>Monetarism of financial assets (ECONOMIC RESEARCH)

We can draw a distinction between two types of inflationary episodes in the past, analysed by “conventional monetarism”:

• episodes of moderate inflation, due to excessively expansionary monetary policies would lead to major strains on production capacity or the job market (1970s, early 1980s, late 1980s, India currently);

• episodes of hyperinflation (Germany in the 1920s for instance), due to a flight (because of mistrust) from money, as holders of money try to get rid of it by buying goods and services, leading to a very rapid rise in the prices of these goods and services.

The first kind of inflation has now disappeared, owing to the significant flexibility in the supply of goods and services (globalisation, deregulations) which implies that the rise in the demand for goods and services no longer results in a rise in their prices. It has been replaced by inflation in asset prices, because of the stickiness of the supply of assets (real estate, equities, bonds, commodities, etc.).

The second kind of inflation (hyperinflation in prices of goods) could, for the same reasons, be replaced by hyperinflation in asset prices: if economic agents want to get rid of money because the money supply is growing too fast, they buy real assets (commodities, gold) and not goods, as is perhaps already beginning to happen.

We are referring to the conventional monetarist explanation of:
1. inflation;
2. hyperinflation.

1. Inflation
Inflation, in the conventional monetarist explanation, is due to the excess demand for goods and services in comparison with the supply stimulated by the excess monetary (and credit) creation, in a situation where the output of goods and services can no longer rise (where the supply of goods and services becomes sticky).

In a nutshell, we have:

This occurred, for instance in the late 1970s and early 1980s in the United States and Europe, with, after the oil shocks that led to a contraction in supply, monetary policies that were at initially expansionary and led to the appearance of a situation of excess demand for goods and, therefore, inflation.

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