Milton Friedman
Inflation is not a monetary phenomenon
In the last edition of Four Hats I mentioned that Milton Friedman was wrong. Inflation is not a monetary phenomenon. This is important for the direction of the Federal Reserve.
This is a big statement that deserves more clarification. In the most recent inflationary episode, direct payments from the government to individuals did juice money supply as those funds received from the government are deposited in banks. The money didn’t cause inflation, the decision to give it to individuals who tend to spend more than they earn did. Of course this cohort, with a negative savings rate, will spend nearly every dollar received. No wonder demand exceeded an artificially constrained supply.
In the 1970s, this was less obviously the case. One key distinction is that another way demand can be created that shows up as an increase in the money supply is if folks take down new credit. This was certainly the case from 1970-now where leverage increased considerably and was only interrupted by economic downturns or financial market panics.
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