We’d sorta hope for a financial market analyst to have better logic than this:
There is, however, something else that’s common to this group of countries that tends to get overlooked in the ongoing debate about whether inflation will return to the world’s developed economies. In the three years preceding the 100 per cent plus inflation rates, all the countries saw their currencies devalue by at least 80 per cent against the dollar. (To rephrase: one dollar was worth at least five times more post-devaluation.)
Why is this important?
OK, yes, if money becomes worth less then money becomes worth less. This is true whether we measure the value of that money in terms of other monies or in terms of real goods. This seems simple enough. But the argument then goes on, well, if all monies devalue then what are they going to devalue against?
More importantly, if expansionary policies are the trigger for massive currency devaluations, which currencies are they going to devalue against if all developed countries are doing the same thing at the same time?
How about devalue against real goods?
Which is indeed rather a gaping hole in the argument being used. We can also go further:
Please note that I’m aware the current debate is not about the possibility that annual inflation rates reach 100 per cent over the coming years, but rather the measurement rising to the mid-to-high single digits. However, the link between currency devaluations and inflation still applies: without significant currency devaluation, there’ll be no return of significant inflation.
I’m open to changing my views. But you’ll have to give me three historic episodes of high inflation without significant currency devaluations preceding them. Actually to start, you can start by giving me one.
Until then, history speaks for itself.
So, our standard assumption is that monetary policy takes about 18 months to work through the system. We also tend to believe that markets are forward looking. We even, within the constraints of MV=PQ, think that larger money supplies will indicate higher inflation.
So, the money supply rises – the M4, not M0, see MV=PQ. Markets are forward looking and start to mark down the value of said currency whether against other currencies or real goods. Because we get to see the money supply figures some 18 months before the full effect is felt. So, currency depreciations lead the inflation in the real economy. The logical constraint being claimed here therefore is what?