On Feb. 10, the Bureau of Labor Statistics announced that the year-over-year consumer price index jumped by 7.5% in January, the highest reading since February of 1982, and well above the roughly 6% that Wall Street experts had forecast. Once again, a single explanation dominated the headlines: As usual, economists, market strategists, and pundits argued that “supply chain” disruptions slowing shipments by land, sea, and air, and causing severe shortages of everything from semiconductors to building supplies, are the principal cause for rampaging prices.

Despite month after month of big CPI numbers, Fed chairman Jerome Powell remains in the “it’s all about bottlenecks” camp. To be sure, Powell has pivoted from his long-held position that the inflation surge is “transitory,” and promises strong action to stop the upward march in prices. He’s hastened the end of the Fed’s gigantic bond-buying campaign, and pledges to rapidly raise the Fed funds rate in the months ahead. But for Powell, the Fed’s just taking emergency action until the root cause of the problem, those clogged supply chains, resume running smoothly. In testimony to Congress on Jan. 9, Powell stated: “The economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and hence to elevated inflation.” In other words, the U.S. is suffering a one-time, temporary shock––a legacy of the collision between the cataclysm that slowed or shuttered output at the world’s factories, and the heavy spending now raging in the Great Reopening.

What if the problem isn’t bottlenecks?

Steve Hanke isn’t buying it. It’s worth listening to Hanke, a professor of applied economics at Johns Hopkins University, because his forecasts have been strongly contrarian, and right on. As early as July of 2021, Hanke posited that the U.S. would be facing price increases of 6% or maybe as high 9% by now, at a time when Powell, and most economists, including Paul Krugman and the staff at the Congressional Budget Office, saw little danger. “The idea that supply chains are to blame is wrong,” Hanke told Fortune. “That problem is real, but it only explains the rising prices for specific goods that are in short supply. What matters for overall inflation isn’t how different prices move around inside the basket of all U.S. goods and services, but the level of the total basket. Since that level is soaring, it can’t be about bottlenecks. The current trend can only be explained by one force, an explosion in the money supply exceeding anything we’ve seen since World War II.”

You’ve probably guessed that Hanke is a hard-core “monetarist,” an adherent of Nobel laureate Milton Friedman’s credo that “inflation is always and everywhere a monetary phenomenon.” The monetarist school boasts a distinguished roster of champions dating back 500 years, notably David Hume and John Locke in the 18th century, and Johns Hopkins legend Simon Newcomb in the 1800s, a hero of Hanke’s who tripled as a great astronomer and mathematician. Irving Fisher led the charge in the first half of the the past century, followed by his disciple Friedman, whom this writer met as a MBA student at the University of Chicago in the 1970s and frequently interviewed as a journalist. Though it still features prominent voices today, among them Robert Hetzel, a retired Fed official, John Greenwood, retired chief economist at Invesco, monetarism has long been out of vogue. Powell dismissed it during congressional testimony a year ago, stating that growth in the money supply “really doesn’t have important implications.”

But on the economy’s most vexing problem, Hanke’s been right, and Powell, Wall Street forecasters, and most economists spectacularly wrong. Indeed, if you plug the key economic numbers into the old-line monetarist formula predicting inflation, you get just about what the CPI is now showing. So now’s a good time to assess if it’s really excessive money supply growth, not the temporary traffic jam in world commerce, that’s fueling inflation. If Hanke’s correct, the U.S. is facing at least two more years of gigantic price increases regardless of when the blockages ease.

The monetarist formula nailed inflation, while the Fed blew it

Hanke insists that gauging shifts in the money supply has always been the best barometer for future inflation. But monetarism appeared to lose its relevance in the last decade-plus of easy money. Critics claimed that the theory should have predicted big price increases when the Fed embarked on its zero interest rate and quantitative easing campaigns following the Great Recession, yet inflation remained subdued. For Hanke, the mistaken view that monetarism was wrong, and that jacking the money supply carries little downside, led directly to the policies that spawned the worst bout in decades––an outbreak, by the way, that could last a long time.

The monetarist approach always works, says Hanke, as long as you measure the money supply properly. And the proof is that it accurately predicted the current spike that the Fed, Wall Street, and most economists missed. “What’s called the ‘quantity theory of money’ that monetarism’s based on isn’t really a theory. It’s the truth, an identity,” says Hanke. “It’s a perfect match with the inflation America’s witnessed since 1960.”

