Since (P x Y) is equal to the nominal GDP, then M x V = nominal GDP. Velocity (V) and Real GDP (Y) are effectively constant in the short run, therefore any changes in money supply (M), will cause a proportional change in the price level (P). Re-writing the equation, we get: P = (M x V) / Y. Real Money Supply. Money supply expressed in base-year dollars, calculated by dividing the money supply by a price index. Related Terms: Accomodating Policy. A monetary policy of matching wage and price increases with money supply increases so that the real money supply does not fall and push the economy into recession. After-tax real rate of return. Money after-tax rate of return minus the inflation.

Welcome to Finance and Fury, the Furious Friday edition. In today’s episode I want to explore the effect of monetary inflation (in other words the increase in the money supply) on GDP growth

Covered GO compared to GDP in Wednesdays episode this week –
To go one step deeper – want to look at the fact that nominal GDP looks to be directly inflated by additional money introduced into an economy – essentially in the form of credit – therefore – GDP growth is simply a reflection of additional money introduced into the economy

And if this is the case – GDP is really not a good macroeconomic tool to use to make policy decisions – as it gives no real indication as to the underlying health or real growth of an economy – as it can just be artificially inflated whilst having debt elsewhere that offset the real growth

This may come as a bit of a surprise – it did to me when looking at some of the figures –

When would you use an earnest money realease. c. You will not use our blog posts or posted content to do anything unlawful, misleading, malicious, or discriminatory; and. You will not post content or take any action on our blog posts that infringes someone else’s rights or otherwise violates the law.

as it is rare to find any economists covering the relationship between monetary expansion and GDP
1. Yet – there is a pretty strong relationship between the money supply growth (measured by M2) and GDP growth over the past few decades since Fiat currencies were implemented worldwide –
2. Especially when Government spending (both as a component of GDP) is now funded through an increase in the monetary supply by fiscal deficits – which are funded through the issuance of bond and in turn these are now funded through CB programs like QE
3. The corporate side isn’t too much better – you have massive zombie companies that have funded investment through the issue of debts
Under normal circumstances – how should the economy grow based around classical economic theories?
1. If you have listened to this podcast for a while – it shouldn’t come as any surprise that I fall into the supply side of economic thinking – and as part of classical economics thinking – there is a thing known as Say’s law – also known as the lawof markets
  1. That is that creation of a product creates demand for another product by providing something of value – which can then be exchanged for that other products – it relies on production being the source of demand
  2. in a market economy, goods and services are produced for exchange with other goods and services – this is known as “employment multipliers” – these arise from the production of goods and services and do not come from the exchange of these goods alone

This goes back to the concept of GO versus GDP – many businesses in the economy exist to be business to business services – that form parts/components that go into the final output that GDP gets measured
1. So there are many economic interactions that don’t get measured
2. So through the market – with additional companies being in demand to produce additional components for other companies that provide goods and services – additional employment growth can occur – with this comes additional incomes and the cycles of consumption can go on

So through the process of creating many different types of economic activity – a sufficient level of real income is created to purchase the economy’s entire output, due to the truism that the means of consumption are limited by the level of production
with regard to the exchange of products within a division of labour of different employees working in different businesses – the total supply of goods and services in a market economy will equal the total demand derived from consumption during any given time period

However – For this type of economic functioning to be present – there are some assumptions that need to be present –
1. flexible prices—that is, all prices can rapidly adjust upwards or downwards – this is the price of the exchange medium as well – which is money
  1. Goes into both interest rates as well as wages in economic activity – both of which are set with floors
2. no government intervention – which doesn’t exist
So this theory quickly falls apart – but it is important – as it can only holds true as long as governments don’t regulate the function of businesses and the consumers exchange – as well as monetary officials – such as central banks messing around with the medium of exchange – the money

Is Money Supply Real Or Nominal Time

Now comes an important question – why does an economy need to grow? Especially when measured by GDP?
1. Does it matter that GDP goes up for you? Compare the economies of Japan and Qatar – looking at GDP per capita – Qatar has had a rise in GDP – very oil rich nations – has $69k USD per capita – however – Japan $41k USD per capita – but Japan’s average net worth is double that of the average Qatari – and living standards are higher in Japan – in a relative economic sense – so who is better off?
2. But total level of GDP – Japan has a GDP of $5trillion USD – Qatar has a GDP of $190 billion USD – the per capita GDP figures are different due to the population levels
In classical economic terms – A healthy economy is not one that “grows”, but one that does not have its production and consumption interfered with.
1. If the money is sound and its quantity unchanged there might not be any change in GDP year after year – but at the same time – there would be no inflation – or devaluation of the medium of exchange as well as increasing living standards through additional technology and supply of goods and services
  1. This is creative destruction – which is a process of any healthy economy which can satisfying the demand of consumers
  2. In the modern economy – the state has carved out a major role for itself – and they have turned human and by extension economic activity into a representation of statics and averages

Hence- any policy that gets the desired outcome of increasing these statistics is deemed appropriate – even though it might not be the case for the individual –

There is a good article on goldmoney that shows some graphs in the US between the relationship of nominal GDP and the broad money supply – measured by M2 – compares the increase in GDP from its base level in 1980 to end-2019 with the increase in broad money – then shows the difference between them
1. These two lines go out at the same sort of rate – and the difference in them is essentially zero
2. The small variations in GDP less the increase in M2 are wholly due to the fact that GDP does not capture all economic activities, only those that are decreed eligible by the statisticians
3. Starts to show that nominal GDP may actually not be measuring economic growth at all – just the amount of money in the economy that forms part of transactions
4. Where this gets interesting is when looking at the recent slumps in GDP around the world – at the same time there has been an increase in the money supply – likely due to a few reasons
  1. The money supply increase has not gone into productive areas – for instance – buying up debts that already existed
  2. For those funds going to consumers – Not being spent and is instead being saved –
    1. People are probably worried about financial secu