Pragmatic Capitalism - No, The Inflation from QE is not Inevitable
Since the Great Recession, the US Federal Reserve has used Quantitative Easing (QE) to put massive amounts of cash into the economy and financial system. Critics of this policy (often the same ones who are seminal critics of Obama or "Big Government") argue that it both hasn't worked and is also creating inflation. This article looks at the arguments for these two claims and attributes them to misunderstandings or missing the macroeconomic forest for the trees. What is astounding is that the theory that QE would cause inflation has not been true, at least so far (7 years and counting). So there have to be two sets of reasons for such a proponent:
(1) How QE will cause inflation AND
(2) Why QE hasn't yet caused inflation
The trouble is, if there isn't a good argument for (2), then this significantly undercuts any seemingly valid case for (1). In other words, QE hasn't caused inflation. If we can see why it hasn't, then there's no reason to believe it will or should. The biggest argument made here is that QE hasn't caused inflation for a very good reason: households were de-leveraging. When loans are paid back, or forgiven, or otherwise taken off the books, this is the opposite of the process for making a loan. When a bank makes a loan, it creates money due to relying on fractional reserves. When loans are paid back, money is destroyed through the same process [this is just as counter-intuitive as fractional banking is]. With household de-leveraging, money was being destroyed. This would create deflation if it hadn't been for QE re-flating the system.
The other arguments for how QE will cause inflation, or hasn't yet, are considered:
-the stock market is inflated by QE. Response: more likely the stock market is perhaps partially influenced by low yields but let's not discount record positive corporate earnings, the real driver of the stock market over the long term.
-the interest on excess reserves that the Fed gave the banks kept them from putting the QE money into the system. Response: more likely it was because banks couldn't find good enough creditors, not because they preferred a small riskless return over a much larger low risk return).
-and finally, inflation will rise once money velocity increases. Response: "It’s little more than another construct utilized by some economists
trying to simplify a complex financial system down into one neat little
(useless) mathematical equation".
