Tribune. When the American economist Milton Friedman (1912-2006) addressed students in India in 1963 through a text he had titled “Look for the money”, he repeated to them a phrase now well known: “Inflation is always and everywhere a monetary phenomenon. “ The economist was careful not to specify that by “Inflation”, he meant a stable and lasting increase in the general level of prices: temporary increases were not the object of his remarks.
Today, and for more than a year, we are seeing a sharp rise in monetary aggregates in many countries. The money supply as measured by the “M1 aggregate” has, for example, grown by nearly 14% in one year in the euro zone after the start of the epidemic (an increase that the Central Bank is accustomed to attributing to mainly to its asset purchases during its press conferences), or nearly 27% in Canada over the same period.
This is unusual compared to 2008, when the money supply increased very little during and after the crisis. This is, however, similar to some experiences from the past. A recent report from the Federal Reserve of Atlanta (United States), for example, recalled that the money supply had almost doubled in five years during the Second World War in the United States, and that inflation had subsequently reached close to 20% in 1947. So why not expect a sustained inflationary surge this time around?
Expectations of households and businesses
The quantitative theory of money is often the benchmark framework for answering this question. It is often interpreted very quickly as the consideration that “More money inexorably implies an increase in the general level of prices for goods and services”. In fact, the prices referred to in one of the most commented versions of quantitative theory, that of Irving Fisher (1867-1947), are the prices of goods and services like those of financial assets.
In Japan, for example, the strong growth in the money supply since the 1990s seems to have mainly been reflected in the price of financial assets. If one reads carefully the writings of Milton Friedman, one also observes that one of the main channels, through which an increase in the money supply would increase the price of goods and services, is that of the rise in the prices of financial assets (and therefore a drop in rates), which itself would lead to an increase in activity, and ultimately prices.
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