My Fear of Inflation Has Subsided
By David Henderson
Unlike Hutchinson, Tim Congdon worried not about inflation but about deflation in 2009. He also wrote in favor of the Bank of England’s efforts to combat it, and did so despite the fact that the growth rate of the U.K.’s M2 money stock was then (July 2009) 10 percent, and would soon reach 15 percent. (The U.K. inflation rate, in the meantime, went from just under 2 percent in 2009 to a post-2008 peak of almost 4 percent in 2011, casting doubt on whether the Bank of England really needed to “keep the money flowing to stave deflation.” Still, 4 percent inflation was far from exorbitant by British standards.) Yet Congdon now considers a 15 percent M2 growth rate dangerously high for the U.S., while otherwise embracing the same quantity-theoretic reasoning Hutchinson uses to determine where prices are headed.
But that reasoning, which rushes straight from money growth rates to likely inflation, rests on assumptions that are just as false today as they were in 2009. One of these is that the velocity of M2 and other broad money representations—the rate at which the money in question gets exchanged for goods and services—hasn’t declined substantially. Another is that the reserve “multiplier”—the ratio of the quantity of broad money to the stock of bank reserves—hasn’t itself declined.
That both of these assumptions are false ought by now to be notorious. But for those who aren’t convinced, the following two FRED charts should suffice to drive the point home:
This is from the always excellent George Selgin, “Return of the Inflation Mongers,” Alt-M, April 27.
I left out the two FRED charts for two reasons. First, I’m lazy. Second and more important, I want you to read his whole article. It’s not long but is very informative. George is one of the most careful monetary economists out there.