Money Supply and Hyperinflation.

This article tries to link Zimbabwe's hyperinflationary period with the authors' forecast of future inflation in the US and Europe. It has missed crucial points. The authors' main basis in their argument has been the escalating money base growth in the US, Europe and Zimbabwe between comparative periods. They infer causality between money supply growth and inflation is always the norm. But that isn't the case.





They point out the apparent similarities between the trends in the time series of money supply and inflation as shown by the about graphs. But that doesn't mean causality. I don't think that statistical tests like the Granger causality tests will prove their points. The similarities in the trends of the 2 graphs could be most likely that both are influenced by other factors, but not one of them influencing the other.

Another issue is that the macroeconomic environment in both locations are different. Hyperinflation or even moderate inflation isn't expected in the near or foreseeable future in the US or Europe despite the growth of money supply. This is because these economies are experiencing liquidity trap conditions meaning that interest rates are close to or at zero. The interest rates should actually be lower but in this case you can't below zero because of profitability issues. Hence massive growths in money supply wouldn't be inflationary because interests rates should be actually lower. Japan is a good example because it has afforded to have huge amounts of quantitative easing but the inflation has been close to zero and in some case deflation. Therefore we can see that the money supply growth isn't going to be inflationary.

This is a different case for Zimbabwe. This is because Zimbabwe, in the hyperinflation era was experiencing stagflation-type conditions. High inflation was associated with a decline in output. Interest rates were also high, hence there wasn't any liquidity trap conditions. Hence in the US and Europe not only wouldn't you expect causality but you wouldn't expect colleration between money supply and inflation.

In Zimbabwe the collerations between money supply growth and inflation do not mean causality in my view. When commentators and some authors talk about money supply growth they mean that caused directly by the central bank (RBZ) via quasi-fiscal activities and "irresponsible" government expenditures. The issue became a bit political and sole blame is put on the shoulders of this institutions. Some attention goes away from the all important of causality between money supply growth and inflation. Like I said before causality isn't the case but the expectations of the economic agents are.

Therefore the article's main argument is wrong and the use of Zimbabwe as a reference point is not in-sync with reality. Some well-known economists like John H. Cochrane have been pushing the authors' arguments of expected future inflation in the US etc. but the real economy has disproved him. My previous post touched on matter. I just hope mainstream literature starts painting a clear picture of the situation.