Inflation is always and everywhere a monetary phenomenon

[TheMotorcycleBoy]

....in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

So I'm sure that most here will already know that this statement is something that we can attribute to Milton Friedman. This seems reasonably obvious on one hand, i.e. if the money supply rises, companies and retailers feel able to rise prices seeing as there will exist the necessary "extra cash" in people's pockets to cover item costs. Additionally since prices are apparently set by the equilibrium point between supply and demand, I can completely understand the demand side of this, regards monetarism. That is - increase the amount of money available, and demand rises, hence so to do prices.

But... how does this work on the supply side? How does constrained supply, create inflation, and at the same time still be a monetary phenomenon?

The only way I can understand falling supply creating monetary expansion, is that suppliers deduce they are in a position of strength, and "try it on" rising prices, and somehow desperate consumers then take on more debt, which results in banks creating more deposits to cover the debt. And hey presto a supply side issue becomes a "monetary phenomenon".

So is that about it? Am I on the right lines here?

thanks Matt

[Urbandreamer]

......
The only way I can understand falling supply creating monetary expansion, is that suppliers deduce they are in a position of strength, and "try it on" rising prices, and somehow desperate consumers then take on more debt, which results in banks creating more deposits to cover the debt. And hey presto a supply side issue becomes a "monetary phenomenon".

So is that about it? Am I on the right lines here?

thanks Matt

I think that the problem is that you are trying to reconcile two conflicting views of inflation.

Austrian economists see inflation simply as an increase in the money supply. This may or may not lead to an increase in prices.
Keynsians do not view increases in the money supply as inflation. Instead it's the increase in the cost of goods.

Depending on where you stand on the subject we are currently either in a period of inflation, costs of goods and services rising, or deflation, reduction in the money supply.

Friedman's statement is the Keynsian view, which presumes that an increase in the price paid should lead to an increase in the supply (output). Ie, the increased prices of oil and gas should lead to others to produce more ie by fraking, hence bringing the price back into line. If there are constraints upon the supply then substitutes will rise in price, ie electricity from wind. That in turn should lead to people investing to increase the supply of such... provided that counter incentives are not put in place.

I think that M Friedman was a "free market" economist. If we assume that the government allows the market to do as it pleases, then we would see a increase in supply (if physically possible), hence his statement works. For some very good reasons, governments are trying to constrain fossil fuel use. This means that market forces can't function, hence his statement doesn't work.

[odysseus2000]

All central banks have been praying for inflation & set it off by restricting Hgv drivers hours, then there were supply side shocks due to the Ukraine war. Central banks love this & many business are raising prices to what ever their customers can be convinced to pay, often in simply selling smaller packets for the same price. The utility regulators are turning a blind eye to prices set when natural gas was peaking & not reset to current wholesale prices.

The consequence of all this is demand destruction & primary prices falling for many things but those falls are not being passed to consumers & lagging indicators remain elevated. This is allowing central banks to raise rates with the Fed leading & this is hurting all the global business, Apple reported 10% currency head winds & Amazon got
creamed, dropping $20, that is $400 before the 20:1 split.

This gouging will eventually stop but it now has momentum & can run for a significant period of years.

Regards,

[88V8]

All central banks have been praying for inflation & set it off by restricting Hgv drivers hours...

I don't dispute that indebted govts rather like inflation, but this is a new conspiracy theory. Tell us more.

V8

[odysseus2000]

All central banks have been praying for inflation & set it off by restricting Hgv drivers hours...

I don't dispute that indebted govts rather like inflation, but this is a new conspiracy theory. Tell us more.

V8

This inflation began when the working hours of hgv drivers were restricted all over the world in a simultaneous introduction of legislation to make hgv drivers work easier. Suddenly all the just in time supply chains fell over and the politicians were happy & then the Pentagon finally goaded Russia into invading Ukraine & so came fabulous shortages & price rises such as natural gas. Unfortunately there is so much natural gas that prices fell to pre war levels, but the utilities are not being forced to bring prices down so we have lagging indicators still high although the leading indicators are well off & we are seeing demand destruction. This is allowing many central banks including the fed to raise rates adding to inflation for multi nationals as a strong $ leads to multi nationals getting less profit from foreign nations & then raising prices to compensate.

Regards,

[TheMotorcycleBoy]

All central banks have been praying for inflation & set it off by restricting Hgv drivers hours...

I don't dispute that indebted govts rather like inflation, but this is a new conspiracy theory. Tell us more.

