Posted by: Dr Churchill | October 2, 2014

Growth bearing inflation is not the Boogey Man is made out to be… Growth Capability Economics proves that

The idea that an increase in economic growth leads to an increase in inflation is risible.

The idea that decreased growth reduces inflation is similarly laughable.

Yet these ludicrous ideas have been reflected endlessly in the media and in old school government and academia as correct.

Yet, whether in Macro or in Micro Economics, these ideas makes no more sense than believing that the Monsters hiding under your bed are holding regular Congress meetings in order to undermine your worthless life.

And it’s a similarly daft tale when senior banking economists spout nonsense by saying that growth causes inflation, and that is a scary scenario.

This high level Fear-mongering accomplishes certain ends. That much we know for certain. Yet the very fact that anti-growth bankers and politicians are so legitimately stupid, is what’s so scary about this silly position…

If you need proof of this position — take the equation of exchange, MV = Py, where M is the money supply; V is the velocity of money — that is, the speed at which money circulates; P is the price level; and y is the real output of the economy (real gross domestic product):

If the growth rate of real GDP increases and the growth rates of M and V are held constant, the growth rate of the price level must fall.
But the growth rate of the price level is just another term for the inflation rate; therefore, inflation must fall.
An increase in the rate of economic growth means more goods for money to “chase,” which puts downward pressure on the inflation rate.

For example:

If the money supply grows at 7 percent a year and velocity is constant and if annual economic growth is 3 percent, inflation must be 4 percent (more exactly, 3.9 percent).
If, however, economic growth rises to 4 percent, inflation falls to 3 percent (actually, 2.9 percent).

That being said, if the Federal Reserve Bank increases the growth rate of the money supply and if this increase is unanticipated, then sellers of products and sellers of labor will, for a while, mistakenly think that the higher dollar prices of goods and higher wages they are seeing are higher real prices and higher real wages…


Surely, some merchants, economists, bureaucrats and assorted donkeys, will mistakenly conclude that the higher growth led to higher inflation.

But we know better, because it didn’t.

Higher growth of the money supply led, temporarily, to both higher inflation and higher real growth.

That’s it.

That’s All.

Nothing More Is Needed.

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