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?
The language we use matters - it provides clarity to our own thoughts and enables…
It is now generally acknowledged that the structure of the NHS needs to be overhauled…
In the film Apollo 13, a loss of oxygen causes the crew to start inadvertently…
There's an idea out there which seems intuitive but then so many ideas do seem…
When we think about the darkly opaque goals of modern central bankers as they relate…
As the papers recently filled with the distressing images of desperate souls looking to escape…
View Comments
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?
"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 decade or more). Just hand waving about 'Velocity of money' won't do. VoM translated means 'We economists can't explain why inflation hasn't risen, so we'll invent this thing no one can see or measure by itself to explain what we can't' Its an economic slight of hand.
My feeling is that the author the piece you quote has the germ of something that explains the lack of inflation in western countries who are blatantly printing money - the usual catalyst for a hyper inflationary event is the collapse of the currency vs some other reserve currency. If all the currencies are inflating at the same time then that can't happen. So you're left with the 'too much money chasing too few goods' argument to create inflation. And here I feel that productivity and globalisation, particularly of manufactured goods has increased so much that the marginal production cost of many items is virtually zero. Thus if the price of the output rises due to extra demand (the more money bit) output is immediately stepped up to compensate. And it doesn't matter if the consumer with the extra cash is in Chicago and the producer in China, globalisation means they can be rapidly united.
I see it all the time in farming - output prices are perennially in the doldrums, having not risen in nominal terms in decades in many cases. If there is even a slight rise in one of them due to some combination of supply issues and demand rises it is very short lived, as the moment the price rise makes marginal production highly profitable the production taps are turned on and within a year or so the extra output has swamped the market and prices are back on the floor again. Hence why inflation seems so stubbornly low - the whole world is the marketplace now, not just the national stage. And there's still billions of very poor people who will slave away producing cheap goods for a dollar. Even when there's trillions of them being printed.
"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. So the consequence of having gov't overspend taxation is the invisible lack of the extra wealth we would have had.
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, then thats definitely a problem.
My feeling is that we are living in a global MMT environment. And while there are spare resources (ie cheap labour mainly) somewhere in the world then all the money printing in the West is just using up that under utilised resource in creating more goods, and thus there is no inflation. All made possible by globalisation of trade. We print money in the UK, draw in cheap goods from China or Vietnam, who are happy to take our currency (for now). Eventually the spare global resources will become fully utilised and then inflation will kick in.
Trouble is that this will take some time (as we are seeing) and by then the politicians will have decided they really have invented the magic money tree to make us all wealthier for no effort, and it will be too late to stop. The inflation will be blamed on something else. Bourgeois wreckers most likely, or the Jews.
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 other is due to a reduction in demand because people cannot afford to buy. Those of us with the ability to think a little can see that people are better off with an increased supply at lower prices. Sadly "Keynesians" who never read Keynes and/or didn't understand him think inflation should be created to beat disinflation rather than government spending used to beat deflation.
Where is the inflation? Check out stock market indices and housing prices. The natural home of money is the markets.
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?