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Page added on November 29, 2018
A Rising Money Supply Doesn’t Necessarily Lead to Rising Prices
According to many mainstream economists, a lack of good correlation between the monetary growth and the growth rate of various price indexes casts doubt on the commonly held view that the key source of inflation is increases in money supply.
It is also argued that before the 1990, the relationship between money supply and inflation was positively correlated. However, from 1990 onwards in the US and other major economies this correlation ceased to exist.
Some commentators have concluded that while in the past the increase in money supply had an effect on inflation this is not the case at present.
We suggest that the lack of correlation between the growth rate of money supply and the inflation rate does not prove that money has nothing to do with inflation.
The main issue here is not about the strength of the statistical correlation but about the definition of what inflation is all about.
Observe that by popular view inflation is defined as increases in the prices of goods and services, which is depicted by the growth rate of various price indexes such as the consumer price index (CPI).
Some economists such as Ludwig von Mises and Murray Rothbard, following in the footsteps of classical economists, regard inflation as increases in money supply. So how are we to decide about the correct definition of inflation? Is it about increases in the money supply or increases in prices?
The Essence of Inflation
The purpose of a definition is to present the essence, the distinguishing characteristic of the subject we are trying to identify. A definition is to tell us what the fundamentals of a particular entity are. To define a thing we need to go to the origin of how it has emerged.
For Mises and Rothbard the subject matter of inflation is not just increases in the prices of goods and services but an act of embezzlement.
Historically inflation originated when a country’s ruler such as the king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens. On this Rothbard wrote,
More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks”, but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.1
(See also “Easy Money, Easy Morals” by Joseph Salerno.)
On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins and pocket for his own use the extra coins minted. What was now passing as a pure gold coin was in fact a diluted gold coin.
The increase in the number of coins brought about by the dilution of gold coins is what inflation is all about.
Note that what we have here is an inflation of coins i.e. an expansion of coins. As a result of inflation, the ruler can engage in an exchange of nothing for something (he can engage in an act of diverting resources from citizens to himself).
Under the gold standard, the technique of abusing the medium of the exchange became much more advanced through the issuance of paper money un-backed by gold. Inflation therefore means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.
The holder of un-backed receipts can now engage in an exchange of nothing for something. What we have is a situation where the issuers of the un-backed paper receipts divert real goods to themselves without making any contribution to the production of goods.
In the modern world, money proper is no longer gold but rather paper money; hence inflation in this case is an increase in the stock of paper money.
Observe that we do not say as monetarists are saying that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.
If we were to accept that inflation is increases in money supply then we will reach the conclusion that inflation results in the diversion of real wealth from wealth generators towards the holders of newly printed money.
We will also reach the conclusion that monetary pumping i.e. inflation is bad news for the wealth generating process. No empirical study is required to confirm or to refute this.
How can we then reconcile strong monetary pumping with moderate increases in prices, which is labeled as low inflation?
The price of a good is the amount of dollars paid for the good. If the growth rate of money is 5% and the growth rate of the supply of goods is 1% then prices will increase by 4%. If however, the growth rate in the supply of goods is also 5% then no increase in prices is going to take place, all other things being equal.
If one were to hold that inflation is the increase in the CPI then one will conclude that despite the increase in money supply by 5% inflation is 0%.
However, if we were to follow the definition that inflation is about increases in the money supply then we will conclude that inflation is 5%.
From the above example increases in the money supply need not always be followed by general increases in prices.
Prices are determined by both real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. While the money growth i.e. inflation is buoyant, prices might display low increases.
28 Comments on "A Rising Money Supply Doesn’t Necessarily Lead to Rising Prices"
Darrell Cloud on Thu, 29th Nov 2018 4:07 pm
If trillions are parked in assets owned by the .05% then the conjured money never hits the street and it does not drive up prices.
makati1 on Thu, 29th Nov 2018 6:00 pm
Economists, financial advisors and the oily gurus are all bullshitters trying to get your buck by reading chicken bones or fish guts and pretending they know something you don’t. This article is no different.
I deliberately read about 100 financial articles this week and they ALL were selling something and not 10% of them could agree on anything in the future. All full of if’s and maybes and all referring to past events, which happened long ago, to substantiate their claims. Leeches all.
No one knows what tomorrow will bring except that it will be worse than today because of the path we have chosen as a species. Collapse is ongoing and will likely happen slowly and then all at once.
Prepare for the worst and hope for the best is all we can do. Are you preparing? .
makati1 on Thu, 29th Nov 2018 6:14 pm
A good description of America:
“…How could that happen in America, if not for the propaganda spewed by the Orwellian Media? To be sure, with every morsel savored, and swallowed, by the vapid dullards of a dying nation….
