What is the relationship between the money supply and nominal GDP growth‪?‬ Finance & Fury Podcast

Welcome to Finance and Fury, the Furious Friday edition. In today’s episode I want to explore the effect of monetary inflation (in other words the increase in the money supply) on GDP growth
Covered GO compared to GDP in Wednesdays episode this week - To go one step deeper – want to look at the fact that nominal GDP looks to be directly inflated by additional money introduced into an economy – essentially in the form of credit – therefore - GDP growth is simply a reflection of additional money introduced into the economy And if this is the case - GDP is really not a good macroeconomic tool to use to make policy decisions – as it gives no real indication as to the underlying health or real growth of an economy – as it can just be artificially inflated whilst having debt elsewhere that offset the real growth
 
This may come as a bit of a surprise – it did to me when looking at some of the figures –
as it is rare to find any economists covering the relationship between monetary expansion and GDP Yet – there is a pretty strong relationship between the money supply growth (measured by M2) and GDP growth over the past few decades since Fiat currencies were implemented worldwide – Especially when Government spending (both as a component of GDP) is now funded through an increase in the monetary supply by fiscal deficits – which are funded through the issuance of bond and in turn these are now funded through CB programs like QE The corporate side isn’t too much better – you have massive zombie companies that have funded investment through the issue of debts Under normal circumstances - how should the economy grow based around classical economic theories? If you have listened to this podcast for a while – it shouldn’t come as any surprise that I fall into the supply side of economic thinking – and as part of classical economics thinking – there is a thing known as Say's law – also known as the lawof markets That is that creation of a product creates demand for another product by providing something of value - which can then be exchanged for that other products – it relies on production being the source of demand in a market economy, goods and services are produced for exchange with other goods and services – this is known as "employment multipliers" – these arise from the production of goods and services and do not come from the exchange of these goods alone This goes back to the concept of GO versus GDP – many businesses in the economy exist to be business to business services – that form parts/components that go into the final output that GDP gets measured So there are many economic interactions that don’t get measured So through the market – with additional companies being in demand to produce additional components for other companies that provide goods and services – additional employment growth can occur – with this comes additional incomes and the cycles of consumption can go on So through the process of creating many different types of economic activity - a sufficient level of real income is created to purchase the economy's entire output, due to the truism that the means of consumption are limited by the level of production with regard to the exchange of products within a division of labour of different employees working in different businesses - the total supply of goods and services in a market economy will equal the total demand derived from consumption during any given time period However - For this type of economic functioning to be present – there are some assumptions that need to be present - flexible prices—that is, all prices can rapidly adjust upwards or downwards – this is the price of the exchange medium as well – which is money Goes into both interest rates as well as wages in economic activity – both of which are set with floors no government intervention – which doesn’t exist So this theory quickly falls apart