“Inflation is always and everywhere a monetary phenomenon.” That insight of Milton Friedman’s underpins the general perception of a rising money supply as associated with a booming economy. So why, as Europe teeters and the United States struggles, have U.S. monetary aggregates like M1 and M2 been spiking sharply in the last two months? According to Paul Ashworth, chief economist at Capital Economics, it is a knee-jerk reaction to fear, which has driven investors away from European securities and into dollar-denominated deposits:

The surge in M2 over the past couple of months is very similar to the one seen after the collapse of Lehman Brothers three years ago.  … The shift clearly reflects renewed concerns about the health of banks in light of their exposure to euro-zone sovereign debt. In particular, investors are withdrawing their money from accounts at foreign banks.