What is Inflation and How is it a Tax (2022) - Milton Friedman 

Much appreciated Dennis, a new video every other week!

@@NotAnEconomist Inflation happens when supply exceeds demand. Currency supply is a component of inflation, just as water is a component of drowning, but water doesn't cause drowning any more than currency causes inflation.

@@alueshen Supply of what exceeds the demand? Are you rejecting any particular claim made in the video?

​@@NotAnEconomist The first 15 seconds you say that prices increase because of inflation. Inflation is not a cause, it is a result. Next we have Friedman's "inflation is always an everywhere a monetary phenomenon". That sounds profound, but it really isn't. It would be like saying that drowning is always and everywhere an aquatic phenomenon. However, knowing this tells us nothing. If someone you knew drown (hypothetically), and you asked the police , "what happened to my friend, how did they drown?" and they told you, "water filled their lungs". You'd probably say "DUH!" because while true, tells us nothing. To say inflation takes place in the presence of currency is like saying that drowning takes place in the presence of liquids. It's a tautology that does not impart any new information. There's nothing useful or profound about that statement. Next, the idea that inflation is ALWAYS an increase in money relative to output is also wrong. It is often said that inflation happens when there is too much money chasing too few goods, which strictly speaking isn't wrong. However, I could just as easily say that inflation is the result of too few goods relative to demand. These two sentences are saying the exact same thing, but in one we start with money and the other we start with goods. It leads people to assumptions about the cause and subsequently, how to fix it. "Too much money" or "too few goods". Which is it? it can be either and that's the part you're missing. In fact in either sentence we cannot assume a cause (too much money or too few goods until we have more information). If there is some amount of money X in circulation and some amount of goods that are in demand Y and people are paid some wages Z and the economy has reached a reasonable equilibrium. Now, if there is inflation we need to know what changed before we can attribute a cause. In the three nations you cite, inflation did not begin with a rampant increase in money with wages and output remaining stable. In fact, all of those nations suffered problems of output and demand due to several factors including output being shifted to war materials, in Russia's case, so many soldiers who are workers in peacetime being killed and so many businesses unable to meet demand because of disruptions in the supply chain. Now the question is when there is inflation, what has changed? Money, (X), Output (Y) or wages (Z) And, since economies tend to have some elasticity because the money supply can shrink and grow thanks to modern banking and across the economy the average business usually operates at something less than 100% capacity, so small changes can be endured by an economy with changes output. Next, "governments control the quantity of money". At best a government influences or manipulates the money supply, but most money is created in the private banking system. That said, the government can be more or less aggressive, but to say that "government controls the quantity of money" without understanding the role that banks play or understanding that banks create credit in economies that are functionally indistinguishable from the governments dollar, would be an incomplete understanding and lead you to false assumptions. There is no correlation in the US between wages and inflation. Copy and paste in browser ---> myf.red/g/j62l (link is to the St Louis Federal Reserve charts) I'm going to stop here, I'm at about 4:00 minutes. We'll come back to it. Respectfully, E4E1

@alueshen First 15 seconds of the video are an inflation joke. As Thomas Sowell said, the first lesson of economics is scarcity. There is never enough anything to satisfy all those who want it. Restructuring the definition of inflation into "result of too few goods relative to demand' is not an accurate statement. Another difference is that Output (goods) requires labor, time, and produce value - printing money doesn't. I don't know why you included wages in your formula, as you mentioned yourself, they do not cause inflation. What comes to historical examples, be it war, supply chain disruptions, or stimulus checks for Covid19, these are all examples of government spending (which I mention in the video as the indirect cause, and reduction of government spending as the cure). When government spends more money than it collects in taxes, it prints the rest to cover its spending. We are back to printing money. Next, the money creation and private banking system. I believe in your paragraph you underestimate the power and influence of FEDs when it comes to Broad Money (M2-M4). Respectfully, NotAnEconomist

Much appreciated! I believe the root problem is that the public at large doesn't understand inflation.

Quantity of money (how much money is being printed during a specific period) is higher than the output - the quantity of goods and services produced during the same period

Thank you, happy to have you here Kate! Seems like your channel has a lot interesting and similar content to offer!

And they use it to both buy votes and to funnel money to friends, family, and donors through government contracts

You are absolutely correct. Many of them do believe what they say because of their ignorance, others lie intentionally, but all of them do it because it is politically profitable. It is the public at large that's at fault, we are letting these politicians get away with spending, false promises, and false cures.

