Economics

Rapid Money Supply Growth Does Not Cause Inflation

Neither do rapid growth in government debt, declining interest rates, or rapid Increases in a central bank’s balance sheet

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By Richard Vague

Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.

The purpose of this paper is to present these findings and solicit feedback on our data, methods, and conclusions.

To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.

There are several reasons to want to better understand the causes of inflation. Currently, central banks in Japan, Europe and elsewhere are trying to engender a moderately higher level of inflation in order to stave off the drift toward deflation and under the belief that it will add to job and economic growth. Also, both public and private debt have reached such high levels in ratio to GDP that some policymakers are beginning to reflect on potential paths to deleveraging, and inflation is one such path. Lastly, a number of countries are trying to moderate levels of inflation that are deemed too high. For these countries, too, a deeper understanding of the mechanisms of inflation is important.

We structured our analysis in the following manner. We tested three different definitions of a period of high monetary growth in three ways.

One, as a 20 percentage point growth in the ratio of the money supply (M2) to gross domestic product (GDP) in a five-year period;

Two, as a 60 percent nominal growth in M2 in a five-year period;

Three, as a 200 percent nominal growth in a five-year period. (We refer to any such rapid increase period as a “boom.”)

We then defined high inflation in two ways:

One, as a period of three consecutive years of inflation of five percent or more (using the consumer price index or CPI);

Two, as a period of five consecutive years of inflation of five percent or more.

This produced six possible cases that we tested:

Case 1. M2 increase of 20% to GDP followed by 3 years of 5% inflation.
Case 2. M2 increase of 20% to GDP followed by 5 years of 5% inflation.
Case 3. Nominal M2 growth of 60% followed by 3 years of 5% inflation.
Case 4. Nominal M2 growth of 60% followed by 5 years of 5% inflation.
Case 5. Nominal M2 growth of 200% followed by 3 years of 5% inflation.
Case 6. Nominal M2 growth of 200% followed by 5 years of 5% inflation.

For each of these six cases, we then reviewed the data for all 47 countries to see how many times high inflation followed high M2 growth, and how many times high inflation occurred that was not preceded by high M2 growth. We considered high M2 growth to have preceded high inflation if the period of high M2 growth was immediately before the period of inflation or that period was coincident with the start of high inflation. So, for example, if a period of high M2 growth was recorded from 1960 to 1967, we considered it to have triggered a period of high inflation if that high inflation period started at any point from 1960 to 1968.

We found that in none of these six cases was high M2 growth a reliable predictor of inflation.

Our results were as follows (See Chart 1).

In Case 1, there were 54 instances where M2 to GDP growth was at least 20 percentage points in five years. Only three of these were followed by a three-year period of high inflation and 51 were not. By contrast, there were 49 instances of high inflation that were not preceded by high M2 growth.

In Case 2, of 54 instances where M2 to GDP growth was at least 20 percentage points in five years, only one was followed by a five-year period of high inflation. 53 were not. By contrast, there were 37 instances of high inflation that were not preceded by high M2 growth.

Cases 3 and 4, where high M2 growth was defined as a 60 percent nominal growth in five years, produced somewhat more positive results in that they were more instances of high inflation, and fewer instances of high inflation not preceded by this level of M2 growth. However, these results still fall far short of a level that could be viewed as causal or predictive since there are still a very large number of cases that do not lead to high inflation. In Case 3, we found 25 instances in which 60% nominal M2 growth led to a period of three consecutive years of 5 percent or more inflation 25 times. However, we found 43 instances where it did not lead to that level of inflation. Moreover, we found six times inflation occurred but was not preceded by this level of M2 growth.. In Case 4, high M2 growth was also defined as 60 percent nominal growth of M2 in five years, but inflation was defined as five consecutive years of 5 percent or more inflation. In this case, high M2 growth led to high inflation 22 times, and did not lead to high inflation 46 times. High inflation occurred eight times when this type of M2 boom did not precede it.[1]*

Cases 5 and 6 underscore the lack of a causal relationship between rapid M2 growth and high inflation, because when we increase the threshold of nominal M2 growth to from 60 percent in five years to 200 percent in five years, it is followed by high inflation even less frequently than in Cases 3 and 4. This is, of course, the opposite of what one would expect if high M2 growth causes high inflation.

