Did QE Cause Inflation?

[The Londonist]

Having read a number of explanations about how QE (Quantitative Easing) works, I initially concluded that it “only” caused asset price inflation by driving down long term bond yields in the developed world (US, EU, UK and Australasia).

Now the assertion in the mainstream media is that QE is one of the causes of the current bout of high inflation.
(I’m not sure whether significant QE was used to provide the monetary stimulus to cushion the CV19 pandemic but I understood that money printed via QE only went to banks as payment for bonds rather than payment directly to taxpayers.)

The growing narrative that central banks are either partly or completely responsible for the high inflation levels is also challenging to refute without unbiased deep understanding of the causes. It seems as if the central banks are easy targets.

Can anyone on TRF from a major financial institution/bank/private equity background shed some light on the causes of inflation from major financial institutions’ perspectives please?

Thanks in advance.

[Chewbacca]

I’ll get the coffee going.

[espanol]

From my readings, there is little consensus among practitioners, academics and Fed officials about what central bank bond buying does to the economy and how.

Japan was considered the first country to implement QE practices (~2001), yet they’ve experienced low growth, low inflation numbers for 20+ years. People love doom and gloom, but who knows.

TL;DR- new territory, strong opinions with largely unknown consequences.

[Rock]

From my secondary-school economics, I had always assumed that QE (printing money) would cause inflation, regardless of the mechanics of how this was applied in the economy.
It is a question that had been in my mind also in recent months and I look forward to opinions from those more qualified than me.
(although there seems to be a general concensus these days that most of the old "rules" of economics are "out the window".)

[rolexpatek363]

I'm no economist, but QE has been going on for years, whereas inflation has only recently started going up.

[beshannon]

QE May Cause Inflation

The biggest danger of quantitative easing is the risk of inflation. When a central bank prints money, the supply of dollars increases. This hypothetically can lead to a decrease in the buying power of money already in circulation as greater monetary supply enables people and businesses to raise their demand for the same amount of resources, driving up prices, potentially to an unstable degree.

“The biggest criticism of QE is that it might cause rampant inflation,” says Tilley. But that doesn’t always happen. For instance, inflation never materialized in the 2009-2015 period when the Fed implemented QE in response to the financial crisis.

https://www.forbes.com/advisor/inves...ive-easing-qe/

[GB-man]

It without question contributed. Sole cause? That’s impossible to say. Supply chain disruptions from covid, increased cost of labor and disruptions in the oil market from the Russian war certainly have significant irons in the coals.

[Chester01]

I mean it’s basic economics that interest rates and prices are connected. We had an era of historically low interest rates for a long time, and that has to be considered. Lots of cheap money. Now, inflation is not just a one country problem, it’s global. So geopolitics play a role, but much of these things are behavioral economics as well and those factors and less understood. But the increasing monopolies (not political look it up. Only a few companies control things like meat, baby formula etc.). This mean if they are hit, there are real challenges that must be overcome.

Then You have companies that were out of work, they know folks got a lot coin from the govt and want to recoup that and so raised prices, add fuel prices to the mix and you gave companies a massive cover to recoup those old losses. Once one did, (lumber first) all did and now it’s almost a joke, why things are high, supply chain, Covid. At this point it’s largely being maintained by consumer behavior that has not yet pulled back.

[huncho]

i don't think the fed realized the impact locking down and then working from home would have on demand. the middle class just started to have way too much money from all the extra savings due to not commuting, going out, traveling, etc. all that extra money had to go somewhere to keep people sane and it went towards materialistic things, stocks and crypto, or real estate, causing assets to go up and giving them more money to then spend again. i personally think that was the major reason we're where we are

[brandrea]

IMHO, energy costs are the main cause followed by printing money.

It doesn’t help that we’ve come from such historically low rates. Everything seems to be swinging in extremes.

[beshannon]

Originally Posted by brandrea

IMHO, energy costs are the main cause followed by printing money.

It doesn’t help that we’ve come from such historically low rates. Everything seems to be swinging in extremes.

True, however there is across the board price gouging going on worldwide. What is being called inflation is greed caused by pricing power. Now we will get demand destruction.

[Star Ferry]

Originally Posted by beshannon

True, however there is across the board price gouging going on worldwide. What is being called inflation is greed caused by pricing power. Now we will get demand destruction.

Business always wants higher prices and is always greedy, so that’s been more a talking point than an actual explanation. Businesses always charge what they believe is their profit maximizing price, unless the law forces them to do something else.

There’s been some fuzzy logic on this point. Take meat producers, for example. The same people claiming “supply chain issues” are preventing product from hitting the market are also claiming there’s pricing power, e.g. monopolistic power. Yet a monopolist makes money by holding back supply. So which is it? Are they refusing to provide and sell more meat, or are they trying to sell the meat and hitting a traffic jam (e.g, a lack of proper trucks or drivers) somewhere in the chain? It can’t be both.

[beshannon]

Originally Posted by Star Ferry

Business always wants higher prices and is always greedy, so that’s been more a talking point than an actual explanation.

It seems that is a great explanation

[Star Ferry]

Originally Posted by beshannon

It seems that is a great explanation

It’s not, because it doesn’t explain why inflation was low for the last 40 years, when everyone was just as greedy as now. How did businesses get all this overnight pricing power?

[SDGT3]

Originally Posted by Chewbacca

I’ll get the coffee going.

Better start two pots.

There's not just one item that caused inflationary pressures to exceed what was the norm. I don't buy the argument that there hasn't been inflation in the past 40 years as the price of everything has gone up including housing, cars, food, watches (to keep it TRF friendly). What's changed is the measure of inflation to make it seem as if it's lower.

Interest rates have been artificially low since the great recession but hasn't caused the high level of inflation we have now. Monetary and fiscal policies on a worldwide basis, supply chain issues, high energy prices followed by pent up demand after lockdowns all caused this perfect storm we're experiencing now.

If I had to rank the top 3 issues causing it it would be

1. Helicopter money from the govt

2. High energy prices which affects everything that is brought to market

3. Supply shortages of goods and services

[DocHorton]

Originally Posted by SDGT3

If I had to rank the top 3 issues causing it it would be

1. Helicopter money from the govt

2. High energy prices which affects everything that is brought to market

3. Supply shortages of goods and services

This. But I would add in "Government mandated shutdowns during the pandemic" as the #1 and move everything else down a spot. The government shutdowns caused the 3 you listed.

[DocHorton]

Originally Posted by GB-man

It without question contributed. Sole cause? That’s impossible to say. Supply chain disruptions from covid, increased cost of labor and disruptions in the oil market from the Russian war certainly have significant irons in the coals.

The "sanctions" on Russian oil have only made them richer, and have had the complete opposite effect as intended. They are now making more money on oil than they ever have in the past.

[mountainjogger]

Originally Posted by beshannon

https://www.forbes.com/advisor/inves...ive-easing-qe/

Great article Brian.

As the article references, QE can have a host of effects, inflation being only one.

Lately I have been thinking about two other effects listed by Forbes, increasing income inequality, and creating asset bubbles.

Also been thinking about the enormous power those that wield this "tool" have.

[Patton250]

Originally Posted by brandrea

IMHO, energy costs are the main cause followed by printing money.

It doesn’t help that we’ve come from such historically low rates. Everything seems to be swinging in extremes.

You sir are EXACTLY right. These plus a minimum wage of $15 an hour kicking in around most of the country isn’t helping. The final nail in the coffin will be the inevitable tax increase these people can’t help themselves from initiating this weekend. Look on the bright side though. The luxury market is crashing and will continue to so those “prices are falling” threads will flourish.

[GB-man]

Originally Posted by DocHorton

The "sanctions" on Russian oil have only made them richer, and have had the complete opposite effect as intended. They are now making more money on oil than they ever have in the past.

That’s the fault of the countries willing to do business with them.

[brandrea]

Originally Posted by GB-man

That’s the fault of the countries willing to do business with them.

Which sadly will always be the case.

Lots of “dirty oil” out there to be had from any number of sources

[rlj676]

Supply of everything was strangled by govt lockdowns and oil regulation.

Demand of everything increased due to spare savings as mentioned above and govt printing money.

Interest rates were more of kindling to exacerbate above in my view.

