## Tuesday, December 28, 2010

### The Friedman Factor

This is a straightforward version of the roundabout calculation Milton Friedman used to make his graphs show similarity between money and prices.

Milton Friedman's famous graphs seem to show that inflation -- a general increase of prices -- is caused by an increase in the quantity of money, relative to output.

I'll tell ya how he made the graphs look like that.

STEP 1: You take the total amount of money that we actually have in this country, in people's pockets and in their checking accounts, and also in their savings accounts.

STEP 2: You take the total purchase price of all the goods and services we produce in a year, or in other words the total we paid to buy all that stuff.

STEP 3: Then you take the money-number from step one there, and divide it by the GDP number from step two.

STEP 4: And then you take the answer from step three and times it by the Consumer Price Index, and you call this "money relative to output."

When you graph the result from step four, it looks a lot like the price trend, because you factored the price trend into that result.