In the recent Wall Street Journal article “Inflation Surge Earns Monetarism Another Look,” Greg Ip writes that a recent surge in inflation is not likely to bring authorities to reembrace monetarism. According to Ip, money supply had a poor record of predicting US inflation because of conceptual and definitional problems that haven’t gone away.
The head of the monetarist school, the late Milton Friedman, held that inflation is always and everywhere a monetary phenomenon. Friedman and other monetarists believed that the key driving factor for general increases in prices is increases in money supply.
This viewpoint has come under scrutiny since the early 1980s because the correlation between inflation and money supply disappeared. According to Ip in 2020, Alan Detmeister, an economist at UBS Group AG and formerly of the Fed, found inflation’s correlation to M2 since the early 1980s was weak and its correlation to both the monetary base and M1 was negative. Most economists have stopped using money supply as an indicator for inflation since the early 1980s.
Many mainstream economists have attributed the breakdown in the correlation between the money supply and inflation on the unstable velocity of money. What is it? According to the famous equation of exchange, MV = PT, where:
- M stands for money,
- V stands for the velocity of money,
- P stands for the price level, and
- T for the volume of transactions.
This equation states that money multiplied by velocity equals the value of transactions. Many economists employ GDP (gross domestic product) instead of PT, thereby concluding that
MV = GDP = P (real GDP).
The equation of exchange appears to offer a wealth of information regarding the state of an economy. For instance, if one were to assume stable velocity, then for a given stock of money one can establish the value of GDP. Furthermore, a given real output and a given stock of money enables us to establish the price level.
For most economists the equation of exchange is regarded as a very useful analytical tool. The debates that economists have are predominantly with respect to the stability of velocity. If velocity is stable, then money is seen as a very powerful tool in tracking the economy. The importance of money as an economic indicator however diminishes once velocity becomes less stable and hence less predictable.
However, an unstable velocity could occur because of an unstable demand for money. Most experts believe that since the early 1980s, innovations in financial markets made money velocity unstable. This in turn made money an unreliable indicator of inflation.
We believe the alleged failure of money as an indicator of inflation emanates from an erroneous definition of inflation and money supply. This failure has nothing to do with an unstable demand for money, and just because people change their demand for money does not imply instability. Because an individual’s goals may change, he might decide that it benefits him to hold less money. Sometime in the future, he might increase his demand for money. What could possibly be wrong with this? The same goes for any other goods and services—demand for them changes all the time.
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Defining Inflation
According to Murray Rothbard and Ludwig von Mises, inflation is defined as the increase of the money supply out of “thin air.” Following this definition, one can ascertain that increases in money supply set economic impoverishment in motion by creating an exchange of nothing for something, the so-called counterfeit effect.
General increases in prices are likely to be symptoms of inflation—but not always, however. Note that prices are determined by both real and monetary factors. Consequently, it can occur that if the real factors are “pulling things” in an opposite direction to monetary factors, no visible change in prices is going to take place. If the growth rate of money is 5 percent and the growth rate of goods supply is 1 percent then prices are likely to increase by 4 percent. If, however, the growth rate in goods supply is also 5 percent then no general increase in prices is likely to take place.
If one were to hold that inflation is about increases in prices, then one would conclude that, despite the increase in money supply by 5 percent, inflation is 0 percent. However, if we were to follow the definition that inflation is about increases in the money supply, then we would conclude that inflation is 5 percent, regardless of any movement in prices.
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. The criterion for the selection of a particular definition was its correlation with national income. However, 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 money irrelevant.
A definition presents the essence of a particular entity, something no statistical correlation could ever provide. To establish the definition of money we have to explain the origins of the money economy. Money has emerged because barter cannot support the market economy. Money is the general medium of exchange and has evolved from the most marketable commodity. Mises wrote:
There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.
Since the general medium of exchange was selected out of a wide range of commodities, the emerged money must be a commodity. Rothbard wrote:
In contrast to directly used consumers’ or producers’ goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium to the previous demand for direct use (e.g., for ornaments, in the case of gold).
Through an ongoing selection process, individuals settled on gold as standard money. In today’s monetary system, the core of the money supply is no longer gold, but rather coins and notes issued by the government and central bank that are employed in transactions as goods and services are exchanged for cash. Hence, one trades all other goods and services for money.
Part of the stock of cash is stored through bank deposits. Once someone places money in a bank’s warehouse, he is engaging in a claim transaction, never relinquishing his ownership of the money. Consequently, these deposits, which are labelled demand deposits, are part of money.
This is contrasted with a credit transaction, where the lender relinquishes his claim over the money for the duration of the loan. In a credit transaction, money is transferred from a lender to a borrower, but the overall amount of money in the economy does not change because of the credit transaction.
The introduction of electronic money seems to cast doubt on the definition of money. It would appear that deregulated financial markets generate various forms of new money. Notwithstanding, various forms of electronic money or e-money, like digital currency, do not have a “life of their own.”
Various financial innovations do not generate new forms of money but rather new ways of employing existing money in transactions. Irrespective of these financial innovations, the nature of money does not change. Money is the thing that all other goods and services are traded for. Once the essence of money is established by excluding various credit transactions, one can identify the status of inflation. Changes in prices are not going to be relevant here.
Conclusion
Contrary to popular thinking, inflation is not about increases in the prices of goods and services but about increases in money supply. Following this definition, we can establish that the key damage caused by inflation is economic impoverishment through the exchange of nothing for something. 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.
Contrary to popular thinking, the essence of money did not change because of various financial innovations. Money is a thing that is employed as a medium of exchange. Furthermore, according to Mises’s regression theorem, the historical link between paper currency and gold is what holds the present monetary system together.
Editor’s Note: We recommend two America First precious metals companies. Our Gold Guy specializes in physical gold and silver bullion. Goldco offers a wide array of products, including gold and silver IRAs. Both are excellent choices for wealth and retirement protection.
About the Author
Frank Shostak‘s consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies. Contact: email.
Image via Shutterstock. Article cross-posted from Mises.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
