Tim Relton

This is the out-of-date Friedman text book explanation. Friedman did not foresee the growth in globalization and financialization following the 1973 OPEC price sanctions when petroleum prices rose seven-fold detween 1973 and 1983 and beyond. In the UK, 25 years in the last 50, inflation was created specifically by cost-push inflation arising from rising imported energy prices and had nothing to do with domestic money volumes. Money volumes DO create asset bubbles which then, in the form of land and real estate and commodity positions, feed into the production costs of goods and services companies and extra costs for households creating cost-push inflation. In other words, what starts off as demand-pull inflation, transitions into cost-puh inflation. The response of companies to cost-push inflation is anticipatory pricing. This consists of raising prices so as to protect profits to guarantee future activities and employment as well as to accumulate enough cash flow to be able to afford the next period's inputs facing rising prices. This then generalises cost-push inflation. This drove Brazil in the 1980s/1990s almost to hyperinflation. The mistake made by the Fed and Bank of England is that since the Quantiy Theory of Money states the same thing as Friedman (money volume rising quicker than output creates inflation) so to reduce inflation use is made of interest rates. However, since most inflation is caused by cost-push effects, raising interest rates only exacerbates the state of affairs by raising costs ressulting in reduced real incomes. This is why Reagan and Thatcher's dumb attempts at supply side combined with high interest rates resulted in the UK, at least, in over half a million families losing their homes diue to repossession and widespread corporate failures. In the USA thousands of multi-generational family farms were lost for ths same reason. You know as a businessman that there is no reason why companies in competition raise their prices, willy nilly, just because there is more money in the economy. In general, the only reason companies raise their prices is in reponse to rising input costs and not national money volumes. The problem is that most economists and central bank people are not businessmen or particularly practical - mainly highly academic. I don't have to explain to you, of all people, that the reason exchange rates tumble, balance of payments decline and we have inflation is the result of PRODUCTIVTY not RISING at a sufficient rate . In other words money volumes can accompany output but this does not counter inflation if caused by inadequate productivity responses to rising input costs. I explain all of this and more in my forthcoming book: