Why Quantitative Easing Hasn't Caused HyperInflation
Some readers have asked me what I think of Robert Higgs post about why the large increase in the Fed balance sheet hasn't caused hyperinflation.
I think that most of the arguments that Higgs made are correct. The most important factor is that the increase in the monetary base hasn't increased money supply very much. And the monetary base is irrelevant for price inflation except to the extent it changes money supply.
There are several reasons why it has had only a limited effect on money supply, including the two that Higgs mentions, that interest that the Fed pays on bank reserves now unlike before (that interest payment BTW makes no sense at all given the Fed's pro-inflationary policies otherwise, unless you assume that the Fed's purpose is to maximize bank profits), and the fact that banks are more reluctant to lend. Another factor that Higg didn't mention is that households and companies are probably also more reluctant to borrow.
Another factor that Higgs overlooks is that the reduction in real interest rates has increased money demand, and as higher money demand has a similar effect as a lower money supply, this has limited the effect of the money supply increase that has in fact taken place.
I disagree with Higgs that it will inevitably lead to hyperinflation or even greatly accelerating rate of price inflation. It would eventually, if the Fed didn't reverse their asset purchases once banks becomes less reluctant to lend and households and companies becomes less reluctant to borrow, but since that would likely be associated with a real recovery as well as higher price inflation, the Fed will be able and likely to reverse them at that point.
I think that most of the arguments that Higgs made are correct. The most important factor is that the increase in the monetary base hasn't increased money supply very much. And the monetary base is irrelevant for price inflation except to the extent it changes money supply.
There are several reasons why it has had only a limited effect on money supply, including the two that Higgs mentions, that interest that the Fed pays on bank reserves now unlike before (that interest payment BTW makes no sense at all given the Fed's pro-inflationary policies otherwise, unless you assume that the Fed's purpose is to maximize bank profits), and the fact that banks are more reluctant to lend. Another factor that Higg didn't mention is that households and companies are probably also more reluctant to borrow.
Another factor that Higgs overlooks is that the reduction in real interest rates has increased money demand, and as higher money demand has a similar effect as a lower money supply, this has limited the effect of the money supply increase that has in fact taken place.
I disagree with Higgs that it will inevitably lead to hyperinflation or even greatly accelerating rate of price inflation. It would eventually, if the Fed didn't reverse their asset purchases once banks becomes less reluctant to lend and households and companies becomes less reluctant to borrow, but since that would likely be associated with a real recovery as well as higher price inflation, the Fed will be able and likely to reverse them at that point.
posted by stefankarlsson at 10:08 PM
9 Comments:
Nice post. Perhaps it's time to switch to modern monetary theory, and ditch neo-liberalism and the Austrian school?
You'll have to elaborate on that point.
Good post. The Fed (USA) should stop paying interest on reserves.
The core PCE deflator is running at 1.3 percent y-o-y. This is not enough inflation, let alone hyperinflation.
There is a strange fetish going around about inflation lately. No one seems to look at Japan, and how 15 percent deflation over 20 years (and 80 percent declines in stock and property values)has just about wrecked their economy, and national optimism.
Many speak as if there is an exquisite moral honor attached to zero inflation. Usually gold enter the conversation.
I prefer five percent real growth and five percent inflation to one percent real growth and one percent inflation. Or secular decline ala Japan.
People in the Austrian School need to take some laxatives.
"I disagree with Higgs that it will inevitably lead to hyperinflation or even greatly accelerating rate of price inflation. It would eventually, if the Fed didn't reverse their asset purchases once banks becomes less reluctant to lend and households and companies becomes less reluctant to borrow, but since that would likely be associated with a real recovery as well as higher price inflation, the Fed will be able and likely to reverse them at that point."
I'd like a more thorough explanation of this. Does he mean the Fed stops purchasing or stops purchasing and begins selling or what?
Kel Kelly disagrees about Japan:
"Despite conventional opinion, Japan's economy has not been stagnant; it has in fact been growing in real terms — although not in monetary terms. The crucial point is that monetary changes do not necessarily reflect real changes. Japan's GDP growth has been slow because money-supply growth has been slow; it is mainly money growth which drives GDP numbers. Therefore, going forward, we must try to observe real economic growth — the production of real goods and services — instead of just GDP. Seeing things in the correct light allows us to recoup Japan's lost decades, which weren't really lost."
http://mises.org/daily/5170/The-Myth-of-Japans-Lost-Decades
Greg Davis:
In 20 years, Japan's GDP per capita is up about 20 percent, but very slow lately (even pre-disasters).
The USA's went up 33 percent, despite many structural and cultural problems.
Japan has many cultural advantages (such as miniscule crime rate), and (currently) a large labor force relative to population. Still, it underperformed the USA.
Also, assets value, stocks and real estate, are down 75 to 80 percent in Japan in last 20 years.
Hard to make a case that tight money works.
In the same 20 years, such nations as S Korea and China has seized the initiative, and are the places people watch.
Now, japan's population is set to fall quickly. Young people are not having babies.
You can't blame tight money for everything, but if economic growth stagnates, and every investment becomes worth lass year after year, do you have babies?
The Nipponistas are the primary threat to American prosperity
Dude, I hate to tell you this,but groceries are up about 20 to 30% in the last year. Gas is up about the same. I know that these are not included in the inflation index, but they make up the majority of cost for the average person. Thus, there is little extra to bid against other product. In addition, the real jobless rate is somewhere around 20%, much higher than the 9% the emipire gives us. This is keeping down labor cost. Finally, we are in a depression, not a recession and thus inflation would be unlikely.
david7134 has some points that would be helpful to address in your blog.
My intuition summarizes your analysis as that of the Government pushing money flow and no one pulling it. And when they start pulling, the Government will push less hard.
To david7134, lower supply and same demand may have pushed prices higher, that doesn't mean inflation caused higher prices, necessarily. So if we are not in hyperinflation, this may be the cause, but need evidence from Karlsson (or somebody).
All the fed did printing $ was offset the decline in the velocity of $
The inflation assumption has been a bust for 3 years now
No arguing we have commodity inflation but that leads to deflation/stagflation. After payinf for gas grociers etc you have less left for discretionary income. We may get inflation but not until the deleveraging slows and housing markets recover.
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