Is the latest word on the flood of money the last word?

US inflation, having jumped by 4.2 per cent, is causing some consternation (as well as a pushback understating of it from the Biden apologists).

But those of us raised on the Fisher identity

MV = PT
(where M is the quantity of money, V is the speed money flows round the economy, P is the level of prices and T is the number of transaction)

are hard pressed to explain why inflation remains so low.

The quantity of money (the Fed’s “M2”) has increased by 33% since January 2020.  Milton Friedman’s exposition of monetarist theory would predict a US inflation rate of 30 per cent, given the modest 2 per cent real growth rate

Yes, V and T may not be stable.  But few, twenty years ago, would envisage their unpredictability counteracting the increase in money supply that has occurred even with the banks sitting on the money created by the central bank.

On the US experience, Australia’s money supply growth of 10 per cent should pose no inflationary issues.

But who knows whether the dam will break?

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26 Responses to Is the latest word on the flood of money the last word?

  1. Boxcar says:

    Don’t know nuffin about economics, but if I handed a trillion dollars to a few people/ companies to play with in the stock market, surely that will have limited the impact on the real economy. Is Japan’s history evidence of this?
    However if I gave $10,000 to 100,000,000 people, that would, historically, lead to inflation.
    But if the factory (China) is able to meet all or most of that demand, where does inflation occur? Wouldn’t that be China.
    Sea and land shipping have the supply limitations to and in USA, so that’s where the push on price increases is building.

  2. Richard says:

    USA’s inflation is starting to rocket, and this doesn’t take into account the inflation when the Biden administration brings in the $15 minimum wage.

    We are seeing the fall of the USA in real-time.

    The Biden Administration, brought to you by CNN and its’ affiliates.

  3. Richard says:

    But who knows whether the dam will break?

    “when” not “whether “

  4. Pyrmonter says:

    20 years ago, I’d have predicted inflation too, and long before now. But we haven’t seen it, and it’s worth asking why.

    Two writers worth reading are:

    https://johnhcochrane.blogspot.com/2021/04/inflation-and-expectations-at-nro.html

    https://www.themoneyillusion.com/economic-indicators-and-the-risk-of-lowflation/

    For those looking at this solely through the lens of the tribal battles of US politics: yes, the Dems are bad. But the case for fiscal discipline is one the Republicans pretty much abandoned in 2016; and about which they did little 2000 – 2008 (though their sins of that time have since been dwarfed).

  5. MD says:

    I think the answer lies in the fact that national economies are not closed systems. The P and T for the US economy are largely determined by China.
    During the economic boom of the late 90s I recall Greenspan saying that he did not understand why we weren’t experiencing high inflation. That answer, IMO, is that China was emerging as the world’s pre-eminent manufacturer of consumer goods and was flooding the world with goods at consistently low prices.

  6. Penguinite says:

    Cost of living up = Value of cash and Savings down! We all know from the lived experience that the value of grocery appears stable because manufactures are packing less for the same price.

  7. John Brumble says:

    20 years ago, I’d have predicted inflation too,

    Well, yes. Of course you would have. Bush was a Republican.

  8. Kneel says:

    “USA’s inflation is starting to rocket,…”

    Indeed. Fuel up 33% (pre pipeline failure), lumber prices up 6 times(!!), food and paper products (as used by restaurants etc) up by 50-200%. And the “dole” is up to equivalent of $16/hr, so no-one is prepared to be a “burger flipper” for $10/hour and many low cost restaurants have had to close or put up signs saying “No-one wants to work – please be patient with those who are working for us, they are over-worked!”
    House prices going crazy, worse in red states that have opened up, prices have tripled in some places.
    Bitcoin at >US$60k, Etherium skyrocketing.

    “The quantity of money (the Fed’s “M2”) has increased by 33% since January 2020. “
    Check the graphs on M1 and M2 in the US for the last 30 years – a real “hockey stick” if ever there was one.

    If the US is lucky they will see inflation. If they are unlucky (or those in charge remain inept), then hyper-inflation may hit. We won’t need to look at Venezuela, soon the US will a case study on how to wreck an economy.

