Dr John Greenwood, our Honorary Fellow and well-known monetary economist, recently shared with us his perspective on the current inflation. He argued that money supply is the key and persistent driver of inflation, instead of interest rates that some central banks are currently focusing on. 

The insightful session invoked many questions from the audience, and Dr Greenwood generously shared his views on them, even questions which were not addressed during the session –  regarding the control of inflation, the US economy and investment under the inflationary environment.

Check out Dr Greenwood’s answers below. If you have missed the webinar, click here to watch the session.

Control of inflation

Q: Oil prices and commodity prices are down now, would it help reduce inflation?

A: Only in a superficial sense. If oil and other energy prices decline, the result will be a short-term impact on the official or measured price indices, but reducing the oil price does nothing to reduce the excess money supply in the economy – which is the true source of the inflation. It is better to control money growth and allow the free market to sort out the prices in individual sectors.

Q: It appears that the excess money released by central banks during 2020-21 is unlikely to be lowered to the prior level, so does it mean this will push up the overall price persistently?

A: Yes. The reason I showed the picture “The Great Wave off Kanagawa” by the Japanese woodblock artist Katsushika Hokusai during my talk was to encourage you to think of the excess money growth as being like a sudden giant wave – a tsunami. Just as the excess water will spread over the land for a long distance, the excess M2 will spread across the economy affecting real growth and inflation for at least 2-3 years. So, yes, I expect inflation will remain elevated through 2023 and into 2024.

Q: Is there an optimal ratio between money supply and GDP?

A: No, it varies by country and according to payment habits, the structure of the banking system, etc. But in every country that I have looked at there is a fairly stable but steadily rising ratio of money to nominal GDP. This is a far more stable relationship to rely on than concepts like the fiscal multiplier from government spending.