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Perfectly possible, sadly, in the case of a collapse of the exchange rate, such as what you would see under a poorly implemented fuel rationing scheme in a country which is import dependent on fuel and has a primary trade deficit and no access to hard currency borrowing.

You need to distinguish between imported and domestic inflation. The domestic economy can be in deflation (that is, the absolute nominal markups, including wages, can be falling due to a general industrial depression) while the consumer price index shows runaway inflation due to deteriorating terms of trade.

It's not the sort of inflation the BundesBank idiots think of when they say inflation. But then, the BundesBank subscribes to a remarkably simple-minded theology. So that should, perhaps, not be surprising.

It is, however, more probable, that the state will use the newfound freedom to conduct economic policy to increase nominal markups and wages. You have to have a pretty extreme commitment to austeritarian idiocy to allow domestic deflation to persist in an environment of hyperinflationary foreign accounts positions.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 18th, 2012 at 09:54:57 AM EST
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