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Matt Gelfand's avatar

It is worrisome that the last point doesn't seem to hold empirically - that inflation and money supply growth should be in parallel. Friedman's well-worn saying that "Inflation is always and everywhere a monetary phenomenon" is widely held to be true. He and Rose Friedman wrote a classic tome to support the claim ("A Monetary History of the United States, 1867-1960") and prior cross-country empirical papers have supported it too.

I wonder whether the next to last point is foundational, that "The difference between long-term interest rates and inflation (i.e. real rates) is constant in the long run and reflects both a risk premium and economic growth." Yes, real rates should relate closely to real economic growth and risk. But if real economic growth varies, which it does because population growth and labor productivity growth vary, and if risk aversion varies, as it arguably does, then real interest rates on long-maturity .instruments also should vary.

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