Money supply and liquidity: why money does not immediately become inflation
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Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
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The simplified formula "they printed money, so inflation is coming" is true in the limit and useless in practice: several conditions stand between the two events, and any of them can fail.
What the money supply is
The aggregate amount of money in an economy: cash plus balances of varying accessibility. Aggregates are numbered in decreasing liquidity, from cash to term deposits.
Why the link is not direct
Money affects prices only if it is spent. The measure of how quickly it changes hands is called velocity, and it is not constant: in uncertain times households and companies hold money rather than spend it.
The second condition is credit. Most money is created by banks when they lend. If banks do not want to lend and borrowers do not want to borrow, the new money settles in accounts.
What it means for markets
An abundance of cheap money has historically lifted asset prices before goods prices: money goes where it is accepted fastest. Tightening works the other way and reaches assets first as well.
The practical use
Not in forecasting but in interpretation. When equities rise while the economy is weak, the explanation often lies in the price of money rather than in improving businesses. That changes the conclusion about how durable such growth is.
Related: The key rate: how a Bank of Russia decision reaches your portfolio, Inflation: how it is measured and why it differs from yours.
Prepared by a language model from our stored data and checked by an editor.
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