Did you consider where the new money entering the supply went first? It would surely make a difference if the first use of money was an increase in income for citizens or an increase in cash for speculation in the financial sector.

This is a hollow conclusion arrived at by equating increased money supply to increased availability of cash in the hands of consumers. There would be inflation if increased money supply increases the money in the hands of the consumer.

New money flows into places where ever there is an arbitrage opportunity. No bank gives anyone interest free loans. Anyone who borrows from banks does so to make a profit. Borrow at a lower rate and use it to earn a higher rate of return by investing the borrowed money. The profit is the difference between interest charged by the bank and the return earned on the investments.

In most developed countries, there is a very vast paper economy which provides higher returns than the real economy. So, smart people borrow the money and invest in the paper economy consisting stocks, land, gold, and contracts, and similar assets. In the stock market "from 1825-2019, the average total annual return was 9.56%. In over 70% of total annual returns have been positive over the same timeframe". ( https://advisor.visualcapit.... Why would anyone settle for low return and high risk investments in the real economy. There is no inflation because the new money never enters the real economy.

Whatever inflation happened was because of increased government spending using fiat money. Most of this reached the general public in the form of wages. But over the past 50 years government spending in areas like education, healthcare, etc. has remained slack driving the middle class into greater and greater debt. So whatever extra money they got was sucked by steep interest rates applied to consumer loans. There may have been increase in the supply during the period of the cited study but there was no increase in the availability of money in the hands of the consumers.

Of course there is a causal relationship between increased money supply and prices if one takes into account asset prices including land and gold. The steep climb in stock prices is also the result of increased money supply. Asset prices have risen at an exponential rate and it is wrong to leave these out of the inflation equation.

There are only two causes of price inflation. One is when demand exceeds supply and the other is when the currency is being debased by it's over production . The problem with current monetary systems is that they create money apart from completed exchanges of goods or services which allows any amount of money to be produced which can lead to debasing of the currency.

Completed exchanges are the only processes that infallibly concretise value. This is because value is generated first in human heads and it is only externalised, i.e. made real, once value is concretised in completed exchanges of goods or services.

How is this done?

Monetary systems, which provide credit card facilities, allow for this to be done as

these facilities enable the infallible concretisation, of value, in new money.

The concretisation is not a one stage process however but a two stage process. The first stage is when a purchaser pays for a purchase by means of a credit card. This means that the seller of the item receives new money to the value of the item purchased. It is new money because the purchaser has not yet earned this money and this gives rise to the second stage of the process where the purchaser signals that the new money has been earned by settling the credit card debt. In other words exchanges using credit cards are only completed once the card holder pays off the credit card debt.

If the only new money that was allowed to enter into circulation was through purchases by credit card infation would cease to happen.

Bingo. And the exclusion of asset prices from inflation calculations indemnifies so-called 'independent central banks' from their role in exacerbating wealth inequality.

You are absolutely right. The authors of this piece clearly set out to prove what they believed and wanted to be true. At least in the US the CPI is a poor measure of inflation.
The semi-detached house in NW London I grew up in was built in 1948, when my Mother finally sold it in 2012 the price she got for it represented an 8% compound increase over that period, which was of course not in fact linear. The periods of most significant "value" increase occurred during vast monetary expansion. That is not inflation?

In that real very real class war between those who have houses as investment assets, and those who just want affordable homes, it is clear on whose side the author of this article stands
https://subprimeregulations...

The conclusion is very interesting. Nicely written.

Does the M2 money supply measure who's hands the money gets to?

In 2008 people worried about inflation but it never really happened and the speculation was because the money went to a very small class of people with limited ability to influence the price of things across the board.

But what they could influence was things like art, certain types of housing, and stocks. Which all saw rapid rises in dollar prices....

So maybe this measure isn't granular enough to measure the money supply ultimate destination and linking it to that classes interests....

Essentially there might have been rapid rises in certain asset classes but this is hard to pick out when the measure is very generalized.

Explain Latin America, then. It was thanks to monetarist theory that the region could finally control its high inflation problems. Also, it is quite telling that the only country that never adopted the recipe in the slightest (Venezuela) is the only one enduring hyperinflation now.

Monetary theory does not regulate inflation, who generates inflation are the capitalist bourgeoisie itself that speculates. Venezuela has an induced hyper-inflation generated by that "exchange house" called, in socialist states like Albania, there is no inflation, because the socialist state of Albania controlled and fixed the prices of goods.

The paper is "Based on our examination of countries that together constitute 91 percent of world GDP." Unsure who that would include outside Brazil in L.A.

Mexico, perhaps? My point is, there are multiple countries and cases in which money growth is correlated with high inflation. Also, I could mention some potential sample bias. Data for Europe, Japan and China is less than 20 years old, well after inflation targeting became the norm throughout the world. Meanwhile, the US and the UK have never experienced hyperinflation during excess printing periods, partly due to their currencies' role as reserves in different time periods.

