The dramatic growth in the U.S. money supply, when broadly measured, that began in March 2020 will do what increases in the money supply always do. Money growth will lead in the first instance (1–9 months) to asset‐price inflation. Then, a second stage will set in. Over a 6–18-month period after a monetary injection occurs, economic activity will pick up. Ultimately, the prices of goods and services will increase. That usually takes between 12 and 24 months after the original monetary injection. Given this sequence, it’s as clear as the nose on your face that we’re going to see more — perhaps much more — inflation entering the system in the coming months.
To get a handle on how the economy works and where we’re going, one needs a model of national income determination. For me, a monetary approach to national income determination is what counts. Indeed, in a fundamental sense, it’s a theory of everything. The close relationship between the growth rate of the money supply and nominal GDP is unambiguous and overwhelming.
So, what is the current U.S. monetary temperature? Let’s first determine the “golden growth” rate for the money supply, and then compare the actual growth rate of the money supply in the U.S. to the golden growth rate. To calculate the golden growth rate, I use the quantity theory of money (QTM). The QTM states that MV = Py, where “M” is the money supply, “V” is the velocity of money, “P” is the price level, and “y” is real GDP.