Posted by:
Lot's Wife
(
)
Date: July 12, 2023 02:17PM
"Inflation is everywhere and always a monetary phenomenon."
--Milton Friedman, 1963
But what that aphorism underemphasizes is the connection to the real economy. What matters is the volume of credit versus the underlying supply/demand balance.
If demand surges after, say, the COVID lockdowns, prices will rise even if the money supply remains constant because people insist on satisfying their pent-up demand. Conversely, if supply shrinks because of an OPEC oil embargo as in 1973, prices will rise even if the money supply is the same because people need energy at any price.
Friedman made this clear when he devised his idea of quantitative easing to fight deflation and depression. The whole point of "helicopter money," meaning his idea of flying over the US and dumping money on poor people, was to increase demand. The rationale was that rich people would just save the incremental windfall and hence not increase demand and prices whereas poor people would spend almost all of their windfall gains because they need food and other staples. Expanding the supply of credit was a great way to stimulate inflation if and only if demand for goods and services rose. In other words, you needed a combination of monetary stimulus and demand stimulus.
Consider the Equation of Exchange, MV = Py, which Friedman had on his car's vanity plate (see below*).
M = supply of money
V = velocity of money, which is how fast it changes hands
P = price level, usually measured as the CPI
y = GDP
If you rearrange the terms, you get P = MV/y, meaning that any change in the money supply, the velocity with which money changes hands, or GDP will influence the price level. It's not just money. It's the balance between money and spending.
Does that qualify as "common sense?"
*Here's the license plate.
https://pbs.twimg.com/media/CglN45qXEAAm9AH.jpgEdited 2 time(s). Last edit at 07/12/2023 02:40PM by Lot's Wife.