Is there any evidence of QE causing inflation? Why or why not?
And what effect has it had on commodity prices, in particular?
QE/Inflation
By CL Follow Mon, 11 Jun 2012, 11:28am 1,853 views 19 comments
In Emeryville CA 94608
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If you want to buy something that the big boys want to too, then you will experience inflation. For instance, say you want to buy a nice home in a desirable area but a tbtf bank, or the fed, is hoarding them because they have access to unlimited free money. Viola! They have taken away your purchasing power and you experience 'inflation'. Maybe they like shiny metals, or works of art. You won't be getting any. It is kind of ironic that most normal working people live on healthful rice and beans, but not 'the fed'.
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Okay. But has QE caused inflation? The way I understand it, you can't have inflation with such slack demand.
That, and the banks are largely sitting on the cash (to recapitalize?), and so it doesn't enter the supply as much as add to the base.
Is that correct?
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QE isn't inherently inflationary, but it creates the potential for tremendous inflation. Anyways, here is your evidence that it is causing some inflation: M2 Growth Spurt.
Here is another analysis using Marginal Utility of Currency. Originally posted here.
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CL says
IMO...
Yes, that is the explanation that I have read.
Your original question is too simple.
It's kind of like asking if lowering taxes lowers revenue. If you lower taxes from 10% to zero, then you will lower revenue. If you lower taxes from 100% to 90%, then people will start to work and revenue will increase. Clearly there is a happy medium somewhere, but finding that medium is difficult. The best number probably depends on where we have been. If people are used to 50% capital gains tax, and you lower it to 30%, lots of people might sell long term holdings to lock in the lower rate. If it has been 15% for a long time, raising it to 30% might cause people to hold stocks longer to put off the capital gains until the rate is lower.
If there is enough of it, quantitative easing should lead to inflation. In the middle of a deflationary event, some quantitative easing might just slow down deflation as banks try to balance their books in the midst of declining asset values.
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TDeloco, YesYNot.
YesYNot says
I'm sure it is, but since I have a shallow knowledge of the material, it's the best I can do!
I was a Math major, but the formulas confuse me sometimes.
(This seems easier, in comparison: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ )
Would you say that inflation has occurred but was mitigated by the deflationary forces then? And are you worried that real inflation will occur, or is that the stuff of legend on anti-Fed conspiracy forums?
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Interesting article. I'm not an economist either, so take with a grain of salt.
MV = Py.
Obviously V is low in recessions, b/c people are less inclined to take on risk when inflation is low or negative. So, increasing the money supply has to fight the decrease in velocity of money.
Also, when you give money to rich people, they tend to just save or invest it. When you give money to average folks, they spend it. At the moment, rich people have ass loads of money, and there are not so many great investment opportunities. So, they buy treasuries driving down the price of the 10 yr notes. This drives mortgage rates down. If the investors thought that there was something better to do with their money, they would do it. If banks thought that there was a chance in hell of inflation around the corner, they would not have credit cards with 18 month 0% intro aprs.
On the other side, half of the population is either stuck with student loan debt or are underwater on their mortgage. These people cannot refinance, so they are stuck paying 7% or more on loans during a time when we have no real inflation. These people are likely looking for some scam to improve their lot, or, they are just refusing to spend money. Every cent they spend is at relatively stupid high rates, so they tend to put off purchases. These people are (should be) hoping for inflation to kick in and save them.
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CL says
It depends on which force is winning: the deflationary forces or the inflationary forces? QE is a response to deflation (or anticipated deflation). The CBs are afraid of severe inflation, but they're a hundred times more afraid of deflation.
The following charts are zoomed in 2008-present.
So QE 1 and 2 blew up the monetary base (M0), but the vast majority of that money had to be held in the Reserve Balances. As such, it cannot be multiplied out by the system.
What's important is the difference between the charts, not M0 by itself. The reason is that if you print a whole bunch of money, stick it in a hole and bury it, it won't contribute to inflation. That money does nothing! It merely makes Bank balance sheets look better. I just eyeballed the above charts and conclude that the difference is about $1.2T. That's 33% up from $900B just before QE1.
The full money stock (M3) is estimated to be about $15T (since the Federal Reseve had stopped tracking M3, the number may vary from one source to another). I'll be using M2 in the analysis below.