The dollar has no gold reserves, it is only based on oil, the day people stop using the dollar and stop trading oil in dollars, this currency will lose its value worldwide. And that is what is slowly happening today.

Mexico is definitely in there. good call.

Generally, I think money supply is a factor, but far far from the only story- and the monetarist/traditional measurements of supply are poor.

Real bad inflations happen with cost-push (oil prices), and weak/destroyed productive capacity- eg Weimar, Zimbabwe, probably Venezuela.

And yes the US is a different story but I don't think reserve status has much to do w/ it- more size of the economy, legal backstop to make good on all debts w/o constraint (fiat), relative strength of institutions, political stability, productivity, military power, etc.

The monetarist view is flat-out wrong though. They all thought the US was going to go into hyperinflation after the financial crisis response.

Here's where I get my understanding of the monetary system, at least the US.

https://www.ibu.edu.ba/asse...

Who controls the oil is Saudi Arabia, a puppet country and plunged into the interests of US imperialism. The US can force Saudi Arabia to flood oil massively so that the price of a barrel of oil will sink and thus affect oil countries.

Sorry for the late response. But, your scenario for "real bad inflations" it not always accurate. I guess I have a Latin American bias: while I agree that Venezuela fits your description, many hyperinflation scenarios in Latin American countries throughout the 80's did not. Think of Brazil, for example. Back then, it already had a sizable industry and a powerful agroindustry. Still, it had extremely high annual inflation, reaching over 6000% in April 1990. Same with countries such as Argentina and Mexico: not exactly weak economies without industry or human capital. Instead, they had extremely loose monetary policies designed to finance gigantic deficits created by overindebtedness, pushed to the brink by sudden capital and export reversals that led to a current account crisis.

Also, I repeat my point of sample bias regarding the analysed periods for the EU, Japan and China.

Peru had hyper-inflation, a huge foreign debt, the capitalist world economy in the 80's was sinking, and this is because the capitalist and imperialist bourgeoisie wanted it that way, they themselves create the crisis and benefit from those crises. For those who want inflation and hyper-inflation for the capitalist bourgeoisie and imperialists themselves, who control market prices and can inflate prices. Furthermore, printing money does not cause it to generate inflation, but on the contrary it makes it stop inflation. If again the private company continues to raise prices consecutively from time to time, then it is necessary to expropriate the means of production.

This article fails to distinguish between consumer goods prices (CPI inflation), and asset prices. M2 is spendable cash money in our pockets and spendable deposit account balances in our checking accounts and current accounts. Savings account balances are not counted as spending money. Commercial banks create new bank deposits to fund their bank loans. People and businesses get bank loans to spend or invest the new bank deposits, not to keep them as savings account balances. The new bank deposits are the new buy-money.

Most commercial bank credit is created to finance debtors’ asset purchases - mainly real estate. In the past few years corporations have been borrowing cheap bank credit and using the new money to buyback their corporations’ own shares, which simultaneously bids up the buy-sell prices of corporate shares, and increases the price-to-earnings ratio of the reduced number of still outstanding shares. Car loans inflate the buy-sell price of cars. Student loans inflate the buy-sell price of college tuition. If banks didn’t make the loans, there would be far less buyers who have money to buy houses, corporate shares, cars, college educations, etc. So sellers would have to drop their ask prices to compete for the limited supply of buyers’ money-spending.

Commercial bank credit-debt expansion - which is money supply inflation - inflates the buy-sell prices of whatever kinds of stuff (mainly mortgageable assets) the loans are used to buy. Increasing credit card debt that is used to finance consumer goods purchases inflates consumer goods prices as measured by the CPI. People spend money that they earn; and people deficit-spend the money that they borrow as bank loans. Adding buy-money to the demand side of the demand-supply equation, enables sellers of stuff to sell their supply of goods, services and assets at higher prices to the debtors who spend their new bank loans buying the stuff. “Monetarism” - the simple relationship between increasing buyers’ spendable money and increasing sellers’ earnable prices - is not wrong. You just have to apply it to the right prices: mainly asset prices, not consumer goods prices.

Agreed

Inflation means the appreciation of goods and services, and the reason of course is the supply-demand ratio and the cost that is determined by the cost of the labor and the state and the investments made. If easy money does not turn into a search for goods and services or investment, if wages and taxes do not rise, from where the hell is to take inflation? The money goes into the pockets of the richest. That's the whole mystery. From where if wages are not rising, and the share of the hired workers in GDP of the world economy is decreasing? Income decreases and business costs are decreasing. Easy money reduces investment costs and increases labor productivity.

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

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 www.taxpolicyusa.wordpress.com

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.

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.

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.

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.

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

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.

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.

Hey, there is a 404 on this link:

http://www.privatedebtproje...
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?

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.

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.

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 Mischief graphs.

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"?

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...
https://fred.stlouisfed.org...

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.

"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/...

Excellent article - we need more like this