  9. Lee says:

    For those looking at this solely through the lens of the tribal battles of US politics: yes, the Dems are bad. But the case for fiscal discipline is one the Republicans pretty much abandoned in 2016; and about which they did little 2000 – 2008 (though their sins of that time have since been dwarfed).

    I figured that you would take that tack – you always got to have a go at the “right”, Pyrmonter – but any criticism of the left is non-existent or very muted.

  10. John Bayley says:

    If the US is lucky they will see inflation. If they are unlucky (or those in charge remain inept), then hyper-inflation may hit.

    While you are correct, you may wish to check comparable data for our own fair land. The narrow measure of money supply M0 (cast + equivalents) has gone up by more than 60% since November and has easily doubled over the most recent 12 months.

    The RBA’s balance sheet chart must have been borrowed from Michael Mann’s infamous ‘hockey stick’ one – it has gone absolutely vertical.

    So no, it’s not only the USA. The situation with fiat monetary inflation is terminal all over the developed world; the utterly fraudulent ‘CPI index’ notwithstanding.

    Prepare accordingly and don’t forget to sharpen up your pitch forks and get the ropes ready. They will be needed for the final reckoning with the perpetrators of this fraud.

  11. John Bayley says:

    ‘Cast’ means ‘cash’ in the above, of course.
    Writing comments on phones should be illegal.

  12. Dr Faustus says:

    MD says:
    May 14, 2021 at 10:48 am
    I think the answer lies in the fact that national economies are not closed systems. The P and T for the US economy are largely determined by China. […]

    IMHO that’s a reasonable argument with regard to drivers of historic inflation.

    The issue now facing the US is that M has near instantly increased, and T has decreased (ie $2tn going to the limited number of US suppliers of infrastructure), from the days of broad market trading with developing China.

    Algebra tells the rest of the story.

  13. Pyrmonter says:

    @ JBrumble

    That was rather my point: with unified control of Congress and the Presidency, the GOP could have done something about the fiscal issues that, even then, faced the US, above all, the impending deficiency in the US Social Security scheme. Instead, they started on an expensive war, and introduced another ‘entitlement’ in the form of prescription drug subsidies for the elderly. All small beer compared to Trump and Biden, mind.

  14. Tim Neilson says:

    That was rather my point: with unified control of Congress and the Presidency, the GOP could have done something about the fiscal issues that, even then, faced the US,

    It depends what you mean by “unified”. The Dems have real party discipline, where dissent is only ever permitted on a kabuki theatre basis by someone whose vote won’t tip the balance but who needs to look good to a blue collar voting base. The GOP are hopeless at that. Hence GW Bush’s 2003 effort to reel back Fannie May and Freddie Mac foundered on splitters, as did his 2005 and 2006 efforts (against which, be it noted, Senator B Hussein Obama, Dem (Ill) voted, before complaining in the 2008 Presidential election that nothing had been done to prevent the GFC).

  15. John A says:

    Pyrmonter says: May 14, 2021, at 10:46 am

    20 years ago, I’d have predicted inflation too, and long before now. But we haven’t seen it, and it’s worth asking why.

    I beg to differ. It depends where you are looking.

    The home I live in now was sold 20 years ago for one-twelfth of its current “appraisal value.”

  16. Simple Simon says:

    John Bayley says:
    May 14, 2021 at 12:29 pm

    The situation with fiat monetary inflation is terminal all over the developed world.
    ….
    Prepare accordingly.

    Always appreciate your comments, John, but in such a situation (terminal fiat money inflation) what sort of preparation is appropriate?
    (Serious question.)

  17. Lee says:

    The home I live in now was sold 20 years ago for one-twelfth of its current “appraisal value.”

    My home was appraised at roughly $125,000 in 1997.
    Recently it was appraised at $650,000, and it would be even more if spruced up a bit.

  18. TPL001 says:

    MV = PT is junk “science”. None of that nonsense macro-economics says a whit about how the money is actually used. In any case, expanding the money supply is, by definition, inflation. The question is how the transmission of that works through the economy in terms of its impact on production goods and consumption goods.

    If, for example, the money comes into the possession of individuals, who did not previously possess it, and it came as a helicopter drop (to quote Friedman), then individual demand for certain consumption goods increases, as do their prices. This contrasts the situation without money: demand would not increase, nor would prices.

