It shows how inflation has historically developed when the amount of money circulating in an economy has gone up. What you can see is that there is virtually a 1:1 relationship, meaning that any rise in the money stock of an economy has measurably led to a directly proportional rise in the inflation rate of the country,measured over a period of 30 years in 110 countries. I am aware that this is as projected by the economical theory (it is known as the quantity theory of money there). But that it panned out so clearly in reality was still surprising to me, for once because economical theories sometimes have a difficult relationship to reality (e.g. the efficient market and the rational behavior of consumers).
The other reason why I found this surprising, is of course the monetary history of the
[chart to follow]
You will also see the inflation in the chart, and you will see very little correlation between the two.
If historically, among 100 countries, over 30 years, inflation has empirically been very closely correlated to money growth, why is there no inflation showing up? Shouldn’t there be an inflation of xy % as the study would imply? For that is after all a rather good defense of the Fed: as long as there is no inflation, there might be little reason to worry too much about the monetary supply.
The following answers come to mind:
1) Faulty indicators – hedonistic CPI (more details to follow)
2) Globalization, WTO (less trade barriers), leading to easy import of cheap labor becoming available in China, Eastern Europe and other parts of the world.
This availability of cheap labor in an unprecented way first caused rather cheaper prices (deflation) for many products as their production moved to low-labor countries. However, in the last 2-3 years there has been an increased inflationary pressures caused by these countries such as
3) House prices – The phenomenon also known as asset price inflation
