Inflation is always a monetary phenomenon
Here is Mark Thoma with a robust defence of Friedman’s Inflation which is “…not what your friendly newscaster means when reporting the monthly inflation rate on the nightly news.” Friedman’s Inflation only covers
” … cases in which the price level is continually rising at a rapid rate. It is this definition of inflation that Friedman and other economists use when they make statements such as “Inflation is always and everywhere a monetary phenomenon… Our aggregate demand and supply analysis shows that high inflation can occur only with a high rate of money growth. As long as we recognize that inflation refers to a continuing increase in the price level at a rapid rate, we now see why Milton Friedman was correct when he said that “Inflation is always and everywhere a monetary phenomenon.” read more at economistsview
But is it?
I wonder how Professor Thoma would grade this recent essay from an LSE student :
lse blog 2021 THE CHANGE OF PARADIGM OF MILTON FRIEDMAN student essay
“Milton Friedman succeeded because Keynes had to be buried. It came out that the paradigm of the curve of Philips blew up, and the world was facing stagnation along with inflation. As Keynesianism couldn’t come up with an answer to unemployment and inflation at the same time, monetarism was imposed as the only way to control the situation. Instead of putting all the eyes on unemployment, inflation started to be the overall nightmare. Inflation started to be seen as a disease for the society. Indeed, it was able to destroy it.
There were the examples of Germany, Austria, and Russia after World War I, when employers would pay their workers three times a day, after breakfast lunch and dinner so they could go out to spend it before it lost all its value.
So Milton Friedman came on and explained his theory of the causes of inflation. The first step to understand Friedman’s theory, is to accept that inflation is always a monetary phenomenon. It’s always a result of too much money, of more rapid increase in the quantity of money than in an output. Moreover, in the modern post gold era, his important intellectual basis was that governments control quantity of money. So, he would say that “inflation is made in Washington DC”.
So Milton Friedman came on and explained his theory of the causes of inflation. The first step to understand Friedman’s theory, is to accept that inflation is always a monetary phenomenon. It’s always a result of too much money, of more rapid increase in the quantity of money than in an output. Moreover, in the modern post gold era, his important intellectual basis was that governments control quantity of money. So, he would say that “inflation is made in Washington DC”. In Milton Friedman’s thought it’s a printing press phenomenon. He spend his life trying to prove that there had never been in history a monetary supply growth without being followed by inflation. “Evidence is in the linkage between both” he would say.
The question is, why? Why does this happen? …
In both cases, we can see that whereas money supply is in a constant increase during the whole period,
inflation slumps over 1975 drastically after measures taken by Governments to fight oil price increase.
If as Friedman said pressures in costs barely affect inflation, inflation should had followed the same
path of the money supply.
As we can see, American Quantitative Easing policy exactly proved the opposite of what Milton
Friedman supported. From a monetarist point of view, the paradigm has oppositely changed due to
the fact that a huge increase of monetary supply has not lead to inflation. On the contrary, we´ve got
money supply inflation without price inflation. …
We can perfectly tell Milton Friedman that Inflation is “not” always and everywhere a monetary
phenomenon. Besides, there is evidence of the strength that public spending has when aggregate
demand is slumping. Austerity measures are proving counter-stimulating in Europe due to a simple
axioma: if you are flying and the plane´s got too much weight, last thing you would drop would be the
engines.”
Martin Armstrong also feels strongly about Clinging to Old Theories of Inflation:
“The sad part is these people who just yell and scream that I am wrong because inflation is caused by only a rise in the supply of money, to be as polite as I can, they are just incapable of understanding complex systems. Even in nominal terms, inflation can be caused by different simulations.
The currency declines and we have asset inflation as I just laid in the USA from 1934 to 1937, or just look at Turkey and Venezuela in real time. The stock market rises in proportion to the decline in value of the currency because assets retain an international value.
Then we have asset inflation as in the DOT.COM bubble where capital is rushing into some new hot investment sector. That specific asset will rises in value against all other assets. This is caused by speculation and is NOT a reflection of the decline in value of the currency. This is easily distinguished as one sector rising compared to all sectors rising because of a decline in currency value.
Then we have demand inflation, which can be illustrated by a sudden shortage of a particular product. This has appeared in commodities as the result of a serious weather condition that results in a shortage of food due to crop failures. This type of inflation has also appeared at Chrismas time when some doll becomes the new rage as was the case with Cabbage Patch Dolls. …
This is just not a simple equation for increasing the supply of money = inflation. … You have to look at the whole system. Anyone who says inflation is created by an increase in money supply is off the reservation clinging to old theories that ignore debt, banking leverage, international capital flows, and that is just the beginning. … Inflation and interest rates follow a Bell Curve. Everything will be normal until confidence is lost. Once that threshold is crossed, then hyperinflation begins and interest rates rise in a desperate move to try to attract capital and confidence.
Clinging to Old Theories of Inflation
“There is yet another dimension that you have to add to this complexity. The BULK of the money is actually created by the banks in leveraged lending. If I lent you $100 and you signed a note that you would repay it, then the note becomes my asset on my balance sheet. I can take that to a bank and borrow on my account receivables. In this instance, just you and I are creating money. Now let a bank stand between us. I deposit $100 and they lend it to you. We now both have accounts that show we have $100. We just doubled the money supply and nobody printed anything. These theories they cling to are old and antiquated. They pre-date even consumer credit and go back to the days of Gresham’s law from the 16th century. I think a few things have changed since then.”