Previous Research Money Supply Changes Lag Rates by 6 Months
Let’s look at Milton Friedman’s favorite plot (CPI &M2/GDP) and analyze what it’s telling us.
Milton Friedman argued that inflation is entirely monetary in nature and the close relationship between CPI & M2/GDP validates this notion. Ideally, the plot of both these terms should trend together in tandem and with the exact same values. Distortions arise due to the incorrect magnitude & delayed actions of central banks that respond to changing economic conditions.
Assuming Milton Friedman is correct (after all he received a Noble Price) and also assuming Fed is very serious about bringing inflation back to 2%, the future path of CPI would likely flatten as CPI yoy growth goes down and eventually reaches 2% and the M2/GDP ratio should increase and go up to meet CPI.
Now, the only scenario in which M2/GDP could increase is if GDP starts dropping. (since M2 cannot increase as Fed continues QT)
With this in mind, one should expect a drop in GDP this year along with an earnings recession and poorly performing equity markets.
Why would it be any different this time?
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