Exceedingly t1_j21dkte wrote on December 28, 2022 at 11:17 PM

Economics question on the current levels of inflation around the world: Milton Friedman once gave this response to the cause of inflation, stating it primarily caused by governments printing money via central banks.

> "Consumers don't produce it, producers don't produce it, the trade unions don't produce it, foreign sheikhs don't produce it, oil imports don't produce it. What produces it is too much government spending and too much government creation of money, and nothing else."

This makes sense to me as printing money dilutes the value of currency, making everything more expensive across the board rather than one specific sector.

Covid caused massive turmoil in March 2020 where indexes dipped more than in 2008, but it only lasted 1.5 months opposed to 2 years because this time governments started printing money to support markets, buying up bonds and other assets.

If you look at the balance sheets of these central banks it shows that they all printed hundreds of billions or even trillions of dollars just after March 2020, presumably to keep the markets afloat. Those balance sheets now show a strong correlation with current global inflation levels, just skewed a year or so.

So is that it? Is the main cause of all this inflation just the knock on effect of governments spending their way out of a crash during covid? And if so, it's my understanding that the only way to truly reduce that inflation is to remove the printed money back out via a "market correction" period, aka a crash. Is that right? Insight from experts in the field would be welcome.

Surrational0 t1_j22vmza wrote on December 29, 2022 at 6:32 AM

>This makes sense to me as printing money dilutes the value of currency, making everything more expensive across the board rather than one specific sector.

So, this relationship between money supply and inflation is definitely correct and likely a major driver of current inflation. However, money supply is not always the primary driver of inflation there are other drivers that can at times be more or less important.

Now, Dr. Friedman certainly believed that money supply was the primary cause of inflation. Though reading his most important work written with Ms. Schwartz he was not as dogmatic as you might see on old TV clips. Check out this bigger picture Wikipedia graph and you can see that the correlation between changes in money supply and inflation is not straightforward even when you consider delayed effects. Certainly if it were a simple relation then an independent central bank would have an easy time keeping inflation under control.

So, what else can drive inflation? Along with the supply of money another very important driver is the supply of things to buy with that money. For instance, if the supply of oil decreases and the supply of money were to stay the same, because oil is pretty necessary for our current society we would experience inflation. The bank of Australia has a broader primer on inflation that has more detail than I can get into here including the important aspect of peoples' behavior. Today both money supply, as you noted, but also many, supply, shocks, are driving inflation upwards quickly.

Good news: a market correction is definitely not the only way to reduce inflation. There are plenty of examples but a recent one is inflation rates dropped quite low through the 2010s with generally decent economic growth. Bad news: market downturns don't always bring down inflation either. Central banks are currently trying to reduce inflation without causing a major downturn. It is not an easy task, however, and there are many drivers of inflation that are out of the control of the reserve banks and governments.

Exceedingly t1_j23ekji wrote on December 29, 2022 at 10:42 AM

Really great reply thank you! I should have known it wouldn't be so clear cut. Thank you for your time, I'm going to dig into the sources you linked now.