Here is M2 2004-2012:
I'm just eyeballing the charts, but here:
M2 2012: $9,900B
M2 2008: $7,400B
$9.9T / $7.4T gives you 133%. M2 grew 33% just like M0 in the above charts.
Plumetting velocity is deflationary. Currently, it is below historic levels. Here's M2 velocity 2004-2012:
Again, here are my rough estimates:
M2V 2012: 1.58
M2V 2008: 1.9
The formula is M*V = P*y, but looking only at the change in M*V we have:
(9.9 / 7.4) * (1.58 / 1.9) = 111% change
So now, use a CAGR calculator and plug in 111% over 4 years, and you get a 2.64% annual inflation. But I'm looking at only half of the equation.
CL says
The article isn't saying M*V = P*y is wrong. In page 4 it says:
Basically, "M" isn't the old monetary base. It's not that simple.
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As you can see above, Velocity keeps plumetting. No doubt, another QE is in the works.
A huge debate between the Deflationists and Hyperinflationists had been going on since 2008. Some hyperinflationists don't understand how the system works. They keep yelling "hyperinflation" yet they couldn't explain why prices aren't skyrocketing after QE 1 and 2. I believe the Forbes article is in response to such people.
A more realistic batch of hyperinflationists think differently:
1) 98% of deflationists' predictions will happen.
2) The CBs will print money in order to save debt.
3) Don't yell out Weimar or Zimbabwe as soon as there's any mention of inflation. More realistic hyperinflation events throughout history have been 3-to-1, 10-to-1, 1000-to-1. The trillion-to-1 hyperinflations are extremely rare and are the result of severe exogenous economic circumstances
Here's a chart originally posted by Baron Dayne:
Basically, M3 will continue to shrink and M0 (via QEs) will continue to cover the gap. At some point, M0 will explode in response to hyperinflation. Printing money is the result, not the cause. This subject matter is so dense, I have neither the time nor the energy to explain it. I'll just have to refer to FOFOA's rebuttal on a deflationist article.
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tdeloco, do you have similar charts for Japan? It would be interesting to see what their money supply and inflation have looked like over the last 20 yrs.
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Sorry, I don't. I sure wish I could find more reliable data on Japan. The money supply charts came from the website of the Federal Reserve of St. Louis. They developed some really good web tools for anyone to use.
However, what I've been saying all this time is that the conditions between Japan and the U.S. are very different.
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Well, the chart predicts complete disappearance of credit and replacement of it by printed money.
Is it politically possible?
Won't banks, who control each and every financial decision, be able to prevent this?
How will it affect our creditors? (Chinese etc.) There will be quite a long period when new credit will be gone, but the interest on existing credit still has to be paid. The only way to hold in this situation will be government printing of lots of fiat money. What will be creditors reaction to such printing?
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Many more questions.
For example, when credit will be gone, what will be the meaning of being the world reserve currency?
Won't other instruments replace dollar as such even prior to this?
When this happens, will it cause a huge price inflation with no actual increase in money supply?
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Thank you for your time. A lot for me to pour over, since I never used to like economics I feel like I'm working from a deficit.
I will read and re-read the information above, so you can know it won't be in vain (unless I fail) :)
Thanks again guys!
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tdeloco says
CL,
tdeloco made a lot of great points above, and I have no problem following him. Another point he made above was that the CBs are afraid of high inflation, but they are a hundred times more afraid of deflation is dead on. This is where some Patnet readers are clueless, and they are hoping for deflation. :)
Troy and Iwog have a good understanding of this inflation/deflation issue. I've been a part of this inflation/deflation debate members for 3.5 years so I believe I have a good understanding of the topic. It's just way too long to lay it all out here.
In short, there are 2 definitions of inflation. 1) velocity of money, and 2) increase in CPI.
Deflation and hyperinflation are 2 sides of the same coin. If you believe one of these two events will occur, you may want to consider owning income-producing hard assets such as real estate. Also, as part of the asset protection, you may want to own some physical gold, not GLD. My guess is having 10%-15% of your networth in physical gold, not silver, should be adequate.
