According to the Quantity Theory of Finance, the sum of money in an economy has an effect on the prices of goods.
According to the theory, more money in an economy leads to higher prices and vice versa. Despite the fact that the hypothesis has many flaws, it is widely accepted that more capital contributes to higher prices.
On an index basis, the price of Crude Oil is shown below, balanced for the level of the US M2 money supply.
Since 2008, the price of oil has been decreasing in relation to the amount of money circulating. Can you recall the fear of “peak oil” and everyone’s belief that the price will continue to rise at that time?
There was, after all, a high point – in terms of price.
Despite the strongest money supply growth in US history, the price of crude oil remains in a downtrend, at least for the time being.
It’s unlikely to see some sustained price inflation until it breaks this downtrend.
Debt deflation remains a clear and present risk.