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What Really Causes Inflation & Deflation?

QUESTION: why national debts eventually default Martin to answer this question you said:

we need to introduce currency. France and Germany were less impacted by converting to the Euro than Greece, Italy, Spain, and Portugal. Why? Currency Inflation!

My question is if it is not the quantity of money that is making $1 million buy fewer Cadillacs, then what is the trigger?

Is it the national debt, being devalued by a lower dollar?

What then is causing that dollar to go lower and purchase less if not a quantity of money causing fewer goods to be chased by more money?

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ANSWER: It is a combination of many trends. The idea of inflation is caused by an increase in money supply has been the one-dimensional answer. It may sound logical, but it is far from the actual cause. Inflation and Deflation are more directly impacted by the credit cycle than the creation of money by the state.

 

Here is a chart of M2, which includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds. If we look at money supply, then inflation should always exist without end. Clearly, money supply is not the only factor involved.

Here is what is known as the adjusted monetary base, which equals the sum of the monetary source base and an appropriate RAM adjustment. The adjusted monetary base is composed of the adjusted total reserves and adjusted nonborrowed reserves. When we redefine the money supply looking at the entire monetary spectrum, you get to see the Quantitative Easing and it peaked in line with the ECM.

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