Do credit expansion and contraction really lead to price level changes?
So I know the technical definition of inflation is an increase in the money supply, but in this blog I will refer to inflation as meaning price inflation, just to make less typing.
I have often heard that an increase in credit expansion leads to inflation. I don't see why.
If money (cash) is printed, then there is more money chasing same goods....this is clearly inflationary.
Credit expansion seems like it could go either way though
If there are 1000 dollars in a simple economy that only produces apples, and there are 1000 apples produced a year, apples likely cost $1 per apple.
Now if a loan is taken out through fractional reserve banking that increases the total money supply through credit expansion equal to $1000, now there is $2000 in the economy....but if the loan was taken out to contrsuct a machine that produces 3000 appels a year, now there is $2000 and 4000 apples per yer, making each apple only cost fiddy cents. This is price deflationary
So it seems as long as the loans are good loans and a good use of capital, that an incease in credit expasion would likely be deflationary. But if the marginal value is smaller than the marginal increase in money, so it will be inflationary.
I bring this up because I often hear people say QE is not inflationayr because there are just excess reserves that pent up and not being lent out....but to me this does not make sense. If the loans were lent out there would be an increase of production which as I showed, could be deflationary. But the fed buying treasuries in the open market is putting more cash in the hands of consumers without any new investment loans, which is just more cash and same amount of goods, which is inflationary.
It is very possible I am missing something here....but how does credit expansion or contraction alone affect the price level?