How The Coming Significant Inflation Will Work

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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?

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Michael van der Rietjohn77JimSpikeWheels Recent comment authors
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Wheels
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Wheels

I’ve been predicting significant inflation for the past 10 years so I’m glad I’ll finaly be right. But what to do now? Buy and burry gold in the back yard, buy stock figuring it will rise along with inflation and higher prices, comodities?

Jim
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Jim

“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 where’s the inflation in Japan, after 3 decades of money printing? Or the US since all the post Financial Crash QE? Or the UK ditto? The ‘inflation is just around the corner’ brigade are starting to sound a bit of a worn record. Something else is needed to explain the current situation (and of the last… Read more »

Spike
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Spike

“Inflation is, always and everywhere, a monetary phenomenon” involving loss of value of the currency. Yes, one measurement of loss of value is relative to other currencies that have not undergone that monetary phenomenon. This would increase the cost of imports. Independent of this measurement, the money has lost value. All other things being equal, the money cost of domestic goods would rise. All other things have not been equal in the last 20 years, and not just from globalization; we have gone from scheduling trips to the library, bank, and City Hall to simply doing it on our phone.… Read more »

Jim
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Jim

Well thats a very different definition of ‘inflation’ to what we would traditionally define it as. Saying ‘we could have been X% wealthier but for the money printing’ is very different from ‘You are X% poorer than you were last year’. If you could afford one loaf of bread per day in the past, and can still afford that today, that seems a OK state of affairs to most people, even if you might have been able to afford 2 loaves under other circumstances. Whereas if you can only afford half a loaf today vs a whole one last year,… Read more »

john77
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john77

You are pointing out that in the absence of reckless printing of money we should be in a disinflationary environment, as our ancestors were after the end of the Napoleonic Wars – lots of spare capacity thanks to inceased labour availability due to demobilisation of armies and less used to manufacture weapons. In Japan productive capacity per employee has increased due to computer-controlled machinery. One problem is that too many journalists and politicians don’t know the difference between disinflation and deflation – one is prices falling due to an increase in supply and reduced prices due to efficiency gains, the… Read more »

Michael van der Riet
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Michael van der Riet

Where is the inflation? Check out stock market indices and housing prices. The natural home of money is the markets.

Spike
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Spike

Hasn’t the author reversed cause and effect? Gov’t takes budgetary action that requires the artificial creation of money (independent of / in excess of available stuff to buy with it). If the national bank guarantees value of the currency against foreign currencies, it quickly understands that it must renounce that guarantee. Then, amazingly, prices of goods skyrocket. So the author concludes that all we have to do is fail to devalue (continue playing pretend) and the money will be just as good as before?