Monday, October 25, 2021

Inflation And Money Supply (duh…)

 Aren’t you sick and tired of hearing that inflation is due to “temporary supply chain disruptions”? 

If you aren’t, may I respectfully suggest you apply for a Nobel Prize in Economics to throw out the one awarded to Milton Friedman for proclaiming (among other things) that “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.

But since I am myself sick and tired, and I most definitely do not claim a Nobel, here’s a graph that Mr. Friedman would agree with and shake his head: the change in nominal GDP and M3 money supply between 4Q2019 and 2Q21. - see below.

GDP (ie economic output) increased by $1.3 trillion versus an increase of $4.3 trillion in M3 money supply (ie the quantity of money) in the same time. This $3 trillion gap, approx. 13% of US GDP, is the real cause and enabler of inflation. Period, end of story.

It is highly probable that things got even worse in 3Q2021 because GDP growth slowed sharply (see previous posts on GDPNow) while the Fed has kept the printing presses running.

Inflation and money supply connected? Well, duh…. 

CPI Inflation Year Over Year 


  1. let me try to take the opposite position, not that I really believe in it.

    can we say that printing adds to M0 money; but only M3 is correlated to inflation? Since M0 is a small fraction of M3; it is theoretically possible to print money without inflation. For example, one could print money then create an enforced saving scheme; Nazi Germany did that and so is China / Hong Kong.... This way, the printed money never enters circulation and thus increases M0 but not M3.

    btw, now that I am typing this, I am wondering, why is M3 correlated to inflation but not M0, M1, M2 or M4...

    1. Money that circulates is always linked to inflation. If you print it but then withdraw it by enforced sequestration then it does not circulate…for example, if the Fed started selling bonds.

    2. cool!... do you have an intuition for why M3 instead of one of the other M metrics?

    3. It holds for all of them, Μ3 is just the broadest. ie the one that includes everything

    4. thanks for educating; I am asking because the M1 curve looks like an impulse function.... If inflation follows M1, it is going to be a few thousand percent...

    5. M1 was changed recently to include more stuff. It’s not comparable to before, hence the “impulse”


      ahhhh.... thanks man! great having you around...