Friday, July 30, 2010

Of Money (3)

In Of Money (2) I said what's important is M1 money, and my graphs show that M1 has had a declining influence on inflation since the late 1950s.

YOU: So why use M1 money, if it has a declining influence on inflation?

ME: Maybe inflation isn't the problem. Maybe inflation is a result of the problem. Maybe M1's declining influence is the problem, or part of the problem, or an indication of the problem that causes inflation.

The reason we never solved the inflation problem is that inflation isn't the problem. Inflation is a result. We never solved the inflation problem because we never paid attention to the declining influence of M1 money. Economists and policymakers never saw that decline as a problem. They only tried to make allowances for it, encouraging the use of credit and encouraging the growth of savings, the source of credit.

What matters is the balance between the two components of M2 money: the balance between money in savings, and M1 money in circulation. When I talk of "monetary imbalance" it is the imbalance between these two components of M2 to which I refer.

The declining influence of M1 money is a direct result of the declining size of M1 as a portion of M2 money. A direct result of the decline of M1 relative to money in savings. A direct result of the increase of money in savings relative to M1 money. And a direct result of the growth of credit-use built upon those savings.

When other people talk about the cause of inflation, they talk about printing money. They talk about the quantity of money. But they never look at the components of money. They never look at the imbalance between the components. And they never look at the inflationary consequences of credit use.

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