    And therein lies the problem: the structure of production will adjust to suit the new demand for production goods and consumption goods. And they claim that this is a Keynesian miracle. It depends how the money enters the economy and who gets it first. The structure of production in the economy represents the complex of industries, each of which is made up various stages (of companies, and their goods and services). Each industry expands in terms of the number of stages as an economy becomes more capital intensive (i.e. an advanced capitalist economy), because there exists more financial capital, derived via savings, allocated to the number of stages.

    Individuals make marginal choices: demand for certain consumption goods might increase (as will their prices); or demand by producers for factor inputs might increase (as will their prices). One will not necessarily find this reflected in in an increasing CPI. It could be reflected in consumer, producer or asset prices (such as commodity prices or stocks or property).

    In a low-interest-rate environment, the state is fooling the market by suggesting that people’s time preference for present consumption is very low, that they are saving more, hence that there has occurred an increase in the available financial capital engineered by the government (fiscal) or central bank (monetary). If it is a one-shot fiscal stimulus (like a USD2 trillion injection), then individuals will bring forward their spending decisions.

    This will not set the economy on the path of economic expansion but economic retrogression. Some industries will expand, employment will rise, as will production. But the debt that arises from fiscal expansion needs to be paid back in the future; demand will then fall. The prices that increase from an increase in money curtail the growth in those industries; demand in certain industries will shrink. Individuals are good economists; they are not stupid and know when they are being conned. Entrepreneurs know that something is wrong with interest rates at 1% or less. In another area of the economy, the new money finds its way into financial assets, whose prices are bid up. But shares are a zero-sum game; no new goods or services are, per se, added.

    The trade cycle and the impact of expansionary monetary policy and expansionary fiscal policy cannot be blithely assigned to changes in aggregate demand and aggregate supply. Those aggregates mean nothing to you and I who live in the immanent present, and who must make decisions on the most important and urgent needs and wants. It is difficult to tease out the complexity of the strands of interconnectedness of money, interest rates, and prices of higher order and lower order (consumption) goods. However, the governments’ action is statecraft, which substitutes government demand for individual demand, engages in theft, a clear moral failure, and puts the economy on a path to economic retrogression (i.e. shrinkage).

    In brief, the latter occurs because the structure of production shrinks as the value that would have been added through economic action, prior to the injection of the new money, only now partially occurs; the new money will flow into those industries and products representative of the new level of demand, which may or not be as productive. Present consumption increases in some and investment decreases in other industries. Therefore over time the number of companies and therefore contiguous stages in productive activity, commensurate with the situation prior to the new money, decreases. As the number of stages decrease, or the level of capital intensity, the value added from the new round of investment diminishes, as does output, GDP and (if measured in any objective way) the standard of living. However, the good news is that the free market is pretty robust.

  19. Primer says:

    Errr….shucks….. as a property trader and constructor my very best times have been in inflationary times. Sorry for the heresy. Bring it on.

  20. John Bayley says:

    ..in such a situation (terminal fiat money inflation) what sort of preparation is appropriate?
    (Serious question.)

    Thanks Simon.

    There may be some guidance to be had in studying history, that may help answer your question.

    I would suggest Adam Fergusson’s book ‘When Money Dies’ – available for about $10 as an Amazon e-book.

    Obviously every inflationary episode is different to some extent, and with the amount of debt now in the system, it would not come as a surprise if we were to experience a crash in asset prices (deflation) first.

    All that gives ‘money’ value is the faith of the general public. Hyperinflation is always due to the disappearance of that faith. It can therefore occur at first over many years, and then very suddenly. Stories like this one are what triggers such changes in perception.

    While Weimar Germany may have happened 100 years ago, I have spent quite a bit of time in South America and talking to people in Peru, Argentina and Brazil about their own experiences with their countries’ much more recent inflationary episodes, in my opinion you can’t go wrong with the following:

    – Diversify your assets: Unless there is a WW III, solid businesses operating in essential industries will survive. Their shares may crash in value, but are unlikely to become worthless.
    Adding a little bit of ‘old faithful’ (gold) and the modern variety (bitcoin) can’t hurt.

    – Ensure you own the roof over your head and, better still, a little bit of dirt to go with it. Being able to grow your own food is something of great value in a depression.

