acquire the necessary resources for basic survival. There is a risk of deflation giving way to rapid inflation depending on how things play out. )
The bartering system kinda sucks, but using money has its own set of problems, as well. The reason why most countries now use fiat money instead of something like the gold-standard is because it allows more flexibility. Under the gold standard, the events above can not be influenced in any way by governments. It's a beast out of control of any regulation. With fiat currency, you have the flexitibility to do everything you would under the gold-standard, but you can also artificially influence the money independently as a stabilizing effect. It's like not having any volume/frequency options on a radio vs having a slider.
IIRC, one of the cited causes of the great depression may have been the return of the gold-standard in the UK. Most of europe stopped using the gold standard in favor of fiat currency during WW1. It allowed them to offset the sharp deflationary effects of the economic contration that occured from the war, and made the costs more manageable (not to mention the promotion of national unity and patriotism through one's own currency). I believe i nthe UK, the economy contracted by 25% due to WW1, and they're an island isolated from the eurpean mainland. So you can only imagine what it was like in mainland europe, especially for the central powers who had to take on the debt of the allied powers.
The UK returned to the gold standard in 1925, which caused a spike in the valuation of their exports as the money devaluation to the pound sterling through fiat was wiped out. Sinec other countries were straddled with their own problems (not to mention many importers of British goods, like Germany, had been forced to surrender most of their gold reserves either to handle their own debt or as a condition of the Treaty of Versailles), this further crippled the export-driven British economy, and affected markets around the globe.
