Thank you for taking time to put this together. One of the absolute best aspects of Substack is the interactions with authors and other readers.
As to the money supply issue (and I'm no expert, believe me), I have ascribed increases in the money supply, especially drastic increases, with increases in inflation, as to many economists (as …
Thank you for taking time to put this together. One of the absolute best aspects of Substack is the interactions with authors and other readers.
As to the money supply issue (and I'm no expert, believe me), I have ascribed increases in the money supply, especially drastic increases, with increases in inflation, as to many economists (as you know). As I understand it, then, increases in money supplies can lead to increases in the rate of inflation, but not necessarily for all products, especially those that are somewhat immune from money supply increases (for various reasons). If I understand that correctly, I will have to reexamine my impulse to equate money supply increases with higher prices.
Again, thanks for the feedback. I enjoy your articles and I learn a lot from them.
Edit: I intended to add a link to a video I saw recently, even though it is somewhat dated. The authors in this video (apologize for the length) do equate money supply increases with changes in economies, particularly depressions. That is not the same as equating money supply changes with increases or decreases in prices, I imagine.
For the longest time, I subscribed to the same view that money supply increases == rampant inflation. You see that so often in the media that it is for many a canon of economics.
The problem is, the data doesn't match. No matter which inflation metric you use, and that includes ShadowStats, the one thing you do NOT see is inflation going hyperbolic in 2020 at the same time the M1 money supply did.
What you DO see is the M1 velocity dropping to damn near zero at the same time as the M1 increase--thus negating the M1 supply increase as an inflationary pressure.
IF the velocity of money is a constant (which it never is) then yes, an increase in money supply will produce inflationary pressure on prices. The caveat here is the "all else being equal"--which is helpful for theoretical analyses of various phenomena but rarely applies in the real world.
For example, when you look at the CPI Year-on-Year inflation rate on the same timeline as M1 money supply growth, the fluctuations don't match.
What you DO see, and this does appear to broadly support the money supply growth==inflation argument, is that, when the M1, M1 Velocity, and CPI are indexed to a common date, up until 2008, they all move more or less in tandem.
2008 and the Great Financial Crisis was a point of departure where that correlation abruptly ended, and has not been restored. M1 and M1 Velocity started moving in different directions and independent of CPI.
I would love to say I fully comprehend the significance of all of this but I'm still working on that part!
Suffice it to say that looking at inflation as strictly a monetary phenomenon is simply an oversimplification of the issue. Money supply plays a part, but it's not the only or even the primary driver in all circumstances.
Thank you for taking time to put this together. One of the absolute best aspects of Substack is the interactions with authors and other readers.
As to the money supply issue (and I'm no expert, believe me), I have ascribed increases in the money supply, especially drastic increases, with increases in inflation, as to many economists (as you know). As I understand it, then, increases in money supplies can lead to increases in the rate of inflation, but not necessarily for all products, especially those that are somewhat immune from money supply increases (for various reasons). If I understand that correctly, I will have to reexamine my impulse to equate money supply increases with higher prices.
Again, thanks for the feedback. I enjoy your articles and I learn a lot from them.
Edit: I intended to add a link to a video I saw recently, even though it is somewhat dated. The authors in this video (apologize for the length) do equate money supply increases with changes in economies, particularly depressions. That is not the same as equating money supply changes with increases or decreases in prices, I imagine.
https://www.youtube.com/watch?v=utTMZBgYKuE
Thank you for the kind words.
For the longest time, I subscribed to the same view that money supply increases == rampant inflation. You see that so often in the media that it is for many a canon of economics.
The problem is, the data doesn't match. No matter which inflation metric you use, and that includes ShadowStats, the one thing you do NOT see is inflation going hyperbolic in 2020 at the same time the M1 money supply did.
What you DO see is the M1 velocity dropping to damn near zero at the same time as the M1 increase--thus negating the M1 supply increase as an inflationary pressure.
IF the velocity of money is a constant (which it never is) then yes, an increase in money supply will produce inflationary pressure on prices. The caveat here is the "all else being equal"--which is helpful for theoretical analyses of various phenomena but rarely applies in the real world.
For example, when you look at the CPI Year-on-Year inflation rate on the same timeline as M1 money supply growth, the fluctuations don't match.
https://fred.stlouisfed.org/graph/?g=T8vC
If you look at the M1 as a percentage change from a year ago, treating it like the inflation rate, there is no similarity in behavior.
https://fred.stlouisfed.org/graph/?g=T8vN
What you DO see, and this does appear to broadly support the money supply growth==inflation argument, is that, when the M1, M1 Velocity, and CPI are indexed to a common date, up until 2008, they all move more or less in tandem.
https://fred.stlouisfed.org/graph/?g=T8w7
2008 and the Great Financial Crisis was a point of departure where that correlation abruptly ended, and has not been restored. M1 and M1 Velocity started moving in different directions and independent of CPI.
I would love to say I fully comprehend the significance of all of this but I'm still working on that part!
Suffice it to say that looking at inflation as strictly a monetary phenomenon is simply an oversimplification of the issue. Money supply plays a part, but it's not the only or even the primary driver in all circumstances.