In the meantime, hypnotized MK Ultra-type loners, high on psychotropic chemicals and under psychiatric care, will continue to break from their prolifically bizarre social media postings in order to shoot little children in gun free zones; as the Orwellian Media paints emotionally manipulative and contrived photo narratives of cartoon-clad illegal invaders using children as pawns in a political scam…
We’re a nation of hollow men, straw men, empty men. A land of therapists, pill dispensaries, coffee houses, fitness facilities, yogurt shops, and hot yoga dens. A people living on imaginary, and regurgitated, green paper vapers for so long, we only know how to recycle anymore. It’s why we build new retail outlets on streets overrun with vacancies and going-out-of-business signage; like a rimfire, and in the center, ashes.
As the plunderers, looters, and slumlords have transitioned American cities into third-world shitholes, the online Titans have created hi-tech online checkpoints. Papers please….”
https://www.theburningplatform.com/2018/11/28/a-veritable-feast-of-reality-choice-and-consequences/#more-187597
Slip slidin’…
Davy on Thu, 29th Nov 2018 6:22 pm
billy, you haven’t lived in the US in a decade or so except for a couple of brief visits to PA. You don’t know what is going on here anymore. Your mind is in an internet fantasy world.
makati1 on Thu, 29th Nov 2018 6:41 pm
“25 Basic Life Skills That Should Be Taught In School (But Aren’t)”
“Think of the vast amount of time that students spend in school. But what do they come away knowing? They are taught very few life skills, so are they really prepared for the real world?…
So in the list below, think of what it would be like if schools were ideal and actually preparing people to live meaningful lives.”
http://www.alt-market.com/articles/3584-25-basic-life-skills-that-should-be-taught-in-school-but-arent
Did you buy that bulletproof backpack for your kid this year? LOL
I AM THE MOB on Thu, 29th Nov 2018 8:16 pm
Mak
Why do you care what the hell is taught in school..You didn’t even graduate from college..You were an ignorant carpenter..
All the students in school right now will be likely dead within the next ten years..Including your grandchildren..
makati1 on Thu, 29th Nov 2018 8:16 pm
Delusional Davy: “billy, you haven’t lived in the US in a decade or so except for a couple of brief visits to PA. You don’t know what is going on here anymore. Your mind is in an internet fantasy world.”
You ASSume that you know all about me. You ASSume too much. I have been back to the States for several weeks every year since I moved here. I have family and friends all over the US that I communicate with regularly. I have access to the internet that tells me a lot about real conditions there, as I do not read the US MSM propaganda you obviously suck up.
You do not have to wade thru shit to know you are in a barnyard. I see the changes with every visit. I am a frog that jumps into the pot annually and can feel the water getting hotter so I jump back out. Soon, I will not make the trip as the water is reaching boiling point and the gates to leave again will be closed. Wait and see.
makati1 on Thu, 29th Nov 2018 8:19 pm
MOB, your ignorance and lack of intelligence is showing again! You broadcast your immature stupidity to everyone who reads your bullshit here. Isn’t it embarrassing to be a worthless snowflake?
Davy on Fri, 30th Nov 2018 4:23 am
I have been back to the States for several weeks every year since I moved here”
Exactly billy and in one spot in PA is all the more direct understanding you have of the US. The rest is cherry picked internet horrors. You are as bad as flag waivers saying all is well. You are disqualified as an extremist to comment on real life in the USA.
Davy on Fri, 30th Nov 2018 7:09 am
Just come on little convoy, we’re gonna make it through the night, convoy.
Breaker, breaker, this is the ExcpetionalistTurd and I need this pussy fucked.
JuanP on Fri, 30th Nov 2018 7:36 am
Nobody needs to live in the USA to understand what it is, Exceptionalist. Your argument is simply not valid.
Davy on Fri, 30th Nov 2018 7:50 am
Meandering again dirty juan? Why no identity theft today and where did Boney Juan go. I didn’t know you were a cocaine fan. Yet, it fits your personality and Miami Beach lifestyle.
Davy on Fri, 30th Nov 2018 8:14 am
Oops, Yeap, sneaky dirty Juan did his identity theft. Lol
Davy on Fri, 30th Nov 2018 7:09 am
joe on Fri, 30th Nov 2018 10:18 am
Inflation (price rises) matters to those on drip drip drip wage rises. Its matters because they are the consumer of the goods produced. The million dollar CEO bonus essentially does not matter economically because it’s money that won’t be spent, or if it is, it will be on luxuries such as million dollar educations, but that money won’t move far. Much of America’s wealth is being traded to China for Iphones and other crap, or being used to buy luxury European cars.
JuanP on Fri, 30th Nov 2018 1:23 pm
Do you see me in your nightmares, too, Davy? Late in the night when the lambs are crying? ROFLMFAO! Little wonder you can’t face the truth about your nature and your country. You are, essentially, a monster and the USA is the biggest terrorist organization in human history, and you, widdle Davy, can’t face the truth.
