Is QE Inflationary?

by Michael J. Howell17. February 2014 09:09
Now that tapering of QE is starting the debate about money and inflation has resurfaced. Where do we stand? Does printing money cause inflation? First define your terms. Do we mean high street inflation, asset price inflation or something else? Second, what do we mean by money? Money has two forms: as means of purchase and as means of settlement. Central Bank QE can change the volume of both, but in the short-term it has most influence over means of purchase that start the economic circuit. QE itself is largely an intermediating process that channels funding to credit providers. QE serves as a direct substitute for other types of funding, such as traditional bank deposits, which is what economists by convention term 'money supply'. However, lately QE has replaced non-deposit funding, such as wholesale funding, e.g. repos and commercial paper, which collapsed post-Lehman. The supply of money is not necessarily affected by this increase in funding, but the volume of credit should be. Therefore, we need to reframe the question? Does an increase in funding cause: (a) an increase in high street inflation and/ or (b) an increase in asset price infation? By lessening the need for forced sales of collateral and reducing rsk premia on asset prices, QE should certainly boost asset prices. Among these a key one is the exchange rate, say, measured in terms of gold. If QE causes the exchange rate to devalue, then it is possible that cost pressures will rise and high street inflation kick-off. However, this surely depends on the flexibility of business, the state of labour and product markets and the degree of spare productive capacity. In short, Central Bank QE represents monetary not cost inflation, since high street prices depend more on costs and asset prices more on money, the vent of QE typically tends to be faster asset price infation. So, does QE cause inflation? Yes, but no! See: The Quality Theory of Money, CBC report 2006. If you believe that 'money' is important the quantity theory works, but if you figure velocity matters too, then you need to think about the quality or liquidity theory of money.

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Is QE Inflationary?

by Michael J. Howell17. February 2014 09:09
Now that tapering of QE is starting the debate about money and inflation has resurfaced. Where do we stand? Does printing money cause inflation? First define your terms. Do we mean high street inflation, asset price inflation or something else? Second, what do we mean by money? Money has two forms: as means of purchase and as means of settlement. Central Bank QE can change the volume of both, bu in the short-term it has most influence over means of purchase that start the economic circuit. QE tself is largely an intermediating process that channels funding to credit providers. QE serves as a direct substitute for other types of funding, such as traditional bank deposits, which is what economists by convention term 'money supply'. However, lately QE has replaced non-deposit funding, such as wholesale funding, e.g. repos and commercial paper, which collapsed post-Lehman. The supply of money is not necessarily affected by this increase in funding, but the volume of credit should be. Therefore, we need to reframe the question? Does an increase in funding cause: (a) an increase in high street inflation and/ or (b) an increase in asset price infation? By lessening the need for forced sales of collateral and reducing rsk premia on asset prices, QE should certainly boost asset prices. Among these a key one is the exchange rate, say, measured in terms of gold. If QE causes the exchange rate to devalue, then it is possible that cost pressures will rise and high street inflation kick-off. However, this surely depends on the flexibility of business, the state of labour and prduct markets and the degree of spare productive capacity. In short, Central Bank QE represents monetary not cost inflation, since high street prices depend more on costs and asset prices more on money, the vent ofr QE typically tends to be faster asset price infation. So, does QE cause inflation? Yes, but no! See: The Quality Throry of Money, CBC report 2006

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Do Central Banks (Really) Create Inflation?

by Michael J. Howell5. March 2013 08:50
It's a provocative title worthy of the John McEnroe stabbing retort 'You cannot be serious?' Indeed, the linkage between Central Banks and inflation must the most accepted 'fact' in economics. However, for some policy-makers right now, perhaps in deflating Eurozone or deflation-weakened Japan, creating inflation would be high on their wish list. Consider the four major crises of the past century: (1) Weimar Germany; (2) 1930s America; (3) 1974/5 Britain, and (4) 1990s Japan. All four suffered banking crises and faced huge debt problems, and all four saw similar policy responses with Central Banks significantly expanding their balance sheets, or much like today's QE. But two cases were inflationary and two were deflationary. Jury out? The defining feature is not the scale of the money printing, but who holds the debt? In the deflationary cases - America and Japan - the private sector was largely the debtor, but in the two inflationary cases - Germany and Britain - the largest debtor was unquestionably the government. Here is the lesson. When the private sector is in debt they will attempt to pay off their debts with any surplus cash printed by the Central Bank. In economic parlance the marginal utility of means of settlement money is high. But when the private sector carries low debts, they have less need for new cash and will tend to spend it, thereby creating inflation. The moral here is two-fold. First, Central Banks are not a sufficient condition for inflation, because they need the government to act as the 'helicopter'. Second, we much watch out for inflation to pick up once private sector debts have been run down and if the Central Banks continue to monetize. That is our risk.

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