I am not sure what you are referring to when you say "no constraints". The beauty of the free market is that it gives us an accurate idea of what the true supply and demand are.

Instead of electing the right people, we need to incentivize the wrong people to do the right thing :) Cheers!

*Summary, and yes, if you look in the comments I have stated my reasons for it. Cheers!

Thank you, and you are correct, that is no secret if you look in the description! I encourage everyone to watch and read Milton Friedman over my videos. This is for those that don't know Milton (or others) and can discover him through this channel, for those that don't want to watch two hour lectures and rather watch a concise version, and for the younger generations that like animation videos :)

Oh, okay that's my bad then for not looking in the description! Keep up the good work!

@@kristoffernyman918 Thank you and no need to apologize!

Please look in the description, anywhere on my channel, and also one of the comments below. This has been discussed already.

You would like to switch the order of some segments in the video?

@@ericallen3006 Bitcoin might be solution to the whole centralized monetary system, not just inflation. I do own some Bitcoin because of its fundamentals. Cheers!

True, thank you for correcting that line. Yet it is not debunked, printing of money is still a dominant factor and Covid inflation is a great example. Things like government spending, policies, aging population and other factors also have their effect and cause printing money as a consequence. If you disagree, I would like to hear your view on what causes inflation. Cheers!

@@NotAnEconomist No central bank in the world today targets the money supply, they look at things like so called inflation expectations(they are still wrong) and have things backwards. It is a combination of energy prices, profit motive, supply side shocks and interest rate hikes which cause the inflation. Inflation is you paying more $ for a unit of product and someone else getting more $ for that same unit product. Here is what economist Ellis Winningham has to say "I'm reposting the following article that I wrote, published on 1 March 2019, for the benefit of those who are having a difficult time understanding why inflation causes "money" creation and not the other way around. Inflation: Money as an Epiphenomenon Epiphenomenon - a secondary effect or byproduct that arises from but does not causally influence a process. You will recall that a couple of days ago I posted the following quote from Doug Henwood’s recent critique of MMT (if you wish to call it such): "Wray’s explanation of the Weimar hyperinflation, one of the most dazzling of all time, is odd. The deficits, Wray explained in his book, were caused by the inflation, not the other way around. In the end, “Germany adopted a new currency, and while it was not legal tender, it was designated acceptable for tax payment. The hyperinflation ended.” Almost nothing about the printing press - he dismisses “printing money” explanations as “far too simple” - and nothing at all about the austerity program. No, there was just an unexplained monetary intervention somehow linked to tax payments. Weimar Germany may be an extreme case, but since it’s often brought up by critics of MMT - “won’t all that keystroking lead to inflation, like Argentina or Weimar?” - it’s one for which they need to have a good answer. Wray’s reluctance to face head-on the risks of printing money makes you wonder how confident he really is of his own theory." -- Doug Henwood, "Modern Monetary Theory Isn’t Helping" and you will recall that I said it should be more than obvious to both students and laypersons alike what it is about the above paragraph that is causing a meteoric rise in my arterial blood pressure. If, however, you think that it is the author's use of the term "printing money", or his mention of hyperinflation, then you're wrong. It's something else far more subtle. It is the following line: "The deficits, Wray explained in his book, were caused by the inflation, not the other way around." And, you will recall that I said it is glaring evidence that Henwood has absolutely no clue what he is talking about. I and others, on the other hand, do know what we are talking about. One of those others is a person for whom I have much respect: David Hendry. Professor Hendry is a British econometrician, most famous for being the founder of General to Specific time series modeling, and most important to our discussion today, his work on money demand econometrics. Now, I do realise that this is probably confusing and, thus, means very little to most of you out there in the public reading along, but to me, it is something other than else. Come to think of it, it should mean quite a lot to you because Hendry demonstrated that DSGE is a pile of fetid, stinking, steaming cow patty, or in my vernacular: Bullshit. But, that is a topic for another discussion. I just wanted to mention DSGE and the word “bullshit” together in a sentence for your benefit. Sort of like one of those word association games people play. For instance, you would say “DSGE” and I would say “Bullshit”. Anyway, let’s continue. Henwood insists that Wray is entirely wrong about deficits being caused by inflation, preferring instead the explanation of too much money printing as the cause of hyperinflation. The reason for that centres on the fact that Doug believes inflation is always and everywhere a monetary phenomenon. The latter part of my sentence should be quite familiar to economics students everywhere. It is a statement by the famous “small ‘L’ libertarian” economist, Milton Friedman. Friedman wanted everyone to believe that money, in and of itself, was inherently inflationary. Apparently, Henwood believes in the monetarist fantasy. Yes, anytime is a good time for any self-respecting Marxist to use whatever it takes, including Chicago School, free-market, small ‘L’ libertarian propaganda, to put people off of MMT. if you’ve studied under me, or followed me for any length of time, then you are well aware of my opinions regarding Uncle Milty’s work - fraud comes to mind - and his fraud is where Professor Hendry’s work on the demand for money is relevant to our discussion. From Henwood’s recent musing in Jacobin, one can easily see that he is relying on monetarism to save the day; specifically, Friedman’s long debunked Quantity Theory of Money (QTM) approach to inflation. For those unfamiliar, I will discuss the issue briefly. Essentially, QTM can summarised by the expression: M(V) = P(Q) Where (M) is the money supply times the velocity of money (V), which is the number of times a single bill changes hands, equals the price level of goods and services (P) times output (Q). There is nothing intrinsically wrong with the expression until you make a couple of variables constant and then manipulate the data, like Friedman and his pal Schwartz did, for ideological gain. What Friedman wanted to do was to show the velocity of money constant. This was a necessary component to his claim that any increase in the supply of money would automatically cause an upward adjustment to the price level, or in other words, inflation. The variable (Q) was safely assumed to be constant by default as the classical view of equilibrium and the labour market was held to be an unassailable fact. In layperson’s terms, there is labour supply and a demand for labour. Businesses demand labour and workers supply it. Equilibrium is achieved when the supply equals demand. Economists assume that we are always at full employment because all workers who wish to work have been given jobs by all employers demanding labour at the present real wage. Therefore, output (Q) is constant. The sticking point for Friedman was to prove that the velocity of money was also constant and if he could, then he was home free because that would leave only two variables left which can adjust: (M) the money supply, and (P) the price level. So, if Friedman could demonstrate (V) to be constant, then he could argue that if the money supply increased, inflation would result. Hendry caught Friedman red handed: “The graph in Friedman and Schwartz (1982, p. 178, Chart 5.5) made UK velocity look constant over their century of data. I initially questioned your plot of UK velocity-using Friedman and Schwartz’s own annual data-because your graph showed considerable nonconstancy in velocity. We discovered that the discrepancy between the two graphs arose mainly because Friedman and Schwartz plotted velocity allowing for a range of 1 to 10, whereas UK velocity itself only varied between 1 and 2.4. ... Testing Friedman and Schwartz’s equations revealed a considerable lack of congruence. Friedman and Schwartz phase-averaged their annual data in an attempt to remove the business cycle, but phase averaging still left highly autocorrelated, nonstationary processes.” In other words, Friedman and Schwartz resorted to intellectual fraud to show UK velocity to be constant in furtherance of their ideological pursuit to claim that money, in and of itself, was inflationary. Though Hendry’s work exposed the fraud, Friedman’s analysis was accepted as fact, and to this day, the Chicago School fraud still imbues the public’s understanding of the Great Inflation of the 1970s with the errant “too much money chasing too few goods” dogma, and the Weimar and Zimbabwe hyperinflation episodes are also tainted with the ridiculous notion of government printing too much money. The Friedman Fraud imparts causation and correlation errors in the mind of the unwitting public to great effect: To date, every, single progressive proposition for the national government to deficit spend for the public’s well-being is met with inflation fear-mongering. It comes as no surprise, then, to see Henwood join the bandwagon of MMT critics screaming, “If MMT economists have their way, they’ll print money to the moon to pay for a Green New Deal, and before you know it, we’ll become Venezimbabweimargentinazuela!” But the truth is that money, in and of itself, is not and cannot be inflationary. The act of money creation carries absolutely no inflation risk. In other words, expanding the money supply is not and cannot be inflationary. Hendry explains this to be the case:

