Thursday, April 1, 2021

Is Money Supply Growth The True Definition Of Inflation? — Brian Romanchuk

No, but a lot of people still think so, even after the "widow-maker" trades that followed expectations generated by this erroneous interpretation of what would result from QE when the Fed introduced it in response to the GFC. They should ask former "bond-king" Bill Gross about it. Remember him?

MV = PQ (or PT) is an accounting identity if properly understood, but imputing causality in the wrong way results in error even if one understands the symbolism correctly. Or making assumptions that do not hold in the real world, like holding V and Q aka T constant, and taking M as the independent variable and P as the dependent.

Milton Friedman is, of course, remember for his interpretation of monetarism along these lines. It was tested in the crucible of monetary policy and failed as theory of inflation that could be used to formulate a rule.

Henry Hazlitt, a talented writer that was not an economist, was perhaps the most influential in disseminating this idea in his book, Economics in One Lesson (1946), about "inflation." It is apparently still influential since it "simplifies" a complex economic idea for the masses.

One could compare Economics in One Lesson with Stephanie Kelton's The Deficit Myth as influencersThey are popular accounts about essentially the same issue. Now that solvency is being brushed off the table in policy discussion in favor of the inflation constraint, The debate is more focused where it should be, because it actually matters, on inflation.

What is needed now is a popular book on inflation that responds to Hazlitt's Economics in One Lesson.

Brian looks at a more sophisticated Austrian view in this post.


Ralph Musgrave said...

Probably the main reason for confusion on the definition of the word inflation is that it actually USED to be defined as an increase in the money supply - at least in the Oxford Dictionary. Roughly 20 years ago they were still defining it that way and I contacted them and told them to get with it and change to the new defionition, i.e. "rising prices" or something like that.

Unknown said...

The money supply was massively increased when the UK started using banknotes issued by both the Bank of England and "Country" banks this was one of the main factors that led to the Industrial Revolution. A currency technology change accelerated growth because an increased number of individuals no longer had to worry about building up large credit tabs because paper based currency in lower denominations became available especially from the "Country" banks as well as employer issued tokens all serviced by good local as well as national payment settlement systems.

Matt Franko said...

“ at least in the Oxford Dictionary ... and I contacted them and told them to get with it ...”

You’re a boss Ralph...

Mike Norman said...


They assume Q and V are constants when they are VARIABLES. Exactly.