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In Case 5, we defined high M2 growth as 200 percent nominal growth in five years, and high inflation as a period of three consecutive years of 5 percent or more inflation. Of the 30 such M2 booms, only seven led to high inflation and 23 did not. By contrast, there were 45 instances of high inflation that were not preceded by high M2 growth.

In Case 6, we defined high M2 growth as 200 percent nominal growth in five years, and high inflation as a period of five consecutive years of 5 percent or more inflation. Of the 30 such M2 booms, only seven led to high inflation and 23 did not. By contrast, there were 30 instances of high inflation that were not preceded by high M2 growth.

CHART 1: Rapid Money Supply Growth

High Inflation- 5 years of Inflation above 5%, and 3 years of inflation above 5%

Led to high inflation (total)-The total number of inflation cases that are led to by an m2 boom (one boom can led to more than 1 high inflation case) Led to high inflation (¬per instance) -The number of m2 boom periods that led to any high inflation case

Please note for the 3y 5% nominal cases, there were 2 instances where the data was not fully complete, however still led to high inflation; it was not counted in the 20% to GDP.

These results did not change appreciably when we divided our test cases into large, medium, or small countries. For example, when we looked only at the top 10 countries as measured by GDP instead of the entire 47 countries in our database, the results were similar. Of the 15 instances where M2 growth was at least 20 percentage points in five years, only one was followed by a period of high inflation, while 14 were not. Yet there were 11 instances of high inflation that were not preceded by this level of high M2 growth.

Of the 12 instances where nominal M2 growth was at least 60 percent in five years, six were followed by periods of high inflation, and six were not. By contrast, there were two instances of high inflation that were not preceded by this level of high M2 growth. And in the five instances where nominal M2 growth was at least 200 percent in five years, two were followed by periods of high inflation, while three were not. By contrast, there were 10 instances of high inflation that were not preceded by this level of high M2 growth

These results were all contrary to what the monetarist theory would suggest. Our findings led us to ask whether rapid money supply growth would at least lead to moderate inflation. To analyze this, we defined moderate inflation as CPI increases of 2 percent or more for five consecutive years (this of course, also includes cases of high inflation, but for the purposes of this paper is simply labeled “moderate”). This yielded the following results:

  • In case 7, of the 54 instances where M2 to GDP growth was at least 20 percentage points in five years, eight were followed by a period of moderate inflation and 46 were not. By contrast, there were 27 instances of moderate inflation that were not preceded by high M2 growth.
  • In case 8, of the 68 instances where nominal M2 growth was at least 60 percent in five years, seventeen were followed by periods of moderate inflation, and fifty-one were not, yet there were fourteen instances of moderate inflation that were not preceded by this level of high M2 growth.
  • In case 9, of the 30 instances where nominal M2 growth was at least 200 percent in five years, four were followed by periods of moderate inflation, and twenty-six were not, yet there were 32 instances of moderate inflation that were not preceded by this level of high M2 growth

CHART 2: Rapid Money Supply Growth

Moderate Inflation- 5 years of Inflation above 2%

Thus, we could find no evidence that rapid money supply growth leads to even moderate inflation.

(In the charts above, the fewer instances of moderate inflation as compared to high inflation results from less available data for moderate inflation cases.)

The detail supporting our findings can be seen at privatedebtproject.org/inflationstudy. In addition, a somewhat more robust set of data on each of the 47 countries in question can be found at debt-economics.org/review-data.php. The data in these spreadsheets is largely a compilation of data that can be readily obtained from sources such as the Bank of International Settlement, the Federal Reserve, the World Bank, CEIC, and the International Monetary Fund.

We tried many variations not shown here for each of these factors and always came out with similar results. For example, in one case our definition of rapid money supply growth was a 2400 percent nominal growth in M2 in five years. In another case, we defined rapid money supply growth as 45 percent “real” growth in M2 in five years. We also used several slightly different definitions of how soon or late inflation had to begin relative to high M2 growth to be considered as following high M2 growth. In each of these alternative cases, the results were similar—high inflation rarely followed high money supply growth and, in contrast, high inflation occurred often when not preceded by high money supply growth. We only used and counted cases where we had all the data, and of course for some countries in some periods we did not have complete data. Overall, we had inflation data for each of the 54 instances of high M2 growth; however, for the 65 instances of high inflation as defined above, we had M2 data for only 39 of them.

