Debunking QE Inflation Myths
I bet that if you watch the news frequently you will have at some point heard some pundit talk about how Bernanke and the Fed keeps printing money and driving up inflation with their quantitative easing policies. This is all nonsense. First, they aren’t printing money, at least not anything outside the norm. If they are printing tons of money what happens? The money supply would be skyrocketing but that is not the case at all. It has drifted higher at a mild linear trend. What has ballooned is the Fed’s balance sheet (see below). You see, the Fed isn’t printing money and handing it to people. It’s trading cash for cash like assets, i.e. U.S. Treasuries. These securities are risk free and therefore behave like cash and just have a large impact on the balance sheet. The purchases are intended to help drive down interest rates to help stimulate borrowing in the economy With interest rates so low, the interest they have to pay themselves on these bonds is minimal and therefore so is the printing. IF they actually monetized the debt they would print enough money to pay off the whole principal of the bonds as well, but that is not at all what they are doing. There are of course more subtleties to this but you get the picture.
On to inflation. People like to say that commodity prices are rising since the Fed started their quantitative easing programs but these same people always forget to mention that commodity prices were rising before they started such measures and even at a faster pace at certain points. These people also like to say that “inflation has picked up since 2009”. Really? You want to make that point? Would you be happier if we were back in the financial conditions right before that at the heart of the crisis? I don’t think so. Further, the sharp rise in commodity prices off of the crisis lows was thanks to global GDPs experiencing rapidly rising growth rates and commodity prices adjusted higher. Admitting this means you are admitting that QE caused this improvement. Fed Watch continues, “What about the surging inflation expectations in the TIPS markets (not necessarily the best measures of inflation expectations, and the ones already falling anyway)? At best, quantitative easing is keeping inflation expectations propped up, barely. And once again, does anyone really want to return to the collapsing inflation expectations at the height of the recession? And are expectations any higher than before quantitative easing? No. Bottom Line: If anything, inflation is lower, both for commodity prices and headline PCE, after quantitative easing. So isn't it finally time to put to rest the myth that quantitative easing is causing runaway inflation? Nothing to see here folks, move along...”
Source - FedWatch & Exabyzness