V8

This inflation began when the working hours of hgv drivers were restricted all over the world in a simultaneous introduction of legislation to make hgv drivers work easier. Suddenly all the just in time supply chains fell over and the politicians were happy & then the Pentagon finally goaded Russia into invading Ukraine & so came fabulous shortages & price rises such as natural gas. Unfortunately there is so much natural gas that prices fell to pre war levels, but the utilities are not being forced to bring prices down so we have lagging indicators still high although the leading indicators are well off & we are seeing demand destruction. This is allowing many central banks including the fed to raise rates adding to inflation for multi nationals as a strong $ leads to multi nationals getting less profit from foreign nations & then raising prices to compensate.

Regards,

Whilst I'm not disputing that shorter supply of HGV hours and raw material (cereal, industrial products, oil, metals etc) constraints after February 24th are inflationary factors, I totally disagree with your statement that that's "when it began". The current inflationary era started when we were hit by the Covid lockdown bomb with Supermarket shelves being emptied of pasta, milk, toilet paper (and most other things!), and the reduction of factory production worldwide. This was fuelled further by the insane quantity of fiat money printed by all developed nation CBs, most ostensibly forcing up financial asset and property prices, and increasing the size of saving accounts, ready to be spent as places/factories re-opened. Of course in 2021 the CBs attempted to portray this as "transitory", but it was sticky regardless. The things you mentioned came afterwards, and IMHO merely exacerbated the phenomenon.

Matt

[TheMotorcycleBoy]

......
The only way I can understand falling supply creating monetary expansion, is that suppliers deduce they are in a position of strength, and "try it on" rising prices, and somehow desperate consumers then take on more debt, which results in banks creating more deposits to cover the debt. And hey presto a supply side issue becomes a "monetary phenomenon".

So is that about it? Am I on the right lines here?

thanks Matt

I think that the problem is that you are trying to reconcile two conflicting views of inflation.

Ok. So do you believe that my explanation of how a supply side problem results in increase price levels is incorrect? That's one of the ways I can currently rationalise Friedman's words. (Later on in this reply - another way occurs to me )

Austrian economists see inflation simply as an increase in the money supply. This may or may not lead to an increase in prices.
Keynsians do not view increases in the money supply as inflation. Instead it's the increase in the cost of goods.

I must admit I've heard of there being these 2 different viewpoints. Unfortunately I seem to have researched Keynesism and Monetarism a little more, and I'm not that clued up on the Austrian perspective. Would that be Schumpeter? Can you recommend any good reads, did Krugman write along similar lines?

Friedman's statement is the Keynsian view, which presumes that an increase in the price paid should lead to an increase in the supply (output). Ie, the increased prices of oil and gas should lead to others to produce more ie by fraking,

I guess that's possible. However, how would MF have translated that back into it being "always a monetary phenomenon", i.e. an increase in money supply? Attempting to progress the logic in your lines, I assume that would imply:

1. Capex and recruitment on the part of the energy firms
2. Borrowing money to finance 1.
3. The result of 2. being an increase of the money supply

Matt

[TUK020]

All central banks have been praying for inflation & set it off by restricting Hgv drivers hours...

I don't dispute that indebted govts rather like inflation, but this is a new conspiracy theory. Tell us more.

V8

This inflation began when the working hours of hgv drivers were restricted all over the world in a simultaneous introduction of legislation to make hgv drivers work easier. Suddenly all the just in time supply chains fell over and the politicians were happy & then the Pentagon finally goaded Russia into invading Ukraine & so came fabulous shortages & price rises such as natural gas. Unfortunately there is so much natural gas that prices fell to pre war levels, but the utilities are not being forced to bring prices down so we have lagging indicators still high although the leading indicators are well off & we are seeing demand destruction. This is allowing many central banks including the fed to raise rates adding to inflation for multi nationals as a strong $ leads to multi nationals getting less profit from foreign nations & then raising prices to compensate.

Regards,

Losing the plot here....
I think I get the bit about the Pentagon instructing Central Banks to restrict HGV drivers' hours. But I lost the connection on how HGV drivers goad Russia into invading Ukraine so that they can then force multinationals to raise prices

[TheMotorcycleBoy]

All central banks have been praying for inflation & set it off by restricting Hgv drivers hours...

I don't dispute that indebted govts rather like inflation, but this is a new conspiracy theory. Tell us more.

V8

This inflation began when the working hours of hgv drivers were restricted all over the world in a simultaneous introduction of legislation to make hgv drivers work easier. Suddenly all the just in time supply chains fell over and the politicians were happy & then the Pentagon finally goaded Russia into invading Ukraine & so came fabulous shortages & price rises such as natural gas. Unfortunately there is so much natural gas that prices fell to pre war levels, but the utilities are not being forced to bring prices down so we have lagging indicators still high although the leading indicators are well off & we are seeing demand destruction. This is allowing many central banks including the fed to raise rates adding to inflation for multi nationals as a strong $ leads to multi nationals getting less profit from foreign nations & then raising prices to compensate.