Another point that I'd like to bring up is that this website used to have more knowledgeable and intelligent people contributing here. Due to some stupid individuals mocking them and taking over the site in the last couple of years, these intelligent individuals had stopped posting, which is a shame. There is just a lack of constructive exchanges on here recently. If you want to see how a constructive forum should be, try biggerpockets.com and you will be amazed at the knowledge that people share on there. Basically, stupidity is not tolerated. :)
Just my 2 cents.
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Thanks E! (I miss Troy, too! But Iwog is still here, right?)
Also, does anyone have anything to add regarding the commodities question? Has QE changed commodity prices in any way?
Thanks!
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QE causes PM's to go up. Commodity prices have to many variables, like crop disease for instance. Oil and gas become easier to get with technology.
Looks like bigger pockets is where the flippers/contractors/realtars hang.
Definitely shows how RE has been sold out completely, investors, Realtars, and banks pretty much control the market.
The policy of TPTB are to inflate, which is the trend. Deflation is why they push QE in the first place.
Still, with a global market, and shitpiles of dollars sitting around in foreign countries, or investors pockets we have 5-10% foreign investment in RE now, which is your basic more dollars chasing fewer goods, and housing prices are up as a result.
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everything says
Actually I could argue that QE didn't cause PM's to go up. PM's have been steadily going up since early 2000. One could argue that PM's went up because the dollar loses its value. The run of of PM's since late 2008 to present could arguably due to the fact that people believe that we will have high to hyperinflation in the near future. What if we have deflation? Wouldn't that cause PM's to go down?
I don't know whether or not it's true, but my parents told me that gold goes up every time we have war. Remember that we came from a third world country & people only believe in gold, not its currency. I still remember that they told me to go buy gold after 9/11. They said people buy gold in uncertain times like war. I said that's crazy. We live in America. People hold on to the dollar. No one buys gold. You now know the rest of the story. :)
QE was used to prevent deflation. Bernanke is a student of the Great Depression so he will do whatever humanly possible to prevent deflation. A good example of deflation was right after Lehman Brothers collapsed in late 2008 and Merrill Lynch got bought out by B of A. Everything went into a tail spin. Housing was in free fall; gas prices dropped; food prices dropped; big ticket items like cars and TV's were stalling; corporations' profits were tumbling; companies were laying off left & right, etc. See how your purchasing power increased in deflation period? See how scary is deflation? It's like a downward spiral & it feeds on itself. It was a scary time for me, but I don't expect some of you to remember.
With respect to biggerpockets, it tailored to investors. My point was that people go to a forum to get opinions, feedback, education. Some individuals have turned this into a realtor hater site. How constructive is that?
Building a successful website with a lot of readers is very hard, but let some individuals ruin it is a little disappointing. Nevertheless, it's Patrick's website. He can do whatever he wants. I just hate to lose some smart contributors because of the not so smart ones.
I don't know if it's just a coincident or not. Troy is a renter himself, but very articulate & fair in his assessment of the housing market. When he laid out his case about how it might be a good hedge buying RE now, some effing idiot would accuse him of being a liar, a realtor, etc. WTF? How constructive is that?
We used to have a very smart gentleman goes by "zephyr" handle. Some effing idiots on here just kept accusing him of BSing, and he's no longer posting here after that. If we lose a couple more good ones on here, I'm pretty much done with this site too. :)
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CL,
I'm at a point in my life where I have to consider about asset protection instead of just keep growing it. Therefore, deflation, inflation and hyperinflation are subjects of interest to me.
Here are a couple of points I like to add to your post. There are deflationary pressures in all over the world, which triggered massive inflationary policy responses to counter these deflationary pressures. With fiat currencies not being backed by hard assets like physical gold, the currencies will be devalued and devalued with QE's and deficit spending will continue until we ultimately have a currency crisis. I don't know when the end game will be, but I'd rather be 10 years early than 1 day late. If I know the exact time period of this event, I would be a billionaire instead of chatting on Patnet. :)
Again, my strategy might be different with others. I'm more about asset protection at this point. Therefore, two must have assets are income-producing properties and physical gold. Argentina is a good example. It went through deflation, then hyperinflation in the early 2000's. Since then, the country has been doing fantastic with relatively elevated inflation, which is really good for real estate. Two things that faired well through this period are real estate and physical gold.
Anyways, just my 2 cents. YMMV.
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E-man says
Thanks E. Much appreciated. :)