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 FAQ:  As long as M3 (Total money supply) keeps on growing at a rate higher than the rate of growth of the economy it creates Inflation.

Posted December 14, 2008

Q. Inflation is the result of a larger than proportionate growth in money supply. What we see now is that M3 (total money supply) is coming down as banks keep sitting on cash because they are reluctant to grant credit. As Money supply is coming down, hasn’t the danger for inflation not become a danger for deflation?

 

A. Only the RATE of Growth in Money supply is coming down;  M3 keeps on GROWING at a slower pace (10% instead of 18%) and therefore we keep on having monetary inflation and not deflation. M1 is growing at a faster rate (more people are keeping their savings under their mattress) and the rate of growth of M2 has also increased to almost 8%.

At this time we also see the velocity of Money coming down. This is a normal and expected faze of the inflation/hyperinflation cycle we are living: people are spending less because they erroneously think prices will come down. The day they understand Inflation is here to stay, people will start to buy whatever they can to get rid of paper money. Velocity will pick up again and we will at that point have entered Hyperinflation.

GDP (gross domestic product) is decreasing by almost 4%!

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