Adding corporate taxes and printing more money sure won’t fix the issue in my opinion.

Deregulate, end subsidizing people not working to up supply along w interest rate hikes would work in my morons opinion. However I knew massive inflation was coming long enough ago to refi while our treasury secretary says it was a surprise and nobody knew it was coming lol.

[Wcdhtwn]

Originally Posted by Star Ferry

Businesses always charge what they believe is their profit maximizing price, unless the law forces them to do something else.

Absolutely untrue. There are many different pricing strategies to go along with the many number of business strategies. Some businesses will price to increase volumes of sales, that isn’t profit maximizing. Some companies want to have a certain position in the market, not the most expensive nor the least, or maybe they want to be the least. These aren’t pricing to maximize profit. Some companies price very aggressively to put pressure on competitors, also not profit maximizing. These are not uncommon examples, thousands of companies undertake these pricing strategies daily and there are countless more.

No product would ever go on sale, no company would ever offer promotions, if the sole objective was to maximize profit.

[Patton250]

Originally Posted by GB-man

That’s the fault of the countries willing to do business with them.

Countries do business with America right? Perhaps you might remember we’ve done our fair share of invading other countries over the last 60 years or so.

[Patton250]

Originally Posted by rlj676

Supply of everything was strangled by govt lockdowns and oil regulation.

Demand of everything increased due to spare savings as mentioned above and govt printing money.

Interest rates were more of kindling to exacerbate above in my view.

Adding corporate taxes and printing more money sure won’t fix the issue in my opinion.

Deregulate, end subsidizing people not working to up supply along w interest rate hikes would work in my morons opinion. However I knew massive inflation was coming long enough ago to refi while our treasury secretary says it was a surprise and nobody knew it was coming lol.

Mic drop.

Best comment on this thread so far brother. You nailed it.

The problem is the truths you posted have a tendency to hurt some peoples feelings so it won’t go over too well. At least not here. I’m glad you said it anyway.

[Star Ferry]

Originally Posted by Patton250

Countries do business with America right? Perhaps you might remember we’ve done our fair share of invading other countries over the last 60 years or so.

As a general rule, when anyone tells you about your moral obligation to do anything, they’re planning to screw you over.

[904VT]

Do bond purchase programs impact interest rates/term structure at the other portions of the yield curve?

If the answer is yes, then it had an influence on inflation. 10 years of QE is almost permanent QE. It should’ve ended in 2012 at the latest. Now you add on top irrational energy policy that does not consult or instill trust in the producers. In turn that impacts upstream energy because they do not know if they will get blindsided by new regulations later that will render their work a waste of money. Couple on top, extraordinary public sector spending that probably resulted in a crowding in effect in addition to crowding out effect in certain sectors and you have an economy out of equilibrium. Now with the pandemic, it allowed shutdown of industries in an unpredictable manner and you end up with a market that lacks one of the biggest factors that makes a market effective, transparency. Play some politics on top in advance of Presidential and mid-term elections along with promotion of basket products that do not purchase based on intrinsic value but rather market capitalization i.e buy high sell low, and you end up with an extremely volatile market when you have black swan events emerge. Imo that’s what we’re looking at.


So those trying to focus on QE exclusively are really just passing the buck along and trying to distract from their $4 trillion in spending. But both are relevant. Just like single factor regression models have lower explainable than multi-factor as it’s never a single factor just degrees of estimated contribution of each factor.

[Laszlo]

I think it was a combination of things, but I personally feel it was exaggerated due to overly amplified stimulus injections that weren’t necessary in early 2020.

[Mifune]

YES... as the world's reserve currency, fractionalization of that currency by MORE THAN 45% in less than a year would have massive inflationary results... there is no debate that if MORE DOLLARS are chasing the same goods, that the pricing on those good will increases by similar orders of magnitude (Rolex bubble, housing bubble, BTC bubble)

is it the only reason... no, is it the main reason... yes.

[Patton250]

Originally Posted by Star Ferry

As a general rule, when anyone tells you about your moral obligation to do anything, they’re planning to screw you over.

Excellent point. After all morality is nothing more then expressions of peoples personal taste.