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Monday, January 10, 2022

The Linkage Between Money Supply and Inflation

For many years now but especially after the 2008/2009 great financial crisis (GFC), a number of observers began to fret about the effect of increases in the money supply on inflation. At the same time, however, other economists and pundits voiced the opposite – inflation was too low and deflation was the real danger.
Well, depending on where you looked, since 2000, we did have some serious inflation. But in consumer prices, it was a comparative yawner. The potentially dangerous consumer price inflation (with resultant higher interest rates) materialized but briefly on the eve of the GFC before diving and then recently re-emerging in the second half of 2021.

But if one looked at asset prices, it was another story altogether. Stocks and the housing markets took off after the GFC and so did cryptocurrencies. Asset inflation swallowed the bulk of the easy money. And the gains were breathtaking.


Then came COVID and the gains in the money supply became increasingly breathtaking. And now we begin to see the attempt to “disconnect” the money printing from the inflationary beast on our doorstep. So now we have talk of supply line problems, crop failures, wars, floods, etc. Well, some of this is true – we have a potential perfect storm. COVID and other disruptions reduced or moderated economic outputs while vast sums of money were printed and distributed by nations around the world – a classic case of more and more money chasing fewer (or at least not an increasing amount of) goods.
But what really caught my eye was a particular apparent attempt to downplay the role of the money supply in any potential future hyperinflationary scandal. And it was captured brilliantly by ShadowStats. Here is the official US M1 (annotated):