Rate of Monetary Growth

The Federal Reserve, a.k.a. the Fed, gets to decide: how low do we go?

Low, as in: the money supply. The Fed, and central banks around the world, use monetary policy to affect the economy. Playing with the money supply (the amount of $$$ floating around in the economy) and interest rates is how they do their thang.

The rate of monetary growth is how fast new money is getting added to the economy. If the rate of monetary growth equaled the rate at which the economy was expanding, then we’d have zero inflation. The amount of new dollars added would equal the amount of new growth added.

Usually, though, we see some inflation. Prices for everything goes up a tad, then wages, again and again.

Economists like Milton Friedman believed that all inflation is a result of the rate of monetary growth. Inflation means the rate of monetary growth is higher than the rate of economic growth. Money is worth less and less, since there’s more money per value in the system. This fits in with the quantity theory of money, where the buyer side of GDP (money supply times the velocity of that money) equals the seller side of GDP (prices of stuff sold times amount of stuff sold).

If the Fed decided to stop printing money altogether, freezing the rate of monetary growth, and the economy kept growing, then dollars would become more valuable. There’d be fewer dollars per value, which would look like deflation (inflation driving in reverse).

Friedman was known for his k-percent rule, a monetary policy strategy. If the Fed followed it, they would increase the money supply by a constant rate each year, no matter what was happening with business cycles. This goes against the mainstream Keynesian idea that the rate of monetary growth should change in response to business cycles.