The quantity theory consists of a basic formula: Changes in the price level––the rate of inflation––must equal the sum of increases in the overall money supply and its “velocity,” less growth in GDP. Velocity is defined by the rate at which “the money supply is turning over in the economy,” the pace at which customers and businesses buy and sell products and services. Put simply, when the money supply is swelling much faster than U.S. output, inflation pounds the economy. That phenomenon accounts for the family-budget–crushing jumps we’re now seeing at grocery store checkouts and gas stations.

Hanke’s “bathtub” view of inflation

Hanke likes to compare looming inflation to the level of water in a bathtub. The water pouring into the tub represents the new dollars swelling the money supply. That new money is coming from one a big faucet fed by two sources. The first is the Fed. The central bank sells Treasuries to banks, then buys the bonds back by “printing” fresh trillions that didn’t exist before. The second is the banks themselves. They create money by issuing new loans. Customers and businesses take those mortgages or small-business credits and deposit the proceeds in savings and checking accounts, and money-market funds. The banks and funds channel that liquidity into still more loans, adding to the money supply.

High future inflation is building, and bound to leak out, when water rises in the tub. Ideally, the volume that flows in drains right out, leaving no excess water. How does that happen? The tub has two drains. The first we’ll call the “G” drain, for economic growth. The growth of goods and services absorbs or offsets increases in the money supply. The second drain is the “demand for money” or “D” outlet. When consumers and businesses add money to their financial portfolios instead of spending it, that trend drains money out of the tub. If the amount of money going in simply equals what is being drained out, inflation will be zero.

What happens if more money is coming in than leaves via the G and D drains? in that case, the level of “water” or money in the tub rises. This excess money eventually spills over and leaks into inflation, through the tub’s overflow valve–– we’ll call it the “I” or inflation valve.

Hanke says that following the Great Financial Crisis, the Fed opened up the faucet, but at the same time, the banks switched their flow from positive to negative. “As a result, the overall money supply growth was modest,” says Hanke. “The bathtub didn’t fill up because the amount of water flowing in was low.” The inflow was so slow that it roughly equaled the amount running out through the G and D drains. So there was little buildup to reach the “I” overflow valve. All told, the faucet’s flow was so slow that inflation stayed well below the Fed’s target of 2%.

Hanke says that everyone from the gold bugs to the Keynesians got the Great Recession wrong because they failed to understand that monetary spigot wasn’t gushing at all. The gold bugs panicked, predicting huge inflation because they could see the Fed’s balance sheet exploding. But they weren’t paying attention to the big lending cutbacks at the commercial banks. “They didn’t see that very little was coming out of the monetary faucet,” says Hanke. On the other hand, the Keynesians said that quantity theory of money didn’t work because the Fed’s balance sheet expanded enormously, but the U.S. didn’t experience much inflation.

The tub fills up

Since February of 2020, says Hanke, the Fed and the banks have grown the money supply by an astounding 40%, or over 18% a year. “Economic growth and demand for money drained off only 10 points of that 40%,” says Hanke. Right now, that leaves 30% in excess money in the tub that still needs to leak from the I-valve in the form of future inflation. No matter what the Fed does from here, says Hanke, we’re stuck with this excess, which is starting to hit the I-valve and will be with us for several years. “You can forget team transitory,” says Hanke. He predicts we’ll be living with at least 6% inflation for the rest of this year and into 2024.

Concludes Hanke: “Supply-chain problems have nothing to do with today’s overall inflation, though they do cause changes in some goods versus others. It’s all about the money supply. Just look at China, Japan, and Switzerland. They face supplychain problems just was we do. But their inflation rates are very low, because there’s little excess money building up in their monetary bathtubs.”

This writer spoke to Milton Friedman many times during the great man’s years at the Hoover Institution before his passing in 2006. I’d call his office and leave a message, and the bantam sage would call back––collect. One time, the operator intoned, “Would you accept the charges from Milton?” and Friedman once quipped back, “I was amused at the operator’s calling me Milton.” It’s likely that if Friedman were alive today, he would have warned that the Fed’s profligacy in the pandemic would cause catastrophic inflation. Hanke filled the role for his idol. But it took Hanke to add his own colorful element to the monetarist canon, the imaginary bathtub whose flows, drains, and faucets tell the true story of inflation.