Topic: The Death of Inflation despite QE (Read 3659 times)

When evaluating the inflationary impact of QE, its important to consider that QE can occur in two ways.  The impact of each can be different.  In the last few years central banks have been primarily buying bonds from banks, which may not be as inflationary as people expect, in the short to medium term.

1.      The central bank buys government bonds from a commercial bank. This appears to have little impact on the economy and really only effects the accounts of the two entities.  The central bank buys the bonds from the commercial bank and in the process creates deposits, (just like how a bank makes a loan to you or me).  These deposits are treated as reserves by the commercial bank.  For example if the Bank of England purchased £10m of bonds from Barclays the Balance sheet impact would be as follows.
a.       Barclays has swapped one asset for another, it has swapped bonds for reserves, the size of its balance sheet does not change
b.      The Bank of England has expanded its balance sheet, it now has a new asset, the bond and a new liability, the money it owes to Barclays

2.      The central bank buys government bonds from a non-bank institution.  Here the situation is a little more complex.  Let’s say for example the Bank of England buys a £10 government bond from a private individual Mr Smith (in reality it is large insurance companies or asset management institutions).  The Bank of England writes a cheque to Mr Smith in exchange for the bond.  Mr Smith is not going to just keep this cheque and do nothing, therefore Mr Smith immediately goes into his normal commercial bank, say Barclays and deposits the cheque.  Now Barclays has £10 more reserves because the Bank of England owes Barclays this money.  In reality of course, this all happens on instantly computers, there is no cheque.  The accounting treatment is as follows:

a.       Mr Smith has swapped one asset for another, he had a bond and now he has bank deposits.  His balance sheet remains unchanged
b.      The Bank of England has expanded its balance sheet, it now has a new asset, the bond and a new liability, the money it owes to Barclays
c.       Barclays has expanded its balance sheet, it has a higher level of reserves which is an asset and it has increased its liabilities, which is the deposit.

I think it is vital to understand the dynamics of QE as these two mechanisms have different outcomes.  Method 1 merely helps banks out in a major liquidity crises.  Method 2 increases bank deposits, Mr Smith has money which he is likely to spend on something.  This is likely to boost the economy and may be inflationary.

Fair point but I'm just talking about 5,000 Euro of a loan. I could struggle to pay 500 a month back for 10 months. If things get tough I'd lower the amount is all.
It is not 50,000 Euro!

That is what they do (invest in assets), but they have a government guarantee if the market tries to burn them too bad.  You would not be so lucky and would wind up filing bankruptcy if things turned against you.

Thanks for the rates guys. I am an American living in Germany so I guess I don't get the good rates.
I would love to get a 5,000 Euro loan at 2%. I would roll it into Bitcoins at an opportune time.
I mean isn't that what the banks are doing once they get money from the FED? They buy bonds, put money into the stock market, etc. as that is near guaranteed profit with little risk. Risk... ehehhe

I highly recommend Wealth of Nations.  It is required reading for anyone who wants to study economics.  BTW, it isn't the worker who increases productivity (other than the initial ramp up as they learn their job), it is technology that makes each worker more effective.  Ultimately, this leads to less demand for labor and does indeed lead to price and wage deflation in an unmanipulated economy.  The worker can never expect anything other than his wage, which is dependent upon economic conditions, until he takes his productive capacity into his own hands rather than merely offering it to the highest bidder.

Here in the US, I get a steady stream of credit card balance transfer offers for 0% interest for the first 18 months and a 3% transfer fee, so effectively 2% annually for 18 months.  Obviously, when rates rise the ability to roll it over will dry up.  However, I only have a balance because I've chosen to pay down student loans with 6-8% interest instead.  I've got enough assets to cover the balance if necessary.

In Canada I am offered 0-2% with a 1% handling fee for 6 months to 1 year. I would pay 6% on my no frills Credit Card and 18% on my 1% back Credit Card.

Spot on.

Contemporary Author Eckhart Tolle's New Earth sees this happening now and predicts it will happen (an awakening).
I had a hard time reconciling the idea as all the things I enjoy today are a result of forced labour. So I wrote it of as an impractical spiritual Utopia on my first reading.

Now understanding the economic mechanisms behind Monetarism I see a clear vector between where we are and where we need to be to continue human evolution.

Bitcoin is the most effective meme I've found in achieving that goal.

Hawker, over exaggerated, it is not all that bad. Read Adam Smith's Wealth of nations for a clear overview of economics.
My point though is it is going to inflation (aka the bankers)

Oh boy, so where is the incentive for the worker to increase productivity if the fat lazy capitalist should reap all the rewards? Just another capitalist i see.

Article explains why printed money did not cause inflation yet. But this money will be spent eventually. It is very naive to think that this money will never be in actual circulation, and it is naive to think that bank money creation mechanism won't multiply it like 20 times.
And what FED is going to do when inflation kicks in eventually? Sell bonds? This will remove bearly 1/20th of injected money due to what I said above. Not to mention the fact it will make goverment borrowing fuckin expensive.

I'm curious here. What interest rates are you guys being offered on credit cards and loans. I understand better credit history means more.
Anyway, I get these offers in the mail (I'm in Germany) and there are credit offers (loans) for 8.5% - 8.9% over 5 years! I am shocked as I don't have bad credit and am self employed for years now.
And that is cumulatively of course, so 8.5% on 10,000 is way way more than 850 Euros.

It just gets me that these banks get such low interest loans from the ECB and then fractionally loan out magnitudes greater amounts at crazy rates. It really should be illegal. How is this helping us?

Working less is not my goal.  Increasing the entertainment value of work, or the work value of entertainment would be a better goal.  Doing what you love to do and having that provide meaningful value to yourself and others is the way to be.

In other words, consider what you would do if you owned all your time, and do that.

solution = Bitcoin

A while ago I found myself sharing a table during lunch with a Director of the largest local credit union.  
Rather than just blurt out Bitcoin and the need for reform in the environmental and Financial systems, (as Amir Taaki so eloquently addresses the bankers in his interviews) I thought I would talk about the resulting problems caused by the system and see if I could come to a consensus and then introduce Bitcoin.

I never got to discuss Bitcoin, Instead I was pigeon hold as a work less party activist. This was something that court me off grad, as a left leaning anarcho capitalist, and utilitarian environmentalist, I had thought of the local work less party, as a bunch of fundamental hippie urban farmers, devoid of material aspirations.

So the discussion revolved around many of the goals the work less party and addressing there platform, which I was rather clueless about.  

Where I had to conclude my discussion is, our economy needs growth, and reducing the amount of work we need to do, to keep on going is a political reform we will have to enforce through law if the political will exists. (Not my opinion just were we left off)

My take home was if one wanted to achieve the goal of more leisure time (working less) and curb exponential economic growth, you can do it with one single reform, if you can effectively introduce a fixed non adjusting means of exchange (money ) you will achieve that objective.  

The net problem is cause by monetary inflation. So mitigating the inflation form QE, is not a solution, it is a tax on the productive members of the economy (the makers of the actual things we need) and all these high flying economists and critics seem to overestimate the fundamentals in the economy.  

The fundamental being: I pay producers $1.30 an hour to produce the typical things society needs, and I pay my layers $500 an hour to suppress competition, and the net outcome is more money is spent on the layer in the economy than on the goods and services that drive the economy.  And as a business the inflation happens first in the professional services and about 2 years down the line the costs of productive labour increases, I am no economist, but I can see the writing on the wall, something has got to give, and it is not the producers at the bottom who are underperforming.  

This pretty much hits the nail on the head. As we enter the "new normal" economic growth cannot continue at the rates we are used to. It is limited by both natural resources and population growth. We need a paradigm shift away from using increased productivity to make more stuff. Instead increased productivity should-> lower prices and less work. If I work less, and thus make less money, but prices are dropping (due to increased productivity and ideally a lack of central bank intervention) I am essentially channeling that increased productivity into a higher standard of living. Over the long term economic growth shouldn't exceed population growth by much.

Since you mention plain old economics, Adam Smith would disagree with you.  According to him, while the capitalist might see a small short term boost in profits, it is solely the landholder who sees any long term benefit from technological increase in productivity.  This is because, as Mark Twain said (paraphrasing), "buy land, they don't make it anymore".  Liquid capital on the other hand is virtually unlimited, as is labor.

Many interesting points here!

In my opinion, if your efficiency increased but your income did not increase, it means that the money supply is not enough -- more product chase for the same amount of money, so that each product get less paid

But there could be other reasons that your income can not increase by 8x even your efficiency has lifted by 8x

For example, if one business is more than 20% profitable, then capitals will enter this branch and increase the competition and drive down the profitability. Patent/secret process might delay that effect but eventually it will even out

And, the demand could not increase by 8x due to consumers do not have 8x income,  added production capacity will just lower the sale price. Of course various type of consumer loans could increase the sale, but it could never generate 8x more sale than before. Anyway, a big part of people's income in the next decade has already been sucked into housing, you can't expect a dramatic increase in spending for decades (Japan's lost 20 years)

The most possible benefit of an increased efficiency is that you could spend much less time to do the same work. But for employee, since the salary is decided by the amount of worked hours, this just means they have to sit in the office and do nothing. And when their boss see that they are not doing anything, they will fire some of them, and that will further reduce the income and demand for the whole society

Due to the limitation in total demand, reduce the working hours is the best way to benefit from the efficiency increase, but seems only a few governments are supporting this view, most of them still think working 8 full hours a day is necessary

Spot on

Interest rate has already been low (0.25%) for a long time,  but average household still pay a lot for their mortgage interest, so most of those cashs are pumped into banks' pocket

QE3 and QEI money was used to buy debts (agent MBS and government bonds), but these debts will have to be repaid at a later time, it just like borrow some more money to buy some time to avoid the default, it does not improve the income, just increase the debt

Correct. The problem with Monetarism , Milton Friedman's Keynesian / Free Market hybrid (aka a managed economy,) is the free market can't adjust to keep the market balance of supply and demand in equilibrium. There are winners and losers and the manipulators have some control on who they are.

One way for central banks to work the system is keep adjusting how the CPI is calculated to make the model work better, the result is misallocated recourses, they call it risk management, but always the risk is mitigated to benefit the present at the expense of the future, while inflation may be bearable for some it will kill the creativity in the economy and the first quality of life compromise will be accommodation for new home owners and renters alike.