The Anti-Price Deflation Helicopters Did Their Job

They love the smell of crisp banknotes in the morning.

In 1969, when the Vietnam War was raging, monetary economist Milton Friedman first coined the term “helicopter money,” in reference to what could be done to stimulate demand in an economy. This parable of simply throwing money out of helicopters was revived by Ben Bernanke in 2002. Most people thought it was a joke, even as Quantitative Easing started in 2008. But nobody is laughing now.

The U.S. government or the Federal Reserve didn’t call it helicopter money, but the stimulus checks issued to Americans from April 2020 amounted to the same thing. The chart below shows the annualized rate-of-change in the U.S. Consumer Price Index. Is it a coincidence that the acceleration started as money was being dropped by helicopters?

The Quantitative Theory of Money hypothesizes that the more money there is in an economy the greater chance there is that consumer prices will accelerate. Indeed, the point that most people miss is that the term inflation in essence refers to the growth of money and credit in an economy. What prices do is secondary but, as the theory goes, they have a good chance of following monetary inflation.

Is it any wonder, then, that we are where we are now? There are, to be fair, a number of “reasons” why consumer prices have accelerated markedly over the past year. Supply chain issues are often cited but that again gets back to monetary inflation. If U.S. money supply had not exploded higher in 2020, perhaps demand would have been dampened and the stress on supply would not have been as great.

As the chart makes clear though, consumer price inflation was rampant well before the war in Ukraine started. It’s pretty much nothing to do with the war. It’s the money supply. And after the biggest monetary inflation in history, what lies ahead? Deflation.