From WSJopinion: The Fed ignored the money supply, and a recession is coming, write John Greenwood and Steve H. Hanke
The relationship between money and inflation remains a mystery to many who should understand it—including Federal Reserve Chairman Jerome Powell. Late last month he said, “We now understand better how little we understand about inflation.” By analyzing the money supply during the global financial crisis, which started in 2008, and our current inflation, we can see why the U.S. economy and inflation behaved differently in those two periods.
Money dominates. Broad money growth drives nominal spending. In normal times most money is created by commercial banks. When a bank makes a loan, it credits the borrower’s deposit account. The loan does not come from the bank drawing down on its reserves at the Fed. Banks can also create money by purchasing securities, again crediting the deposit account of the issuer or seller of the securities.
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