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many people me included have failed to accurately foresee inflation rates this year and uh obvious question why and and and one of the things that people talk about a lot in that is changes in the quantity of money so-called money supply and then the so-called velocity of money so in the 19th century there's a famous formula created in theory never actually used in practicality called MVP equals PQ which is the quantity of money times how many times it turns over in a year equals the price of goods times the quantity of the goods and this concept mppq model was a theoretical construct which was never successfully applied in the 1960s Milton Friedman with his groundbreaking work quantity monetary History of the United States uh with a lot of data in a big fat tone uh laid out the history of movements in seeming velocity and seeming quantity of money uh that basically LED you to the conclusion that he would teach when I was young which was that they should control the quantity of money and not try to predict what would happen to the velocity of money because they didn't know how and that over time the velocity of money would mean revert come back to what it is normally on average they just keep the quantity of money growing smoothly the problem that's occurred and I've spoken about this before at other times and places and written about it that the problem that's occurred in more recent years is that world in which he lived then and articulated that well was a simpler world and that there was basically two kinds of money that you could measure and no others there was that which sat in green bills and checking accounts and then there were savings accounts that was pretty much it it was easier to measure today there are Myriad near monies and it's hard to tell what's actually money uh people often don't sit in money it pays no interest uh and they get to out of the money into a near money like a treasury bill which is not money but you can sell it like that to get money and it's hard to tell what's money what's not so it's hard to measure when covet came along central banks in the world more so in America than outside but central banks largely increase the quantity of money in a big rush thinking that this would be a protective device against covet and then with time that didn't immediately create any seeming inflation problems people expected it to but it didn't and I think that but I can't prove that is that most of it dissipated off into near monies really quickly because they paid interest or something like interest and then later some of that seeped back into the world and creates the inflation problem we have now if you've heard me before you might have heard my snake in the rodent analogy which is that when a snake eats a large rodent the rodent's actually dead the moment it's inside the snake maybe even before but that large rodent inside the snake creates a bulge makes the snake A little sluggish but it doesn't make the snake sick the snake digests the rodent and eventually there's no more bulge in that process we as a culture in my opinion ate a lot of inflation but it's really hard to figure the timing of how it moves through the rodent our digestion of it through the economy we had the supply chain problems that we used to hear a lot about there's still some but they're much better than they were quantity of money now as best as it can be measured is growing moderately but we still have all this inflation and I think part of that is because you can't measure the quantity of money very accurately today and we're digesting the inflation we've already eaten you can actually see many of the leading indicators of future inflation having come down most commodity prices are way down from where they were earlier in the year uh shipping costs are down because supply chain snorkels are unsnarfling all of those features but predicting the timing of it is treacherous I'm going to be facetious here uh the FED themselves have never been very good at predicted things and they said if you recall late last year that the rise in inflation was transitory the fact is it kind of depends how you define what transitory is and the way most people interpreted that they interpreted to mean a few months but the fact is inflation's gone on longer than that and uh if you think of transitory as maybe it just takes longer to get the rodent to get through the belly of the snake that's a different form of transitory as the commodity prices are coming down the supply chain snarvels are being undone and we don't create money at an exceptional rate and we don't have new huge government spending programs and all of those things that might be government spending programs perhaps financed by debt and perhaps that debt created by Bank Lending or with bank Lending creating increases in the quantity of money as long as those there isn't new inflation to eat the inflation will work through the snake and it is transitory it's just a matter that it's difficult to predict the timing of how long the digestion works so I just want you to think of that that inflation appears to be I mean we think of inflation in our own personal lives type of what we buy which tends to be end goods and services which is the end of the process but the beginning of the process which includes things like changes in commodity prices and increases in the quantity and money and all that stuff the earlier indicators they're all behaving better it's just a question of how long it takes if if that were not true long-term interest rates would be much higher than they are the fact of the matter is with inflation where it is if inflation were to stay at those levels for very long if it were not somewhat transitory whether you mean transitory being this long or this long long-term interest rates would be much higher I want you to think of this a lot like the snake eating the large rodent and think about inflation that way and it's just a matter of timing until that inflation moves the other direction I do appreciate you listening to this long rant of mine thank you very much ] foreign
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