Money supply: The proportionality constraint

The expansionary monetary policies conducted in OECD countries are lead ing to a sharp increase in the money supply (here we are talking about the money supply for non-bank economic agents, not the money supply from the central bank). This is where the proportionality constraint comes into play. If the money is a transaction money, in the long run it must move in proportion to income, i.e. nominal GDP; this explains why, in the long run, if real GDP is determined independently of monetary policy; there is a strict link between money supply growth and inflation. If the money is an investment money, in the long term it must move in proportion to wealth (which includes money, bonds, equities, real estate, etc.). This explains why, in this approach, there is a strict long-term link between money supply growth and the prices of other assets (financial and real estate). But there is a problem with this second theory: if the money supply grows rapidly, total wealth must in the long run grow at the same pace, which means that total wealth will grow continuously relative to income (nominal GDP). This is impossible, because there will no longer be enough income for the "young" to buy back the assets held by the "old". There are then two possibilities: Either the money supply growth must stop, as economic agents do not want to hold any more money; Or, even if this is not apparent today, the rapid money supply growth will eventually cause goods and services prices to rise at the same pace.