Regards,

Losing the plot here....
I think I get the bit about the Pentagon instructing Central Banks to restrict HGV drivers' hours.

Really? That's out there man. I'm seeing an image of the Smoking Man of the XFiles right here. Any evidence of this? The Pentagon doing this - not the Smoking Man.

[Boots]

But I lost the connection on how HGV drivers goad Russia into invading Ukraine so that they can then force multinationals to raise prices

Putin is an HGV Driver's cabal's deep cover sleeper agent.

[GoSeigen]

Has the OP accepted what money actually is, i.e. a liability of banks? If not it's hard to have a productive discussion about money!!

Perhaps he could quickly summarise what his current understanding of money actually is. [Some of the responses are already with the fairies...]

GS

[Urbandreamer]

......
The only way I can understand falling supply creating monetary expansion, is that suppliers deduce they are in a position of strength, and "try it on" rising prices, and somehow desperate consumers then take on more debt, which results in banks creating more deposits to cover the debt. And hey presto a supply side issue becomes a "monetary phenomenon".

So is that about it? Am I on the right lines here?

thanks Matt

I think that the problem is that you are trying to reconcile two conflicting views of inflation.

Ok. So do you believe that my explanation of how a supply side problem results in increase price levels is incorrect? That's one of the ways I can currently rationalise Friedman's words. (Later on in this reply - another way occurs to me )

I don't think that ANYONE has correct economic answers, just good arguments. Nor have I spent a great amount of time studying economics.
I did read "The road to serfdom" and tried to wade through "The general theory of employment, .....", but it's more a simple interest.

Anyway, MF claimed that he didn't mean his words the way that you are understanding them

Milton Friedman famously claimed that inflation is always and everywhere a monetary phenomenon. Later he clarified that he was referring to episodes of persistent inflation. In the short run, supply shocks can impact the price level.

https://www.econlib.org/persistent-infl ... henomenon/

I believe that we would have inflation without the current oil and gas supply shock, but if was asked would state that to be the "cause" of our current "inflation". Ie the main cause, while the effects of the increase of money supply being hidden.

[mc2fool]

I believe that we would have inflation without the current oil and gas supply shock...

And that includes sunflower oil, of which Ukraine and Russia together produced more than 50% of world's total. https://www.atlasbig.com/en-gb/countries-by-sunflower-oil-production

And quite a few other staples too. The last 12 month CPIH is 8.8% but food and non-alcoholic beverages have gone up 14.6%. Part of that, of course, will be due to increased energy costs in production and transportation, but also a big part will be down to disrupted supply.

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2022

[TheMotorcycleBoy]

Has the OP accepted what money actually is, i.e. a liability of banks? If not it's hard to have a productive discussion about money!!

Perhaps he could quickly summarise what his current understanding of money actually is. [Some of the responses are already with the fairies...]

GS

It's stuff that people use to buy stuff with. It is present in difficult guises (M1, M2...). But regardless of at any one time on the whole of the planet presumably there is finite, countable quantity of this stuff. When more of this stuff abounds it seems possible that more of it will be required to buy things with. And yes, seeing as its tedious to store and take responsibility of, banks will record its amount electronically. And furthermore, as long as they stay within certain boundaries banks can also create extra amounts of it. A bit like who in past centuries people could write IOUs, I assume.

Is that Ok? I acknowledge that explanation is probably neither exhaustive or perfect, but I think that displays a reasonable understanding, portrayed in a fairly terse manner.

Now that I've answered that question, what's your view on the OPs question? That is, how does a (theoretical) supply side problem translate to yielding Inflation as a monetary phenomenon.

Matt

[TheMotorcycleBoy]

Presumably a supply side problem results in banks creating more money in order to satisfy existing demands, i.e. to enable consumers to pay the higher price (and possibly facilitate the appearance of new suppliers). Since both supply and demand influence price level, but inflation (apparently) is always a monetary thing.

Yes GS I did read my earlier post. viewtopic.php?p=434120#p434120 It didn't really help with clarifying my query.

Matt

[Urbandreamer]

Presumably a supply side problem results in banks creating more money in order to satisfy existing demands, i.e. to enable consumers to pay the higher price (and possibly facilitate the appearance of new suppliers). Since both supply and demand influence price level, but inflation (apparently) is always a monetary thing.

That doesn't work in this case. Indeed the likes of MF wouldn't argue that it can.

As I understand the Keynsian argument, supply can be limited by demand. Which can in turn be limited by the ability to pay. The old bit about the price of eggs being constrained by the supply of 6d's, as per Dr Samuel Johnson.

As I understand that argument, it doesn't apply to the current situation. The argument being that demand causes supply and the constraining problem being the medium of exchange. That isn't the constraint at the moment.