    – Owe nothing to anybody; think about what is really important in one’s life; perhaps it’s not that McMansion with a massive mortgage on it, nor a $100K Tesla in the garage to virtue signal with.

    There is not much more you can do, but realise that no asset as such is risk-free. Even cash falls into that category, especially in the current environment.

  21. John Bayley says:

    TPL001 @ 5.40 pm:

    Thanks; this is a very well presented summary.

    Those aggregates mean nothing to you and I who live in the immanent present.

    One of my old professors used to describe this as: “If I put one hand in the freezer and the other in a pot of boiling water, an economist would say that in the aggregate I should be feeling quite comfortable!”

    This is, however, how the government economists, every one of them a Keynesian/statist to their core, think the economy should be ‘run’.

    And what has for a long time surprised me about quite a few otherwise apparently sensible commenters here at the Cat is the fact that they clearly think we do somehow need the likes of the RBA to set ‘monetary policy’, pursue ‘inflation targets’ as defined by the deeply flawed and in fact downright fraudulent ‘CPI’, and so on – in other words, the type of economics which would make the Soviets proud.

  22. Pyrmonter says:

    @ TimN

    US party discipline is a fairly modern thing – it has come with the regional sorting. The Dems are cohesive now, but … I suspect you, like me, are old enough to remember when Southern Dems, the likes of Sam Nunn, voted like centrists, if not centre-right figures. The last of them is, perhaps, Manchin, who does seem to be either (a) voting along the lines of his median voter; or, more likely, positioning to extract a very high price for his vote for something truly controversial.

  23. Tim Neilson says:

    Pyrmonter says:
    May 14, 2021 at 10:32 pm

    OK, but I think my point stands – Dem holdouts have to negotiate hard, whereas RINO squishes can stab the base in the back knowing that the party elite couldn’t care less.

  24. TPL001 says:

    John Bayley @ 7:40 pm

    Good advice, John. Diversify your assets: Gold and silver; own property; no debt.

    I have read White’s book on “Inflation in France”, and reading “The Great Inflation: by W Guttman and P Meehan. As you noted, there is also Adam Fergusson’s “When Money Dies.”

    Fergusson: https://mises.org/wire/when-money-dies-100-years-later
    White: https://mises.org/library/fiat-money-inflation-france

    My take on Weimar, is that it was those with assets, like property or shares, who fared reasonably. They can supposedly keep place with inflation. But the notion of dying money is that, per Gresham’s Law, it leads to a flight to real goods, rather than exchange commodities, such as currency. Those in Zimbabwe, who perceived the problem eventually, as I understood it, started using US dollars, Euros and other exchangeable items rather than money.

  25. John Bayley says:

    Those in Zimbabwe, who perceived the problem eventually, as I understood it, started using US dollars, Euros and other exchangeable items rather than money.

    Yes, and the ultimate rock bottom is usually reached by most people reverting to a simple barter system.

    Unlike the Zimbabwe, Argentina etc experiences though, where the USD offered a reasonably solid refuge from the Z$ or the ‘austral’, we are now at a stage where all fiat currencies are being debased at an accelerating rate. This does not show itself in cross-exchange rates between the yen, euro, USD, AUD etc, because of that very reason, and hence it helps make most people think that all is well.

    Going by the current developments in, say, Venezuela though, it seems crypto-currencies have offered an alternative escape route; at least to some extent. Many businesses accept Dash, Litecoin and Bitcoin.

    When I was last in Argentina 3 years ago, with the ‘official’ annual inflation rate then sitting at around 65%, I was quite surprised at just how many businesses were prepared to accept both USD and BTC, instead of the ARS.

    We do, indeed, live in ‘interesting’ times.

  26. Michael says:

    Falling interest rates allow businesses to borrow for ventures that they otherwise would not have, had interest been stable. The result is misallocation of capital, overproduction of goods and services which squeezes prices, margins and wages.

    Automation, ever increasing scale, centralisation of operations in increasingly marginal businesses, and rampant speculation in property and equities are evidence of it.

    Falling interest is driving deflation, or soft inflation at best – *not* the quantity of money.

    https://monetary-metals.com/inflation-or-deflation-part-2/

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