Further, we did this analysis using different definitions of the money supply and always came out with similar results. In place of M2, we did the analysis using M1, for which historical data is widely available for the countries in our database, using M0, and also using the Monetary Base (currency in circulation and bank vaults plus banks’ reserve balances at the central bank), for which historical data is generally available only for larger countries. In these cases, as in the ones above, high inflation did not follow rapid money supply growth, and high inflation occurred frequently when it was not preceded by rapid money supply growth.

HIGH GOVERNMENT DEBT GROWTH, DECLINING INTEREST RATES, AND HIGH CENTRAL BANK BALANCE SHEET GROWTH

Although less often discussed than money supply growth, economic commentators also often mention high rapid government debt growth as a cause of inflation. A more recent variant of this is the case when a central bank is active in purchasing government debt or bank loans—what is commonly called quantitative easing–with the result of high balance sheet growth. Some economists have argued that this too will bring inflation. Some also suggest that rapidly declining or low interest rates are a cause of high inflation. We tested all three of these theories.

We followed the method used above in assessing whether rapid government debt growth leads to inflation. We defined a period of rapid government debt growth in two ways. One was to define it as 20-percentage point growth in government debt to GDP in a five-year period, and the second was to define it as 200 percent nominal growth in government debt growth in a five-year period. We defined high inflation as a period of five consecutive years of inflation of five percent or more. Then we reviewed the data for each country to see how many times high inflation followed high government debt growth, and how many times high inflation occurred that was not preceded by rapid government debt growth.

Our results on government debt were as follows.

In case 10, of the 47 instances where government debt growth was at least 20 percentage points in five years, six were followed by periods of high inflation, while 41 were not. By contrast, there were 25 instances of high inflation that were not preceded by this level of rapid government debt growth.

In case 11, of the 85 instances where nominal government debt was at least 60 percent in five years, 17 led to high inflation, 68 did not. There were 9 cases of high inflation that were not preceded by a public debt boom.

In case 12, of the 40 instances where nominal government debt growth was at least 200 percent in five years, eight were followed by periods of high inflation; 32 were not. There were 23 instances of high inflation that were not preceded by this level of high government debt growth. 

Chart 3: Rapid Public Debt Growth

Rapidly Declining Rates

We also followed this method in assessing whether declining interest rates lead to inflation. Specifically, we defined a period of declining interest rates as a five-percentage point decline in interest rates in any consecutive five-year period. The rates used were the prevailing market lending rates, or, if that data were not available, we used a government debt rate, usually a government treasury bill rate (maturity of less than a year). Again, we defined high inflation as a period of five consecutive years of inflation of five percent or more. Then we reviewed the data for each country to see how many times high inflation followed declining interest rates, and how many times high inflation occurred that was not preceded by declining interest rates.

Our results were as follows. Of the 70 instances where rates declined by five percentage points or more in any consecutive five-year period, four were followed by periods of high inflation; and 66 were not. There were 17 instances of high inflation that were not preceded by this level of rate decline.

We also looked at a five-year decline in real interest rates of three percentage points or more. Out of 115 total such cases, 11 led to high inflation, and 104 did not. There were 17 instances where there was no preceding period of a declining real interest rate.

Central Banks

The data set for our analysis of growth in central bank balance sheets was not as large since there are relatively few large central banks. Here, we took only the five largest central banks, namely the Federal Reserve, the European Central Bank, the Peoples Bank of China, the Bank of Japan, and The Bank of England, and used balance sheet data back to 1915, 1999, 2002, 1999, and 1706 respectively. We noted where there was balance sheet growth to GDP of more than 10 percentage points in a five-year period. Of the seven such occurrences, none were followed by high inflation. There were six instances of high inflation that were not preceded by this level of increase.

