Less money, fewer problems? | Financial Times
Chasing money is a very difficult thing. Many attempts to determine the exact relationship between the number of prints or deposits in an account and inflation have failed.
So much that these attempts gave us the word Goodhart Law, Which describes the nasty trend that once we try to regulate it, any variable will lose to tell us what we want it to do to the economy.
Monetary movement helps explain why most economists have neglected aggregates in recent decades. However, after the pandemic, officials around the world injected large amounts of cash into their economies, and currency growth surged, so there has been a recent recovery.
This revival is worthwhile. Although the link between money and price is vague, the sharp rise in the total amount of broad money—and their inevitable result—credit usually does tell us something about prices and financial stability.
Keeping this warning in mind, we show you the following charts, which were provided to our inbox by the Oxford Institute for Economic Research this morning:
The growth has slowed significantly, and we trust you will agree.
So how much does this make sense to anyone assessing the outlook for inflation?
The economic slowdown depends on the central bank’s abandonment of the quantitative easing program as planned. Their money printing is the biggest contributor to broad money growth in developed economies. Although the exit of the stimulus plan currently seems to be a fairly safe assumption, the market has always overestimated the central bank’s willingness to tighten policy, and we doubt whether the exit strategy of policymakers will continue to be as smooth as it has been so far. However, if this tightening does go as planned, we expect private sector lending standards will also tighten. This will also further affect broad money growth and inflation.
Whether money growth can create broader price pressures depends largely on whether we see an acceleration in circulation. As the Oxford Institute for Economic Research pointed out in the report, as the reopening is in full swing (and we hope so), funds may change hands more frequently. However, since 2008, we have been waiting for the increase in narrow money (through the central bank’s quantitative easing program and other aggressive monetary easing policies) to translate into speed. The power from capital to labor-really exists.
It’s not as simple as having less money and less problems. In fact, although the total amount is worth paying attention to, we are shocked by more attention to the dynamics of the labor market and supply chain because it can more effectively use the time of inflation observers.