Setup lyn for mac 2011 as default1/8/2024 Monetary inflation is generally a starting point for the next two forms of inflation: consumer price inflation and asset price inflation, which we feel more directly.Ĭonsumer price inflation is when the nominal price of a broad set of goods and services goes up. On the other hand, during instances like the 1940s and the 2020s so far, it was government deficits that drove broad money growth, rather than private sector loan growth. We also see major banking crises, such as the Panic of 1893, the Great Depression (early 1930s), the Savings and Loans Crisis (early 1990s) and Great Financial Crisis (2008/2009), where loans collapsed. The private sector drove the creation of money. We can see on that chart that the 1880s, 1890s, and 1900s decades, as well as the 1950s and 1960s decades, were characterized by strong loan growth and low government deficits. This chart shows the growth in private sector loans, government deficits, and broad money growth, as a percentage of that year’s GDP for the United States since 1881: For a full breakdown of how money creation works, see my article about money printing. ![]() There are two main forces that drive up the broad money supply over time: either banks make more private loans and thus create new deposits (which increases the money multiple, the ratio of broad money to base money), or the government runs large fiscal deficits while the central bank creates new bank reserves to buy large portions of the bond issuance associated with those deficits (which increases both broad money and base money). This chart shows the US broad money supply over time in blue on the left axis, and the year-over-year percent change in that broad money supply in red on the right axis: There are alternative measures of broad money that can include additional types of cash-equivalents as well. ![]() In other words, it’s not about prices going up it’s about the amount of money in the financial system going up.īroad money supply, M2, refers to all of the various bank deposits for people and businesses that exist in the system, like checking accounts and savings accounts, as well as physical currency in circulation. Monetary inflation generally refers to an increase in the broad money supply, such as M2. So, rather than debate which definition is best, we can define three types of inflation, and go from there. Economists of different schools of thought often speak past each other about what inflation is. Which goods and services are we measuring the price level of when we quantify overall price inflation levels, and with what weighting? Can there be instances where the volume of money and credit goes up a lot and yet prices still remain low, and if so, why would that happen and what would we call that? ![]() That dictionary definition is a good place to start, but opens up some obvious questions. In other words, if the number of currency units in the system goes up way more than the availability of goods and services in the economy, then we can get supply shortages and price increases. Merriam-Webster defines inflation as “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. Who Benefits or is Harmed by Inflation?. ![]() How Accurate is the Consumer Price Index?.Broad Money Supply vs Consumer Price Inflation.Read from the beginning, or jump to the section you want. This article looks at 150 years of data across multiple countries to provide a general idea of what inflation is, what to look for, and how to invest with inflationary and deflationary risks in mind. Inflation is a controversial and complex topic.
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