We also noted where nominal central bank total assets grew by 100 percent over a five-year period. Of the 12 such occurrences, one led to high inflation, 10 did not, and we did not have inflation data for one occurrence. There were five instances of high inflation that were not preceded by this level of growth in nominal assets.

We invite our readers to analyze our work as presented in the websites mentioned above. We would welcome any comments, observations or suggestions for modifications to our analysis. Any such comment can be sent to the author at [email protected].

IMPLICATIONS

If our observations hold, there are several implications. The most relevant of these seems to be that the current efforts of central banks to engender inflation are unlikely to be successful.

Central banks are correct in one thing: namely, in their view that stronger loan growth would add to economic growth; after all, private loan growth is a core determinant of GDP growth. But under most circumstances monetary policy has a relatively low impact on loan growth, ranking behind actual demand from borrowers (which is in part a function of how leveraged they are and therefore their capacity for more debt), the credit policy of lenders, and the capital requirements on those lenders.

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This leaves unanswered the question of what causes inflation? There is of course a vast literature on this subject. Our review suggests that inflation appears more frequently in less developed countries, and that the causes of individual cases vary but generally include such factors as imbalances between supply and demand, including supply shocks on the one hand and private credit-induced demand on the other; currency exchange rates, which can cause the import of inflation; and considerations relating to the politics and political stability of the country. I have touched on the particular role of inflation in debt deleveraging in an article on private debt in The Democracy Journal. As an outgrowth of our overall work on these macroeconomic questions, we are now developing a view of the causes of inflation that would include a variety of macroeconomic factors. However, given that the conclusions on inflation put forward in this article are outside of conventional economic thinking, we are interested in receiving your feedback on these observations so we can further refine our thinking.

CONCLUSION

Based on our examination of countries that together constitute 91 percent of world GDP, we suggest that high inflation has infrequently followed rapid money supply growth, and in contrast to this, high inflation has occurred often when it has not been preceded by rapid money supply growth. The U.S. economy may well experience some increase in inflation in the coming year, but if it does, it is likely it will be due to factors other than monetary policy.

I would welcome any and all feedback and look forward to your input.

Originally published here at the Institute for New Economic Thinking.

2017 January 16

*[1] Though most M2 booms defined as 60 percent or more nominal growth in five years are relatively short, there are a number that lasted a very long time. For example, in China, such a period has lasted from 1982 to the present. During that period, there were two periods where inflation was over five percent for three consecutive years or more, 1987 to 1989 and 1992 to 1996. For our purposes, we counted this as only one instance of high inflation following rapid M2 growth, and it is counted that way in Chart 1 on the line labeled “Led to high inflation (per instance).” For the benefit of analysts reviewing our work, we also show the total number of high inflation periods—even if they occurred in the same M2 boom—on the line labeled “Led to high inflation (total).”


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  • Duncan Cairncross

    Excellent article – we need more like this

  • Postkey

    “If our observations hold, there are several implications. The most relevant of these seems to be that the current efforts of central banks to engender inflation are unlikely to be successful.”

    “Beyond the powerful theoretical arguments against monetary policy denialism, there’s also a very inconvenient fact for denialists; both market and private forecasters seem to believe that monetary policy is effective.”

    http://econlog.econlib.org/archives/2017/01/the_peculiar_pe.html

  • Laughing_Gnome

    As measured by CPI blah blah blah. Lost interest at that point.

    My biggest cost is housing and house prices grow hugely as banks create credit primarily secured on domestic and commercial property. But of course, houses and other assets are not part of the inflation measure.

    M2 why? Serious question. I thought M4 was the flavour these days.

    • Derryl Hermanutz

      Right on. Money supply growth causes asset price inflation (first real estate, then stocks); not consumer goods price inflation (CPI inflation, that economists call “inflation”). Asset prices can be inflating to the moon, but as long as the price of Corn Flakes is stable, economists see “no inflation”.

      M2 is essentially checking account balances and cash outside banks. Though many small buy-sell transactions are conducted with cash, the vast bulk of buy-sell is conducted by transferring deposit account balances from payer to payee deposit accounts, via check, debit card, online banking, wire transfer, etc.