@@NotAnEconomist “As background, monetarism was at its peak. Margaret Thatcher-the Prime Minister-had instituted a regime of monetary control, as she believed that money caused inflation, precisely the view put forward by Friedman and Schwartz. From this perspective, a credible monetary tightening would rapidly reduce inflation because expectations were rational. In fact, inflation fell slowly, whereas unemployment leapt to levels not seen since the 1930s. The Treasury and Civil Service Committee on Monetary Policy had found no evidence that monetary expansion was the cause of the post-oil-crisis inflation. If anything, inflation caused money, whereas money was almost an epiphenomenon. The structure of the British banking system made the Bank of England a “lender of the first resort,” and so the Bank could only control the quantity of money by varying interest rates.” - Professor David Hendry, “The ET Interview: Professor David F. Hendry”, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 811, July 2004 www.federalreserve.gov/pubs/ifdp/2004/811/ifdp811.pdf So, it’s not an expanding money supply, but spending that’s at issue. Spending is necessary for inflation to occur, and that spending can be either private or public, or both. As an example, the US federal government could issue $98 trillion right now. But, if it sat in an account somewhere unspent, that $98 trillion would have no hope of being inflationary. It would have to be spent. What professor Hendry is saying here is what Wray is also saying - Inflation caused an increase in the demand for money. In other words, inflation came first, leading to a demand for more and more money. Money, in these cases, was an epiphenomenon. How could such a thing occur? To answer that question, we will use the subject of Hendry’s comments, the Great Inflation of the 1970’s, as our example. Oil is a vital component to an economy that operates on fossil fuel. It is necessary for transportation and home heating in some regions. Suffice it to say that were a supplier to hinder its supply, the price of goods and services will spike because of the elevated transportation costs of bringing them to market. In the 1970’s, OPEC set off such a cost-push inflation episode. The price of anything that relied on oil, from groceries, to home heating went up. The rising prices meant that most people did not have enough money to cover the higher costs, and that includes business. Thus, the onset of the supply shortage caused inflation which, in turn, caused a demand for more money to accommodate the higher price level. One of the many ways this reality can be demonstrated to the public is to examine a thing we call “lag time” which occurs in production between inputs and outputs. Inputs are the things necessary to produce a good or service: Labour, capital equipment, etc. Outputs are the final products ready for sale. The time in between input and the final output is called a lag. During the lag time, business is spending for production. As the price level increased due to the oil supply shortage, the costs of production increased, and so, businesses needed more money to tide them over during the lag time. They sought more bank financing and they were accommodated. Hence, the demand for money increased, and the money supply increased as a result of inflation, as Hendry mentions. As Wray says, the deficits were caused by inflation, not the other way around. Printing money did not cause hyperinflation in Weimar. The same can be said for Zimbabwe. First, the food supply was destroyed, then the production infrastructure was damaged to the point that unemployment rose to 80+%. This caused a demand for more money, which clearly was accommodated. The Zimbabwe hyperinflation was not caused by “printing money”; it was caused by a catastrophic supply collapse. Wray is correct and Henwood is flat wrong."

@@NotAnEconomist The price increases cause higher Fed govt deficits, cause the money supply to increase. Yes there is a correlation between inflation and the money supply, however the causality is backwards. The increase in prices causes the money supply to expand. Increase in prices causes credit expansion as well as more deficit spending by the Govt. So it is NOT a monetary phenomena, if it were then if you revert back into time and the very 2nd dollar printed by the US Fed govt would have caused prices to increase which is obviously not the case.

@@NotAnEconomist Also how could it be that only Federal govt can cause inflation when the majority of the money supply is created by banks making loans? So Fed govt $ is somehow more inflationary than bank created money?

I can only suggest researching more about the topic, cheers!

@@NotAnEconomist No, you don't understand. I have. I've studied econ for 15 years, and this video is inaccurate and unhelpful because it doesn't reflect reality.

@@simowilliams6990 if you'd like to make a counter argument, please point to sources that would refute this video and people can decide for themselves. The ideas in this video are derived from Milton Friedman and Quantity Theory of Money. Cheers!

@@slatwar3221 that’s still inflation… And no, it clearly wasn’t a joke, but rather a poorly thought-out sentence written by someone who probably doesn’t understand why it’s wrong.

@@slatwar3221 I'm rubber, you're glue

​@@simowilliams6990 @SlatWar I am truly glad you two found each other, feel free to continue confirming your biases in the comment sections of my videos, it helps the algorithm.

@@NotAnEconomist Mine isn't a bias, it's a definition. Inflation is when prices rise over time. The cause is irrelevant; when prices rise over time, that's inflation, period. This is THE definition of inflation commonly used & accepted by the vast majority of economists, scholars, and commentators. It is uncontroversial, EXCEPT in the Austrian school, where they choose to define inflation as an increase in the money supply unmatched by an increase in supply, presumably for the sake of anti-government/anti-fed/anti-public spending propaganda.