The Economy Is Running on Fumes. A Recession Is Right around the Corner

Money is the economy’s fuel. When it surges, nominal GDP (real GDP plus inflation) surges. When it plunges, spending plunges. This is what the well-known and robust quantity theory of money, which has been around since the 16th century and was in recent decades championed by Milton Friedman, tells us. It’s also what common-sense, do-it-yourself economics tells us: Substantial changes in the money supply, broadly measured, make the real economy and prices, with lags, go up and down.

Surprisingly, these days, central bankers reject the tried-and-true quantity theory of money. As Federal Reserve chairman Jerome Powell testified during the Fed’s February 2021 semi-annual monetary-policy report to Congress, monetary aggregates, such as M2, do “not really have important implications for the economic outlook . . . that classic relationship between monetary aggregates and economic growth and the size of the economy, it just no longer holds.”