      Governments print and mint the cash money supply, but cash enters the economy via the central/commercial banking system. Central banks buy cash from the government and pay by typing a spendable credit into the government’s central bank account. Commercial banks buy cash from the central bank, and pay with a debit to their reserve account balance. You buy cash from your commercial bank, and pay with a debit to your deposit account balance. Rserves are banking system money. Deposits and cash are ‘the economy’s” money supply.

      Bank lending, and bank purchases of government securities (bills, notes, bonds), “creates” the deposit account money supply, which is about 95-97% of all money that exists. Banks create, and debtors borrow and spend, the deposit account money into existence. Payees — e.g. people who sell real estate to mortgage debtors — earn and now “own” the new deposit account money. Most deposit account money ends up earned by people who keep the deposit account balances as their long term savings, which simply removes that money out of circulation in the economy’s spend-earn stream.

      M2 is the “circulating” money supply — cash in people’s wallets and business’s cash registers and safes; and people’s and business’s checking account balances in their bank accounts.

      People, corporations and institutions transfer some of their savings out of their deposit accounts in the commercial bnanking system, into their brokerage accounts in the savings-funded capital markets financial system where the savings become “capital” and savers become capitalist “investors”. Capital markets investors typically buy already existing assets like stocks and bonds that are bought-sold and re-bought/re-sold in the secondary markets.

      Primary dealer commercial banks create new deposits in government bank accounts, to pay for their purchases of new issues of government debt. Governments typically transfer the new deposit balances out of their commercial bank accounts, into their central bank accounts, and spend the commercial bank-created money out of their central bank accounts. Primary dealers then sell most of the bonds into the secondary markets where central banks, non-primary dealer commercial banks, and “you” buy bonds as investment assets. Central and commercial banks create the money they use to pay for their asset purchases. Non-banks buy assets with money we have earned and saved.

      Stock-issuing corporations only get the money from stock sales when they issue new stock at IPOs and subsequent events. The brokerage through which you buy stocks is the secondary market. Stock sellers get the money that is paid by stock buyers.

      About 17% of the total US$ money supply has been transferred into the capital markets financial system where the savings exist as cash balances in brokerage accounts that are loaned into the short term money markets. This part of the money supply is not spent-earned by buyers-sellers in the “real” producer-consumer economy. This money circulates in the capital markets, among buyers-sellers of previously existing investment assets.

      Savings account balances — up to 60% of all money — are the uncirculating part of the money supply. Banks don’t lend or invest their depositors’ account balances. Every bank loan and asset purchase is funded by the bank’s creation of a new deposit to pay for its purchase of a private debtor’s new interest-bearing loan account balance, or a government debtor’s new interest-bearing bill, note of bond (“bond”) debt.

      Most bank credit (the deposit account money supply: a “loan” created as a credit that adds to the borrower/debtor’s spendable checking account balance) is created to finance debtors’ asset purchases, not their consumer spending. Banks create buy-money that adds to demand for already existing assets like houses, stocks and bonds (bonds, in the international carry trade). Adding demand money into asset markets enables asset owners to sell their relatively fixed supply of assets at higher prices.

      Bank credit expansion inflates asset prices, not CPI prices. E.g if you bought a Las Vegas bungalow in 1975 for $30k, you could have sold it in 2005 for maybe $500k, all because banks keep creating more and more money to fund their asset-backed (“mortgaged”) real estate lending. Sellers of price-inflated assets (like real estate) might spend some of their capital gains on consumer purchases, which adds some secondary CPI inflation.

      Commercial bank credit expansion — not government money-printing — inflates the money supply. The primary inflation from money supply (M2) inflation is asset price inflation. During the 2000s, banks and mortgage originators created trillions of new dollars to finance the real estate bubble. Real estate sellers earned and now own all those trillions as their savings account balances and brokerage account cash balances and asset valuations. Asset valuations have been inflated to historic highs — and interest rates and asset yields have inversely been pushed to historic lows — by all those investible savings looking to earn a return.

      The “global savings glut” inflates a global asset price bubble, and keeps it inflated because where else is all that investible money going to go? Low yields are better than no yields from holding cash, or almost zero interest on savings account balances. Which doesn’t stop rich people and corporations from holding trillions of savings in offshore bank accounts, to avoid paying taxes, and to avoid being bailed-in to bailout the structurally insolvent commercial banking system.

