Johnny Lee’s apt warning in his hit song “Lookin’ For Love In All The Wrong Places” suggests you cannot find what you seek unless you know what you are looking for and look in the right place. The same might be said about “inflation.” It turns out that too many people are looking for the wrong response to the relentless expansions of money and credit overseen by the Federal Reserve.
In the wake of the ongoing (never ending?) implementation of “unconventional” policies (e.g., ZIRP, NIRP, QE, LSAP, etc), most monetary aggregates have soared to previously unimaginable heights. In turn, those schooled in or influenced by Monetarism, especially if guided by the seminal works of Milton Friedman, are looking for “inflation” as measured as rising price levels as indicated by indices like the CPI or PCE.
It may be worthwhile to make a point concerning what is meant by “inflation.” Among Classical Economists, inflation was the act of creating excessive rates of growth of the circulating medium at the time. In practical terms, an inflated money supply leading to disequilibrium was depicted as a cause of economic instability.
However, the success of Monetarists during the second half of the 20th century, especially in explaining the “stagflation” during the 1970s, led its usage to describe an effect of monetary expansions. This is seen by examining the “equation of exchange” used to support the Modern Quantity Theory of Money.
While the equation of exchange appears in various forms, we will use the following:
MV = Py;
M is money supply growth,
V is velocity of circulation (the inverse of the demand for cash balances),
P is the price level (e.g., CPI or PCE),
y is a measure of output (e.g., GDP)
- America’s Future is Not So Bleak as You May Be Inclined to Believe
- The Great Currency Crisis of Our Lifetimes Is Starting Now
- From October 1, German streets will be patrolled by the military to prevent riots
- The Truth About the Criminal Sabotage of the Nordstream 1 and 2 Pipelines
- Fired up and blasting the NWO: Italy’s new Prime Minister Giorgia Meloni sums it up perfectly. No wonder the elites and establishment don’t want her to succeed.
- Drunk driving could soon be impossible thanks to new, mandated intrusive computer chips in cars
- The USDA Wants You To Register Your Garden
- A Major Country is Imploding…
- Alleged Neo-Nazi Kills 15 Including 11 Children in School Shooting
- Credit Crunch Has Arrived To The UK – No One Wants To Invest In A Collapsing Economy!