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On deflation and hyperinflation, is the ratio of M2 to MBASE a useful indicator?

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For several years I’ve been seeing and hearing about hyperinflation but I’ve never found any evidence to support it. In looking for evidence I tried plotting the ratio of M2 to MBASE using FRED data since 1959 (M2NS / BOGMBASE) and some annual, long history from 1918. (Long history plot attached.) All I see is an indication of deflation, or at least low inflation. Do you think this is a useful indicator?

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Posted by (Questions: 1, Responses: 0)
Posted on 12/05/2017 10:01 PM
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Hi XXX,

I wrote a paper on this a few years back.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

My basic conclusion is that hyperinflation isn’t really a monetary phenomenon. It’s usually a political phenomenon that politicians respond to with monetary actions. For instance, in the case of Weimar the govt had foreign denominated debts that it couldn’t afford following the war. This political phenomenon led to the govt printing paper currency to pay off the debts. This worsened the inflation and helped turn it into a hyperinflation.

The more common cases include socialist regimes in South America where the govt is corrupt and thinks it’s cool to just print money and spend it.

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Cullen Roche Posted by (Questions: 10, Responses: 1800)
Answered on 12/05/2017 10:43 PM
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M2 grows when there is a demand for credit. M0 does not effect that directly and the relationship between M2 and M0 has changed since QE. There used to be an indirect but quantitative connection between M0 and the Fed funds rate, now the Fed changes that rate with interest paid on excess reserves.

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Posted by (Questions: 22, Responses: 337)
Answered on 12/07/2017 5:44 AM