China is rapidly expanding its money supply.Its M2 money supply has now reached nearly $50 trillion—

China is rapidly expanding its money supply.Its M2 money supply has now reached nearly $50 trillion—more than twice that of the United States, even though China's economy is only about two-thirds the size of the U.S. economy.By itself, that statistic doesn't prove much. China's financial system is fundamentally different from America's, and a higher M2-to-GDP ratio is largely a structural feature of its banking system.But one fact is hard to ignore: When money supply grows faster than the real economy, that money eventually has to go somewhere. Not all of it ends up in factories or productive investment. A significant portion flows into financial assets—stocks, real estate, bonds, and gold.We're already seeing signs of that. Chinese gold ETFs have recorded one of the strongest first halves in their history, while the People's Bank of China continues to accumulate gold despite elevated prices.From a mainstream economics perspective, this reflects an expansionary monetary policy aimed at supporting an economy facing weak domestic demand and a struggling property sector. From the perspective of economists like Hayek and Mises, however, the story looks different.Creating new money does not create new wealth. It creates new purchasing power. And that purchasing power reaches some parts of the economy before others. As a result, newly created money often pushes up asset prices before its effects become visible in consumer prices.That may explain why, throughout history, gold has often acted as more than just a hedge against consumer price inflation—it has also protected investors against asset inflation.So when a central bank keeps buying gold even at record-high prices, it may be telling us less about where gold is headed, and more about how it views the long term purchasing power of fiat currencies. link@The_Economist_Telegram