Neither does Rapid Growth in Government Debt, Declining Interest Rates, or Rapid Increases in a Central Bank’s Balance Sheet
By Richard W. Vague, Managing Partner, Gabriel Investments
Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.
The purpose of this paper is to present these findings and solicit feedback on our data, methods, and conclusions.
To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.
Richard Vague is currently one of the managing partners of Gabriel Investments and the Chairman of The Governor’s Woods Foundation, a non-profit philanthropic organization. He is also the author of The Next Economic Disaster, a book with a new approach for predicting and preventing financial crises, and A Brief History of Doom, which documents the history of private debt crises. Previously, he was co-founder, Chairman, and CEO of Energy Plus, an electricity and natural gas supply company operating in states throughout the U.S. that was sold to NRG Energy in 2011. Vague was also co-founder and CEO of two credit card companies – First USA, which grew to be the largest Visa issuer in the industry and which was sold to Bank One in 1997, and Juniper Financial, the fastest-growing credit card issuer of the past decade, which was sold to Barclays PLC in 2004.
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