No matter how much we want or need Russian oil or gas, we are not willing to pay the political costs. Indeed I agree with that position.

Then it gets messy. We can't let those who provide alternatives benefit from the situation, after all they "didn't invest to provide relief". As it happens I was investing (in wind) assuming that such supplies would be required at some point. I WON'T be supporting efforts to get us out of the current situation. "Economically", in the sense of the subject, it makes no sense to do so. Just as there are incentives to not work, or indeed to not be good at working (the better you are at it the more that the government punishes you with taxes aimed at you), there are government incentives to avoid investing in energy production.

PS, have your read MF son's book "The Machinery of freedom"? David F Friedman is not an economist I believe, but it would seem that he might of learned a bit as a child. Many would regard the ideas as odd, but it's difficult to argue that it's impossible that they could work. Certainly interesting.

Oh, and sorry for straying into policy.

[odysseus2000]

Whilst I'm not disputing that shorter supply of HGV hours and raw material (cereal, industrial products, oil, metals etc) constraints after February 24th are inflationary factors, I totally disagree with your statement that that's "when it began". The current inflationary era started when we were hit by the Covid lockdown bomb with Supermarket shelves being emptied of pasta, milk, toilet paper (and most other things!), and the reduction of factory production worldwide. This was fuelled further by the insane quantity of fiat money printed by all developed nation CBs, most ostensibly forcing up financial asset and property prices, and increasing the size of saving accounts, ready to be spent as places/factories re-opened. Of course in 2021 the CBs attempted to portray this as "transitory", but it was sticky regardless. The things you mentioned came afterwards, and IMHO merely exacerbated the phenomenon.

Matt

Yes, there were shortages due to Covid and then the whole system was rebuilding it self and it was then that the EU and others brought in all the restrictions on HGV driving hours etc throttling supplies and raising prices. It was a brilliant move by the politicians who have been desperate for inflation to eat away at central bank debt and it created the great inflation wave that we are now dealing with. Had all of these HGV regulations not be introduced the whole system would have produced all the supplies needed and we would not have had this inflation to be compounded by the invasion of Ukraine.

In any sensible system the HGV regulations would have been moved back to allow for a recovery from Covid before they were introduced.

Regards,

[murraypaul]

Had all of these HGV regulations not be introduced the whole system would have produced all the supplies needed and we would not have had this inflation to be compounded by the invasion of Ukraine.

Do you actually believe this?

Can you actually tell us what HGV regulations were introduced, when, and why they had such a large effect?

[TheMotorcycleBoy]

Whilst I'm not disputing that shorter supply of HGV hours and raw material (cereal, industrial products, oil, metals etc) constraints after February 24th are inflationary factors, I totally disagree with your statement that that's "when it began". The current inflationary era started when we were hit by the Covid lockdown bomb with Supermarket shelves being emptied of pasta, milk, toilet paper (and most other things!), and the reduction of factory production worldwide. This was fuelled further by the insane quantity of fiat money printed by all developed nation CBs, most ostensibly forcing up financial asset and property prices, and increasing the size of saving accounts, ready to be spent as places/factories re-opened. Of course in 2021 the CBs attempted to portray this as "transitory", but it was sticky regardless. The things you mentioned came afterwards, and IMHO merely exacerbated the phenomenon.

Matt

Yes, there were shortages due to Covid and then the whole system was rebuilding it self and it was then that the EU and others brought in all the restrictions on HGV driving hours etc throttling supplies and raising prices. It was a brilliant move by the politicians who have been desperate for inflation to eat away at central bank debt and it created the great inflation wave that we are now dealing with. Had all of these HGV regulations not be introduced the whole system would have produced all the supplies needed and we would not have had this inflation to be compounded by the invasion of Ukraine.

In any sensible system the HGV regulations would have been moved back to allow for a recovery from Covid before they were introduced.

Regards,

Why did you mention the Pentagon then?

Matt

[PeterGray]

the EU and others brought in all the restrictions on HGV driving hours etc throttling supplies and raising prices. It was a brilliant move by the politicians who have been desperate for inflation to eat away at central bank debt and it created the great inflation wave that we are now dealing with. Had all of these HGV regulations not be introduced the whole system would have produced all the supplies needed and we would not have had this inflation to be compounded by the invasion of Ukraine.

In any sensible system the HGV regulations would have been moved back to allow for a recovery from Covid before they were introduced.

Regards,

I can see no new EU HGV restrictions since covid. Can you link to them? The only changes have been in the UK, which relaxed restrictions during covid and then reimposed the, long term, original ones. The UK relaxation was reversed in April 2022.

There have, of course been considerable problems for HGV at British borders, Dover, in particular due Brexit and a failure to prepare.