Most economists have stopped using money supply as an indicator for inflation since the early 1980s
- Most mainstream economists attribute the breakdown in the correlation between the money supply and inflation on the unstable velocity of money
- The famous equation of exchange, MV = PT, where MV = P/M stands for money, V stands for velocity, P stands for the price level, and T for the volume of transactions, is a very useful analytical tool
- If velocity is stable, then money is a powerful tool in tracking the economy
- Since innovations in financial markets made money velocity unstable, this makes money an unreliable indicator of inflation
Defining Inflation
- Inflation is defined as the increase of the money supply out of "thin air"
- Increases in money supply set economic impoverishment in motion by creating an exchange of nothing for something, the so-called counterfeit effect
- Price increases are determined by both real and monetary factors
- It can occur that if the real factors are "pulling things" in the opposite direction to monetary factors, no change in prices will occur
Defining Money Supply
- Prior to 1980, it was popular to employ various money supply definitions in the assessment of the changes in the prices of goods and services.
- Since the early 1980s, correlations between various definitions of money and national income have broken down.
- Some analysts believe that this breakdown is because of changes in financial markets, making past definitions of the money irrelevant.
Conclusion
- What matters as far as inflation is concerned is not the correlation between money supply and the prices of goods and service but increases in money supply.
- Money is a thing that is employed as a medium of exchange. Following this definition, we can establish that the key damage of inflation is economic impoverishment through the exchange of nothing for something.
https://mises.org/wire/inflation-money-supply-growth-not-prices-denominated-money
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