Money growth and inflation: Policy lessons from a comparison of the US since 2008 with hyperinflation Germany in the 1920s

The quantity theory of money implies that sustained inflation requires a sustained increase in the money supply. It does not, however, imply that all increases in the money supply are inflationary. This letter explores and illustrates this issue by comparing the inflationary consequences of the same base expansion in the US following the collapse of Lehman Brothers with Germany's hyperinflation experience after WWI. A key factor explaining the vastly different inflation experiences between those two episodes is how the monetary expansion translated into demand. The Fed's base expansion did not translate into demand for goods and services since most of it was absorbed by a huge increase in demand for liquidity by financial institutions. By contrast, the German monetary expansion was immediately translated into demand for goods and services since it was motivated by government's hunger for seigniorage revenues.