Marc Cuniberti With inflation the worst in 4 decades, we look for reasons why prices are skyrocketing.
Economist Milton Friedman said “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.
Put simply, increase the currency in an economy faster than the total output of goods and services increases and inflation will rise. The more imbalance of currency to production, the higher the inflation.
Washington for decades seemingly discounts Friedman’s theory. It’s no surprise to anyone that freshly minted money has poured out of Washington’s money conduit, the Federal Reserve, with the most egregious money creation occurring in the last 2 years or so. The more than generous handouts were an attempt to stave off the detrimental effects of CoVid and its subsequent worldwide shutdowns by governments everywhere.
Much of the blame coming out of Washington points the inflation finger at the Russian/Ukrainian conflict which has pinched down the supply lines of many commodities.
Although there is little doubt the war has constrained supply, some argue that much of the inflation follows along the lines of Friedman’s hypothesis.
After all, Friedman was no dummy. He was fully aware of supply side effects on prices, yet if one rereads his inflation hypothesis, he unequivocally points the finger exclusively at monetary creation as the sole cause of inflation.
There are arguments stating worldwide economies cannot simply be shut down almost entirely for a year or more and then turned back on like a light switch. Supply conduits are complexed systems. Once halted, it takes months to start them up again and even more time to get them functioning to the levels they were prior to the shutdowns.
No doubt Friedman never imagined a total stoppage to the entire world’s workforce as was witnessed during CoVid, and one wonders what Friedman would have to say as it pertains to inflation. We will never know if he would have adjusted his exclusive claim that money creation is the sole source of a general increase in prices.
That said, there is little argument among scholars that the massive money creation that was bequeathed on individuals and businesses in the last two years has played a large part in the inflation we are now seeing. The total money supply in the U.S. was increased by 40% or so in the last two years. This is without precedent.
That said, there is still little mention in our political hallways that at least acknowledge that massive government spending is contributing to our record inflationary rates we are now seeing.
To validate that one, look no further than to the State of California who will soon be sending out yet more checks to its residents to help offset the rising costs consumers are struggling with. The irony, at least to those that believe Friedman’s hypotheses on inflation is correct, is that California is printing even more money to counteract the previous effects of previous money printing.
Sounds like typical government reasoning to this analyst.
“Watching the markets so you don’t have to”
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This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214
