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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Tampering Or Tapering?

by Michael J. Howell8. July 2013 22:23
Two conclusions emerge from recent US and European Central Bank policy comments: (1) the Fed seeks to clearly distinguish (a) 'forward guidance' on Fed Funds from (b) QE, which determines the risk premium on bonds. Thus taken together forward guidance and QE determine bond yields. However, contrary to popular belief we believe that QE raises and does not reduce bond yields. Rather it reduces all other risk premia. The Fed by seeking to taper QE is trying we believe to stop the hunt for yield and likely wants to fatten 'too low' risk spreads on instruments such as junk debt, (2) the decision by the ECB and BoE to include 'forward guidance' is an interesting step. The ECB is admittedly using more 'words ' and according to our earlier points cannot control risk premia without QE. Nonetheless, the important thing here is that a European 'forward guidance' clearly opens the way for monetary policies in the US and Europe to formally diverge significantly. This could be key in 2014.

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Tampering Or Tapering?

by Michael J. Howell8. July 2013 22:09
Two conclusions emerge from recent US and European Central Bank policy comments: (1) the Fed seeks to clearly distinguish (a) 'forward guidance' on Fed Funds from (b) QE, which determines the risk premium on bonds. Thus taken together forward guidance and QE determine bond yields. However, contrary to popular belief we believe that QE raises and does not reduce bond yields. Rather it reduces all other risk premia. The Fed by seeking to taper QE is trying we believe to stop the hunt for yield and likely wants to fatten 'too low' risk spreads on instruments such as junk debt, (2) the decision by the ECB and BoE to include 'forward guidance' is an interesting step. The ECB is admittedly using more 'words ' and according to our earlier points cannot control risk premia without QE. Nonetheless, the important thing here is that a European 'forward guidance' clearly opens the way for monetary policies in the US and Europe to formally diverge significantly. This could be key in 2014.

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Bank of England Liquidity Injections...More QE Needed?

by Michael J. Howell12. March 2013 12:51

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What Do Central Banks Do?

by Michael J. Howell11. March 2013 12:11

Prompted by yet another claim, this time by the great house of Goldman that Central Bank QE push up bond prices and push down yields by circa 100-125bp, it is worth looking at the facts and the theory. QE1, QE2 and now QE3 have seen generic 10 year yields rise. The ending of QE1 and QE2 saw 10 year yields fall. It is really that simple. If the 10 year bond represents the risk free asset for many long-term funds, then Central Bank balance sheet expansion will likely lower the risk premia on other risky assets and raise the risk premia on bonds. In short, the yield curve will steepen after each QE: it did and it is again now. Why the fuss? Surely, this is exactly what policy-makers want to do? Falling long-term yields would signal their failure not their success!

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