Money supply and inflation

Visual Capitalist has a nice chart showing money supply overlaid on inflation from 1875 - 2021. When the money supply increases faster than its ability to produce goods and services, inflation often results.

The money supply in the chart is “Broad Money.” Broad money (M3) includes currency, deposits with an agreed maturity of up to two years, deposits redeemable at notice of up to three months and repurchase agreements, money market fund shares/units and debt securities up to two years.…

There is a close correlation between broad money supply and inflation.

The two exceptions were the 1880s which had tremendous productivity growth, and the 2000s, which saw wage and price declines due to automation and outsourcing production.

There was also massive diversion of money into assets, such as real estate and stocks, rather than consumer goods. Consumer services (education, medical care) had high inflation.

The Visual Capitalist chart notes that the money supply grew 25% in the first year of the pandemic – 2020. The chart ends at the end of 2020.

Here is the current M3 chart. M3 is increasing at a steep slope – far steeper than the slope from 2000 - 2020. The steep slope shows no evidence of leveling off. In fact, it correlates strongly with the CPI chart.

M3 was $15.47 X 10^12 in February 2020. M3 was $21.84 X 10^12 on 3/10/2022, an increase of 41% in just over 2 years. Even without pandemic restrictions and bottlenecks, this is far faster than the growth rate of GDP.

No wonder we have inflation! Until the growth rate of M3 declines we will continue to have inflation.



and the 2000s, which saw wage and price declines due to automation and outsourcing production.

We did have some inflation in the period. It is always the case that the adding to the money supply creates two things GDP growth and inflation. The balance of which depends on how much monetary stimulus and the current economic environment. That is why the March spike is all Ukraine war based. There are still ripples.

Of course recession is one way to resolve the money supply problem.

Usually the Fed would respond by cutting interest rates. But in an era of inflation, what do you do?

Let money supply collapse?

Getting it right will be interesting.


It is only a recession if you are out of work.

That was used to hit people over the head.

But the reality is it is only a recession if you are out of work.

The FED is risking only minor recession not calamity.

Due to multiple external factors:

  1. Avian flu,
  2. Russia attacking Ukraine,
  3. public getting tired of Covid,
  4. future increasing interest rates,
  5. high housing costs, especially new starter home prices,
  6. Gas, oil, nat gas pricing,

inflation is up (eggs, chicken, turkey, more)–which will absorb some of the excess cash. People who are middle class and below are likely hurting. They have already used up most of the cash the govt gave out.

However, how much of the increase in cash went to people who really don’t spend but invest (in what)? Short-term investments boomed because they offer low rates but turn quickly, making the funds available again to chase better returns should one become available. Otherwise, absent a better opportunity, the funds go back into short term investments because there is (as yet) no good alternative.

Car sales in the US is taking some of the extra cash. But it will be maybe two years (more?) for production to restart in earnest. However, some of that production will be shifted to EVs (which will grow in number over time), which uses far fewer workers and components.