With the Federal Reserve bound for a fairly large rate increase this Wednesday, plus talk by the White House on whether the definition of a recession should be changed (likely, for no other reason than to avoid a recession) it’s easy to forget about the money supply. Conversations about the root cause of price increases hardly makes headlines. Even before the Austrian school, many expressed concerns with increasing the money supply. Dr. Mark Thornton dedicated a substantial amount of his career towards writing about the effects of monetary expansion, commonly referred to as the Cantillon Effect.
Looking at the M2 money supply from countries around the world reveals the problem Cantillon wrote about in the 18th century.
Here’s Venezuela’s M2, a country which had an inflation rate of almost 3,000% in the year 2020.
See below for Turkey’s (Turkiye) M2. It also suffers from the same upward trajectory, almost like a ski slope. ABC News reports annual inflation is at 78.6%, 24-year high.
Even Ukraine is feeling the effects of price and monetary inflation. Not only do billions of dollars in foreign aid continue to flood into the country, but their M2 currency has also increased drastically over time. Its annual interest rate is 25% and the expected inflation is at 30%, according to Reuters.
If one were to look at the majority of M2 charts from around the world, the same exponential increase in money supply becomes apparent, making the cause of this global price inflation fairly easy to diagnose. Back in the USA, the M2 chart doesn’t look terribly different; the same upward trajectory, turning exponential is seen:
Stock traders say that parabolic moves don’t end well. The trajectory of money supply growth is highly suspect because so few outcomes are possible, none painless.
Either the money supply will continue increasing at an accelerated rate, and more price distortion, higher prices and economic destruction will ensue, or somehow, the Federal Reserve will have to do something no other central bank in the world can do, i.e., show restraint.
Still, Cantillon’s ideas from almost three centuries ago continue largely unnoticed by central planners. The problem can be quickly thought through: A central bank can create new money and give it to a select few, which is a great advantage to those who receive the new money first. Or, money can be more equally distributed to the masses. But as we can all understand now, most prices will rise and dollar purchasing power will become severely weakened. Therefore, whether newly created money were to go to a few, or to everyone, the outcome for society will always be harmful.
Unfortunately, only a few places exist where people can have these conversations. Luckily, Mises University is one of those places.
THIS ARTICLE ORIGINALLY POSTED HERE.