Monday, September 20, 2010

Everybody Thinks

Everybody thinks printing money causes inflation. I think printing money and the use of credit (either, or both) cause inflation.

Everybody thinks they printed too much money, and that's why we had inflation. I think they didn't print enough, but instead encouraged the use of too much credit. (Perhaps because they thought credit-use would not cause inflation.)

Everybody thinks they printed too much, and borrowed too much too. Doesn't make sense to me. (Why do both?) I think they borrowed too much, and the borrowing created both debt and inflation.

Oh, one more thing: Everybody thinks "they" is somebody else. I think "they" is us.


Gene Hayward said...

Gene Hayward here...I have been reading many of your archived posts and some nominal additional readings, and I am going to include in my teaching the significance of credit vs money supply as you have pointed out. I think I have been missing the boat in teaching inflation as JUST an monetary/money supply phenomena and not emphasizing the role of credit. Thanks again.

The Arthurian said...

Thank you so much, Gene.

Questions arise: If we add credit into the mix, shouldn't there be unaccounted-for inflation, that would now be explained by the credit use? (I hope I said that right.)

Everybody and his brother shows a version of Milton Friedman's "money relative to output" (MRTO) graphs, with inflation mimicking the pattern of M2/RGDP... But of course it is spending that affects prices, and money in savings -- the greater part of M2 money -- is not in the spending stream. So I would subtract "savings" from Friedman's numerator, and add "credit use" or "additions to credit use."

Obviously there is a relation between credit-use and money in savings.

But now, if we change the numerator, won't we mess up the beautiful comparison shown in Friedman's MRTO graphs? No... That beautiful comparison was artificially created by arithmetic manipulations, as I point out in comments at The Secret Economist.


The Arthurian said...


See also this post and the follow-up.


The Arthurian said...


"... it is as if the creation and allocation of interest-bearing bank credit does not affect relative prices or incomes." -- Dirk Bezemer & Michael Hudson, September 2016.

alt link

The Arthurian said...

Again Bezemer & Hudson:

"Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories."