The Death of Inflation despite QE

[Hawker]

Interesting article on how years of money printing has failed to get inflation started.

http://coppolacomment.blogspot.com.au/2013/05/inflation-deflation-and-qe.html

Money quote:

Under-employment and falling productivity force down real incomes. Add to this the effects of fiscal tightening in both the UK and the US, which hit working people on middle to low incomes disproportionately, and to my mind you have a significant hit to aggregate demand which is sufficient to explain deflation in both countries. Both UK and US governments believe that monetary tools such as QE can offset the contractionary impact of fiscal tightening. But this is wrong.

[johnyj]

This clearly shows that currency's valuation has no direct relation to supply and demand, it is decided by consensus

People always use hyperinflations happened during war to prove that oversupply of money will cause inflation, but that is a very bad example of exponentially increased military spending combined with reduced productivity in the society, and a high risk of government being wiped out in the war. During normal days, even a 10x increase in money supply won't impact CPI that much, most of those newly added money can just sit in someone's pocket doing nothing

And this further proved that the current pyramid of central bank managing from the top is not a good structure for organizing the society

[hashman]

You mean the death of price inflation despite concurrent monetary inflation. 

Conditions, especially velocity of money, will change the exact numbers but in general it probably takes somewhere in the neighborhood of years to a generation for price inflation to emerge after monetary inflation.  Especially if the monetary inflation just goes to the very top of the pyramid and has to go through a narrow funnel to get lower.   

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?       

[johnyj]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?       

1% of that QE money has reached the 99%

[Hawker]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?        

1% of that QE money has reached the 99%

Unless I am mistaken, QE has pushed down interest rates.  Many of the 99% have mortgages so QE is already directly pumping cash into their accounts.  The same pressure on bond rates has kept a large tranche of people in jobs that otherwise would have been lost due to companies being unable to raise cheap finance.

[hashman]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?       

1% of that QE money has reached the 99%

The OP's linked article basically says no, it hasn't. 

The claim is that the QE has enabled institutions to keep afloat and keep paying huge salaries and bonuses, and made asset prices higher, but has not reached the consumer.  Price inflation shows up when the average consumer suddenly has more cash to spend, so retailers can start jacking the prices.  The current DOW highs and continued large bonuses have apparently not (yet?) affected the average consumer. 

For most consumers, having higher net wealth will affect spending.  However for the first few levels of QE beneficiaries, the extra money isn't going to affect spending at all and therefore won't affect price inflation. 



 

[NewLiberty]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?       

1% of that QE money has reached the 99%

The OP's linked article basically says no, it hasn't. 

The claim is that the QE has enabled institutions to keep afloat and keep paying huge salaries and bonuses, and made asset prices higher, but has not reached the consumer.  Price inflation shows up when the average consumer suddenly has more cash to spend, so retailers can start jacking the prices.  The current DOW highs and continued large bonuses have apparently not (yet?) affected the average consumer. 

For most consumers, having higher net wealth will affect spending.  However for the first few levels of QE beneficiaries, the extra money isn't going to affect spending at all and therefore won't affect price inflation. 

Add this to the fact that government money goes first to the government employees, and banks and contractors.  They get it before inflation's effect.  Once they spend it into the economy and the rest of us get hands on it, it is post-inflationary.

The onset of inflation is often rapid and changing monetary policy is not fast nor often is it rapid in effect, in the USA:

[Hawker]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?       

1% of that QE money has reached the 99%

The OP's linked article basically says no, it hasn't. 

..snip...

It doesn't say that at all. 

[Adrian-x]

Interesting article on how years of money printing has failed to get inflation started.

http://coppolacomment.blogspot.com.au/2013/05/inflation-deflation-and-qe.html

Money quote:

Under-employment and falling productivity force down real incomes. Add to this the effects of fiscal tightening in both the UK and the US, which hit working people on middle to low incomes disproportionately, and to my mind you have a significant hit to aggregate demand which is sufficient to explain deflation in both countries. Both UK and US governments believe that monetary tools such as QE can offset the contractionary impact of fiscal tightening. But this is wrong.

One fundamental point that is overlooked in these examples is Innovation.

When I started my new company over 10 years ago it was just me. I employed the latest technologies available in the industry, and I was more productive than the previous company I worked for who employed 8 people.  

To my surprise over time my competitive advantage was lost and my income was reduced. What changed is I was now expected to be 8 times more productive for the same salary, those who didn't adapt went out of business and those who did became more productive. Being more productive did not equate to an increase in revenue but rather it masked inflation with a static price, the benefit was absorbed by the printing of money.  

The point being the efficiency innovation employs is lost through the increase in the money supply, and it is disguised as price stability or marginal inflation.  The net benefits of technology don't benefit the manufacturers or the consumers but the fractional reserve banking system.  Obviously there are industries that innovate slower or faster than others - computers would be a good example, but the trend is innovation is lost to inflation.

[Hawker]

Adrian-x what you are describing is increased productivity.  None of the benefit of that should go to you as a person doing the work - it goes to the provider of capital.  This has nothing to do with QE - its plain old economics.

[bb999]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?        

1% of that QE money has reached the 99%

Unless I am mistaken, QE has pushed down interest rates.  Many of the 99% have mortgages so QE is already directly pumping cash into their accounts.  The same pressure on bond rates has kept a large tranche of people in jobs that otherwise would have been lost due to companies being unable to raise cheap finance.

On the other hand 0% interest rates mean anyone with savings is having money taken directly out of their accounts.  Also 0% interest rates makes it much cheaper to invest in those innovative technologies that replace expensive human workers with less expensive automation.  QE is not a free lunch.

[Hawker]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?        

1% of that QE money has reached the 99%

Unless I am mistaken, QE has pushed down interest rates.  Many of the 99% have mortgages so QE is already directly pumping cash into their accounts.  The same pressure on bond rates has kept a large tranche of people in jobs that otherwise would have been lost due to companies being unable to raise cheap finance.

On the other hand 0% interest rates mean anyone with savings is having money taken directly out of their accounts.  Also 0% interest rates makes it much cheaper to invest in those innovative technologies that replace expensive human workers with less expensive automation.  QE is not a free lunch.

That's not a reasonable point.  Without QE you have risk of default and that would mean confiscation of savings.  Given the choice, people choose the tiny loss that inflation inflicts.

The workers that can be replaced by outsourced labour or machines are surplus to requirements.  QE is not relevant to their fate - they need to be looking for new jobs.

[bb999]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?        

1% of that QE money has reached the 99%

Unless I am mistaken, QE has pushed down interest rates.  Many of the 99% have mortgages so QE is already directly pumping cash into their accounts.  The same pressure on bond rates has kept a large tranche of people in jobs that otherwise would have been lost due to companies being unable to raise cheap finance.

On the other hand 0% interest rates mean anyone with savings is having money taken directly out of their accounts.  Also 0% interest rates makes it much cheaper to invest in those innovative technologies that replace expensive human workers with less expensive automation.  QE is not a free lunch.

That's not a reasonable point.  Without QE you have risk of default and that would mean confiscation of savings.  Given the choice, people choose the tiny loss that inflation inflicts.

The workers that can be replaced by outsourced labour or machines are surplus to requirements.  QE is not relevant to their fate - they need to be looking for new jobs.

QE effects the timing of their fate.  A project to replace a human worker with an automated machine is less likely to happen at 5% interest rather than 0.

Even with QE there is the risk of default.  Banks still grow broke today, look at Cyprus if you don't believe that.  Also there are plenty of historical examples where inflation inflicts a significant loss not the "tiny loss" you reference, get some facts before you call my point unreasonable.

[Hawker]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?        

1% of that QE money has reached the 99%

Unless I am mistaken, QE has pushed down interest rates.  Many of the 99% have mortgages so QE is already directly pumping cash into their accounts.  The same pressure on bond rates has kept a large tranche of people in jobs that otherwise would have been lost due to companies being unable to raise cheap finance.

On the other hand 0% interest rates mean anyone with savings is having money taken directly out of their accounts.  Also 0% interest rates makes it much cheaper to invest in those innovative technologies that replace expensive human workers with less expensive automation.  QE is not a free lunch.

That's not a reasonable point.  Without QE you have risk of default and that would mean confiscation of savings.  Given the choice, people choose the tiny loss that inflation inflicts.

The workers that can be replaced by outsourced labour or machines are surplus to requirements.  QE is not relevant to their fate - they need to be looking for new jobs.

QE effects the timing of their fate.  A project to replace a human worker with an automated machine is less likely to happen at 5% interest rather than 0.

Even with QE there is the risk of default.  Banks still grow broke today, look at Cyprus if you don't believe that.  Also there are plenty of historical examples where inflation inflicts a significant loss not the "tiny loss" you reference, get some facts before you call my point unreasonable.

Surely the worker is more likely to be replaced when finance costs 5% as the business is under that much more pressure?

I take your point about "unreasonable" - your point was perfectly reasonable and I just disagreed.  Sorry

[bb999]

No worries I have no problem with reasonable people disagreeing.

My point about the 5% interest is that in a more normal interest rate environment (I picked 5% as an example, my main point is that 0% is not a normal interest rate) a project that has to meet a 5% return on investment hurdle rate (I'm veering off into finance here) is going to be much harder to find than a project that has a 0% return on investment hurdle rate.

If I buy a machine that replaces human workers for $100 using borrowed money and have 0% interest then that machine needs to earn me at least $101 to justify the investment.  At 5% it has to earn at least $106 which narrows down the investment pool.  Ultimately those workers are still going to lose their jobs if a machine can replace them, but QE(0% interest rates) allows the process to accelerate. 

[Hawker]

No worries I have no problem with reasonable people disagreeing.

My point about the 5% interest is that in a more normal interest rate environment (I picked 5% as an example, my main point is that 0% is not a normal interest rate) a project that has to meet a 5% return on investment hurdle rate (I'm veering off into finance here) is going to be much harder to find than a project that has a 0% return on investment hurdle rate.

If I buy a machine that replaces human workers for $100 using borrowed money and have 0% interest then that machine needs to earn me at least $101 to justify the investment.  At 5% it has to earn at least $106 which narrows down the investment pool.  Ultimately those workers are still going to lose their jobs if a machine can replace them, but QE(0% interest rates) allows the process to accelerate.  

But you are in a market.  If you don't get rid of the unproductive worker, a factory in China will put your entire company out of work.  Surely the higher the interest rate, the faster you have to fire people?

[bb999]

No worries I have no problem with reasonable people disagreeing.

My point about the 5% interest is that in a more normal interest rate environment (I picked 5% as an example, my main point is that 0% is not a normal interest rate) a project that has to meet a 5% return on investment hurdle rate (I'm veering off into finance here) is going to be much harder to find than a project that has a 0% return on investment hurdle rate.

If I buy a machine that replaces human workers for $100 using borrowed money and have 0% interest then that machine needs to earn me at least $101 to justify the investment.  At 5% it has to earn at least $106 which narrows down the investment pool.  Ultimately those workers are still going to lose their jobs if a machine can replace them, but QE(0% interest rates) allows the process to accelerate.  

But you are in a market.  If you don't get rid of the unproductive worker, a factory in China will put your entire company out of work.  Surely the higher the interest rate, the faster you have to fire people?

I think that hits on a different issue, the competitiveness within the market.  I was specifically talking about the effects of QE.  When the federal reserve sets interest rate via QE it is overriding the market forces that you reference and thus we get bad investment booms (the tech bubble or housing bubble are examples.)  In the long run it wont even be the Chinese firm with cheaper labor costs that will wipe you out it's the company that goes fully automated, similar to what Foxconn is pushing towards these days. 

My main point was that for all of the talk about the benefits of QE there are potential downsides and they are not included in most analyses of the usefulness of the policy. 

[bitzox]

Price inflation will of course arrive immediately if any of that QE money ever makes it to the 99%.  The big question is, will it?        

1% of that QE money has reached the 99%

Unless I am mistaken, QE has pushed down interest rates.  Many of the 99% have mortgages so QE is already directly pumping cash into their accounts.  The same pressure on bond rates has kept a large tranche of people in jobs that otherwise would have been lost due to companies being unable to raise cheap finance.

On the other hand 0% interest rates mean anyone with savings is having money taken directly out of their accounts.  Also 0% interest rates makes it much cheaper to invest in those innovative technologies that replace expensive human workers with less expensive automation.  QE is not a free lunch.

That's not a reasonable point.  Without QE you have risk of default and that would mean confiscation of savings.  Given the choice, people choose the tiny loss that inflation inflicts.

The workers that can be replaced by outsourced labour or machines are surplus to requirements.  QE is not relevant to their fate - they need to be looking for new jobs.

QE effects the timing of their fate.  A project to replace a human worker with an automated machine is less likely to happen at 5% interest rather than 0.

Even with QE there is the risk of default.  Banks still grow broke today, look at Cyprus if you don't believe that.  Also there are plenty of historical examples where inflation inflicts a significant loss not the "tiny loss" you reference, get some facts before you call my point unreasonable.

Surely the worker is more likely to be replaced when finance costs 5% as the business is under that much more pressure?

I take your point about "unreasonable" - your point was perfectly reasonable and I just disagreed.  Sorry

Replacing workers is more expensive when financing costs are higher, if a business can get a loan for next to nothing it makes sense for them to do so and to invest in capital (robots, automation, advanced software etc). If the cost of capital is high it is significantly cheaper to higher a low wage employee as their are 0 financing costs associated with hiring most workers. granted this assessment assumes that all else is equal, when you have things like massive changes to how much companies pay for healthcare and social security that necessarily drives up the cost of hiring people vs machines.

Also the majority of the 99% would be protected by the FDIC under a default, most of them don't have more than a quarter of a million worth of fiat sitting in their checking account. I believe that 5-10 years from now the legacy of the G8's experiment with sustained QE and by extension ZIRP will be the buildup of an asset bubble of currently unknown proportions. Just like easy money helped fueled the dot com bubble and the housing bubble it is now fueling the risk asset bubble. Anything with yield is being snapped up by professional investors just like high yielding mortgages were before the housing crash.

As to lower mortgage rates, that's a great idea but most people with ARM were for foreclosed on and getting a Refi for anyone without stellar credit is pretty hard where I live. Also the 1% probably makes more in a month of the rise in risk assets (dow and S&P 500 at historic highs) then the 99% saves on paying .5% lower rate on mortgage. Especially when you consider the tax implications negate about 1/3 of any savings. While a 99%er with good credit might be able to get a loan at 3.5% JPM and BoA are paying .5% and turning around and gobbling up yield irrespective of long term valuations. QE benefits the first recipients of money which are the financiers of government debt, not contractors or government employees.

[Adrian-x]

Adrian-x what you are describing is increased productivity.  None of the benefit of that should go to you as a person doing the work - it goes to the provider of capital.  This has nothing to do with QE - its plain old economics.

You have assumed the capital didn't originate with me; or the risk undertaken in the business was deviating from the status quo was insignificant. None the less, I would agree bad business investments parr for the course.
But you (and monetarists) are overlooking the role increased productivity and innovations have on the economy.  

[Hawker]

Adrian-x what you are describing is increased productivity.  None of the benefit of that should go to you as a person doing the work - it goes to the provider of capital.  This has nothing to do with QE - its plain old economics.

You have assumed the capital didn't originate with me; or the risk undertaken in the business deviating from the status quo was insignificant. None the less, I would agree bad business investments parr for the course.
But you (and monetarists) are overlooking the role increased productivity and innovations have on inflation.  

As in your increased productivity and innovation reduced inflation in your sector.  Fair point.  In the early 90s I had a headhunting firm with 7 staff - the Internet meant firms could get direct applicants and that reduced firms costs.  Of course, it put me out of business.  So I know what you mean - these productivity increases can be very painful for those involved.