Davy on Fri, 30th Nov 2018 2:31 pm
Dirty Juan, don’t flatter yourself. You are a nothingburger. You make noise and soil the board like a rodent that is about it. You are a freeloading mooch who needs to be deported.
JuanP on Fri, 30th Nov 2018 5:19 pm
I am still here, Exceptionalist! Get used to it! Why don’t you stop moaning and whining like a whore?
makati1 on Fri, 30th Nov 2018 5:43 pm
JuanP, your description of Davy is spot on! A whining bitch that cannot accept any reality that makes the schoolyard bully look bad. He supports the biggest, most arrogant and selfish terrorist organization in the history of the world and cannot accept that that is the cause of the disintegration of all he has and will ever have.
But then, his poor marriages proves that: like his country goes, so goes Davy. Spoiled, arrogant bullshitters that are getting their ass kicked by the rest of the world and well deserved.
I AM THE MOB on Fri, 30th Nov 2018 5:55 pm
Mak
Older people can come to believe their own lies
New research shows that within an hour of telling a falsehood, seniors may think it’s the truth. Findings suggest that telling a falsehood scrambles older people’s memory so they have a harder time recalling what really happened.
http://www.brandeis.edu/now/2018/november/lying-old-gutchess%20.html
Your brain is scrambled..
LMFAO!
Davy on Fri, 30th Nov 2018 5:58 pm
“A whining bitch that cannot accept any reality that makes the schoolyard bully look bad.”
LOL, listen to the whining bitch act like a school yard bully. What a stupid old man
Davy on Fri, 30th Nov 2018 6:00 pm
“I am still here”
LOL, another idiot whining bitch acting like a school yard bully.
makati1 on Fri, 30th Nov 2018 7:31 pm
MOB, do you EVER think for yourself? It is not evidenced by your posts here. Copies of others work, childish putdowns, your own lack of education or experience with real life, etc. Do you realize how stupid they make you look to the rational, intelligent people here? Obviously not or you would not do it.
Why don’t you just off yourself like you told everyone here that you would do in your early posts? Suicide is the mark of a coward, not a mark of intelligence. But then all ‘snowflakes’ are brainwashed babies and will never grow up.
makati1 on Fri, 30th Nov 2018 7:38 pm
Davy, getting senile or is it the drugs? You are now resorting to parroting the descriptions others use here to describe you. Finally realizing that your bully tactics don’t work here?
Can’t look in a mirror can you? Why? Because you know that you would see a loser. A worthless piece of goat dung that has no life outside PO. A failing government/family teat sucker with nothing worth living for. Do the world a favor and just take MOB’s way out.
Davy on Fri, 30th Nov 2018 7:58 pm
Billy, don’t attack me and you won’t get hurt. You drew first blood above you whining bitch.
fmr-paultard on Fri, 30th Nov 2018 8:41 pm
Aswang u attack supertard because u an extremist
makati1 on Fri, 30th Nov 2018 10:49 pm
Davy, you drew ‘first blood’ many years ago, and continue it until now. You cannot touch me so any school yard bully threat is laughable. You are nothing. A brainwashed, arrogant American. A zero.
Words don’t hurt. Especially your bullshit, which I mostly ignore. I consider the sick source. I see a fat nine year old standing in the school yard threatening some skinny nerd he doesn’t like and demanding his lunch money ‘or else’. Grow up Davy.
Free Speech Message Board on Sat, 1st Dec 2018 3:02 am
Wow.
Having critical thinking skills means that you’re a Jew?
The USA is now an immoral bankrupt warmongering police state flooded with illegal immigrants.
Americans bitch and complain that they are victims of the Jews, but how can Americans say that they aren’t responsible for anything?
If the Jews tell you to be immoral and you are immoral then whose fault is that?
If the Jews tell you to go in debt and you are in debt then whose fault is that?
If Americans hate wars then where are the war protests?
If Americans hate illegal aliens then where are the protests?
If Americans love freedom then why do they beg for more laws?
Do Jews outnumber white people?
Can’t white people start movie studios, media companies, and stock markets?
Are Americans crippled retards?
How can Americans sleep at night while the USA collapses?
How can Americans look in the mirror today without feeling disgusted?
Davy on Sat, 1st Dec 2018 4:50 am
“Davy, you drew ‘first blood’ many years ago, and continue it until now. You cannot touch me so any school yard bully threat is laughable.”
Then why do you come out wildly attacking me in your morning and through punches through the day at me? I think you are wounded and whining. Your best friends have gone and now you are struggling to maintain what little remains of the ugly esprit de corps of your group censorship club. Now you are on the receiving end and whining. Who is acting out the schoolyard bully? Billy you are losing brain cells by the day. You force the same old lame message of US collapse and the Asian Phoenix. It’s a joke. You package cherry picked facts that are presented as lies. They are no longer potent. You need to get out of your rut but in your case you are too old. People your age never grow up they die.