Does GDP follow the money supply?
This is the 4th installment in my Monetary Economics series. The first three installments were:
From these three articles, we have learned that:
Home loans use money created out of thin air
When the principle is paid back, it is destroyed
There is no justification for charging interest
House prices can be halved by banning this practice
The ‘Interest Rate’ monetary tool is used by central banks to extract as much money as possible from the public without a collapse
The money supply is the primary driver behind stock market prices
This paper by Mallet and Keen found that GDP is largely based on changes in the money supply. Professor Alexander Faure in his book Money Creation: Advanced Readings, also states this.
The close relationship between money and nominal GDP is well known. Friedman and Schwartz (1982) were the first to give it much attention, using data for a long period. … Many other scholars have done similar research with good results when broad money is used. … It is notable the R² of domestic credit extension and broad money is close to 1.0 for most countries (UK = 0.994; US = 0.996; Japan = 0.98).
What does this mean? Doesn’t GDP reflect a nations economic capacity?
Not really. To some extent yes, but as we can see it is mostly due to money supply. More money in circulation will increase GDP, naturally.
There are slightly better methods. Purchasing Power Parity measures economic power more effectively, while GDP per hours worked is better for measuring individual prosperity.
In other news, I predicted that the RBA would increase the interest rate once again. This didn’t happen, the RBA left it unchanged.
The RBA governor said the reprieve would “provide some time to assess the impact of the increase in interest rates to date and the economic outlook” but warned the bank could need to hike rates further in the months ahead.