The 'Too Much Money Chasing Too Few Goods' Myth

The Inflationistas are revolting. Their ratio beliefs have been violated and in paroxysms of anguish they bring forth their incantations:

as any student of economics should know, inflation is caused by too much money chasing too few goods and services. Nonetheless, there was not a single reference to the rapid growth of the money supply (or anything related) in the Bank’s latest statement.

Which just goes to show how little an education in mainstream economics is worth. A student of economics should not know that because it is wrong.

It is too much demand for too few goods and services that may cause prices to rise. Demand is desire backed by the ability to pay - which could just be a decent line in credit from a bank, since banks create money. Similarly the quantity of money in the economy according to the ‘money supply’ figures may not be causing any demand at all, because it is held by people as savings, either as a status symbol or as insurance against an uncertain future. They do not desire to spend their money. (See Japan for details).

Or it may be that the supplier simply runs out at the current price, in which case the demand remains unfulfilled and the money stays in the bank - introducing a mathematically intractable time delay into proceedings that mainstream cognitive dissonance appears permanently unable to detect.

The mainstream belief is that money can only be treated as static if it is exchanged for bonds paying a different interest rate. Until then all of it is permanently in motion - as though saving in a bank never happens. It’s a ridiculous notion at odds with the real world.

What we have here is the ’loanable funds’ belief creeping in by the back door. The crazy idea that some magical interest rate will arise that will balance savings and borrowings - such that all ‘money’ things will flow in a perfectly offset manner. That doesn’t happen in the real world where money is created and destroyed constantly via the actions of the financial system.

Dynamically, the usual state of affairs is that there is an excess of saving over borrowing by the private sector. That constant drain to savings has to be accommodated or the fiscal drag will collapse the economy. That accommodation tends to show up as less tax collected than government spends.

Should it ever switch around the other way, then the extra spending from savings will cause additional taxation to arise and a government surplus will appear, or, more likely, the savings will move abroad which will show up as increased imports and a widening trade deficit.

None of these things require a shortness of breath and an increased pulse rate. They are a natural consequence of the correct understanding of the monetary system.

One using the lens of Modern Money.