      • Laughing_Gnome

        Thanks for your detailed reply Derryl. A bit more detail than I bargained for!

        I am well aware of how money (credit?) is created and have a reasonable handle on the money supply measures. I just wondered why this author chose to break with (what looks to me like) convention and reference M2. Spending readies as opposed to static money would seem to be a reasonable choice.

        • “I just wondered why this author chose to break with (what looks to me like) convention and reference M2.”

          Maybe Richard Vague is still arguing with Milton Friedman. Friedman used M2 in his Money Mischiefgraphs.

          Economists talk about financial innovation. Maybe M4 would be the best measure since 1995, and M2 the best measure before 1975, and something else in the years between.

          What are “Spending readies” and “static money”?

          • Laughing_Gnome

            Thanks Arthurian

            I think Friedman had the last word, as we all will some day 🙂

            Yes, M3 seemed to be the flavour for a long time and now it is hardly mentioned. I have an idea that M4 was intended to standardize between international measures with the same names but slightly varying composition.

            My very own terms, colloquialisms if you will.

            By spending readies I mean the cash in my pocket which I am definitely going to spend this week, the credit in my current account ( I’ll say checking account like an economist ) which I may well spend shortly, and savings in an accessible deposit account which I might be amassing to spend on a big ticket item.

            By “static money” I mean hoarded investment / savings money which will only ever be spent on shares, bonds, or investment vehicles of some sort. I think I have a serious point here. Economists talk about the velocity of money as a factor of GDP. If only the money which is likely to be participating in real economic activity were included the “velocity” would be a great deal faster. Government bond issues might be thought of ( by me at least ) as transforming hoarded investment money into active money flowing through the real economy.

            Here’s a question for someone. I seem to remember either M3 or M4 included some form of “repurchase agreements”. Here’s the thing; M0 is central bank reserves and as such doesn’t agregate into the higher measures, e.g. M1 = notes and coin with the non-bank public, M2 = M1 + sight (checking) acounts, M3 = M2 + whatever. So, M0 doesn’t add in to those measures as it is not available money. However repurchase agreements are what banks use to borrow reserves (M0), so would that not add central bank reserves into the higher measure?

          • M1 and M2 are old (Friedman era) but so am I, and I still like them. By the definition at FRED, M1 is like your “spending readies”. Add your “static money” to it and you’ve got M2 or a newer, broader measure like M4 maybe.

            https://fred.stlouisfed.org/series/M1SL
            https://fred.stlouisfed.org/series/M2SL

            What you call static money I call “sedentary” (as opposed to “circulating” like M1).

            I agree with you on Velocity: Money in savings has a velocity of ZERO until somebody decides to spend it. When they spend it, it comes out of savings and goes into M1 anyway.

            I *definitely* agree with you that government bond issues are a way to get money out of savings (or hoardings) and get it circulating again. I like the clarity of that view.

  • Hey, there is a 404 on this link:

    http://www.privatedebtproject.org/inflationstudy
    Where is your source / expansion?

    It would be interesting

    a) to know your ‘episodes’ of money supply growth, as well as
    b) those cases where inflation did ‘really’ take place.

    c) what happens under different ‘definitions’ of money supply, e.g. using M3?

  • ckmurray

    Great approach and analysis. So simple and powerful I’m surprised it hasn’t been done before (though I guess each year there is new data being generated).
    I would suggest, as other commenters have, that it may be worth repeating the same analysis on asset prices of various forms – property, equities, etc. I think the results would be very different.
    In any case enjoyed reading this.

  • jothwu

    If your sole intent is to understand causes of inflation, your analysis must include the variable “propensity to save” and this must be done for all income groups. To view money supply outside of the levels of spending misses an important ingredient. Money supply must be tied to pressure within an economy to consume for it to have an influence. Without pressure to consume goods and services, inflation will remain flat regardless of the amount of money pumped into an economy. Attempting to stave off deflation by increasing the money supply would be like trying to inflate a tire with a three-inch hole by simply increasing the supply of air pumped into it.

