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Comment by roenxi | Hacker News Reader

The official line is that inflation is low; but as far as I see the amount of money in the American economy, which I put at, eg, ~7% in the last 12 months of the M1 [1], appears to be growing faster than the inflation rate which is what, ~2-3%?

If this isn't being measured as 'inflation', it makes me ask why inflation is the key measure. The amount of new money is pretty substantial.

[1] https://fred.stlouisfed.org/series/M1SL

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Basically because the velocity of money is variable and depends on societal factors (lending practices, payment technologies, even psychology). What the central bank is really looking to do is keep the amount of money that's in flight supporting transactions at any given moment roughly stable. When velocity drops the money supply needs to increase faster than inflation to keep the amount of cash in flight the same. https://fred.stlouisfed.org/series/M1V

You have to look at stocks and flows together.

M1 is the stock of money.

But if that money doesn't flow, then it doesn't drive economic activity.

Here's the velocity of M1 -- it falls off a cliff in 2009 and continues falling to the present day.

https://fred.stlouisfed.org/series/M1V

If velocity held constant as the money supply increased, then you'd have a very good point.

You can flood the system with liquidity, but if nobody spends it, then it makes no difference. I believe this is what economists call "pushing on a string".

Money supply is not the dominant cause of changes in the price level, despite what hard money advocates think.

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