  • Steve

    Yes CPI is not an accurate or honest standard. Also measuring over a period that includes both inflation and deflation will tend to mitigate either/both. As Minsky says “the fundamental direction of capitalism is up” that would include prices as well. Not only do costs as a flow generally exceed individual incomes as a flow causing cost inflation, but human action seeing an increased flow of demand will inevitably result in demand push inflation. Integrating these particles of truth in Minsky, Social Credit and Austrian theoretics results in Wisdomics-Gracenomics whose new monetary paradigm of gifting enables price deflation to be successfully made a part of profit making economic systems and simultaneously breaks up the monopoly monetary paradigms of Debt, Loan and For Production only with which the business model of Finance dominates and manipulates every other business model and 90+% of the general populace.

    wisdomicsblog.com

  • mohinderkumar

    Money (essentially credit) is also a “commodity” under given capitalist mode of production -a special kind of commodity (“general equivalent” into which other commodities can find equivalence for exchange) which bears price (cost of production also?). Exchange rate is the relative price of one money into another: Money–money exchange, the exchange b/w two general equivalents which have a national character (by and large). But US$ has global character, a global standard for comparing monies. By Richard’s argument, inflation in the countries of the third world and in developing economies is largely BECAUSE of exchange-rate phenomenon. For instance, in India could it be a case that inflation measured by CPI (over 5% or even 7-8% as in previous quarters) was MOSTLY DUE to rising value of US$ and relative devaluation of Rupee? It looks plausible, particularly when Richard’s data show that Money Supply M2 is not a factor in causing inflation in India. That implies commercial banks can happily inject credit supply to a greater extent (provided demand exists). What will banks do if people show poor demand for money (credit) for investment and when RBI (central bank)/commercial banks have virtually no role in (containing) inflation? Is this the reason (idleness), that Financial Inclusion is pursued per force so that artificial relevance of commercial banks and central bank is maintained? Institutional impositions! Why can’t humanity exist, survive and progress sans central banks/commercial banks? Is it possible? I think so.

  • Alexandre Plante

    Monetarism was proven to be incorrect back in the early 80s. The Monetarists posited that the inflation of the 70’s could be cured by reigning in the growth of money supply, and that inflation would then fall without causing a recession. The experiment was tried in 1979-80, followed by the deepest recession since the 1930s in 1982-83. The tight monetary policy may have reduced the rate of inflation, but not through the mechanism posited by the Monetarists. Instead the tight credit conditions and high interest rates caused a recession, that caused high unemployment and a drop in demand for commodities, and that is what brought down the rate of inflation. Furthermore Monetarist-run central banks kept real interest rate high for 15 years from around 1980 to 1995, despite relatively high unemployment and slow growth. This choking-off of growth by using a policy that favours the wealthy contributed to the rise in indebtedness and increasing disparities of income of that period (not to mention also rising government debt, which had been generally falling since WW 2), and are probably the deep roots of the economic crisis that has afflicted the world since 2007.

  • Lucas Carvalho

    What is defined as M2? Do you consider central banks money plus banking credit and savings or is it savings out? Because in some countries (Brazil, e.g.), savings have almost zero cost of being used to transactions, it is indeed money at any definition.

  • Rory Short

    New money does not cause inflation only if there has been enough under-lying growth in the real economy to support the value of the new money.

  • LeonardCTekaat

    When high inflation raises its ugly head our reaction to it is very damaging to our capitalist economy. Monetary policy creates higher interest rates which in turn creates high unemployment which reduces aggregate demand which reduces inflation rates.
    There is a better way of reducing demand that doesn’t create high unemployment. I am talking about the 2% Appreciation/Inflation Taxation Policy. This tax reform policy would reduce demand without creating high unemployment. It would reduce excess demand created by “irrational exuberance” which is created in asset and commodity markets by people by with money to invest and access to credit. Inflation and bubbles are not created by the working class.
    For more information on the 2% Policy go to http://www.taxpolicyusa.wordpress.com

  • nathaniel haraden

    Complete failure to account for role of derivatives. Criminal levels of paper-leverage used to manipulate prices artificially.