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tabony | 1 year ago
But at the end of the day, the causes of inflation are not cause and effect. You can print money to save an economy without causing inflation as we did during the 2008 financial crisis[4] or you can print money and cause hyperinflation as in the case of Argentina[5] or Zimbabwe. It’s more about how you do it instead of what you do.
[1] https://www.oxfordeconomics.com/resource/how-inflation-erode...
[2] https://cepr.org/voxeu/columns/using-inflation-erode-us-publ...
[3] https://www.stlouisfed.org/on-the-economy/2022/aug/inflation...
[4] https://econofact.org/rising-inflation
[5] https://mises.org/mises-wire/how-money-printing-destroyed-ar...
alaxhn|1 year ago
If you print money you will increase the rate of inflation. The question is how much and when. During crisis, often lending is impacted which can lead to a decrease in the supply of available capital. Printing money in this circumstance can head off deflation and thus like you point out you have printed money without causing inflation to increase above the historical baseline rate like we did in the 2008 crisis. Crucially, you cannot rely on this strategy to reliably make up for a budget shortfall as we have seen time and time again (see bullets for two examples). The parent comment is correct that often a perpetual budget shortfall leading to an expansion of public debt can and often does lead to an inflation crisis but you are right that there is a bit more nuance.
To make an analogy: if you eat much more than the average person you will become overweight. You might object that this is factually incorrect and a silly thing to say because there are some exceptions such as if you only eat fresh vegetables, are training for a marathon, have a medical condition etc but in broad strokes this is true. However in the general case, eating too much leads to weight gain (even if it is arguably not the root cause which may be that we have engineered our food supply for financial incentives rather than compatibility with our evolutionary history :D).
* https://en.wikipedia.org/wiki/Debasement#Roman_Empire * https://en.wikipedia.org/wiki/Paper_money_of_the_Qing_dynast...
Fade_Dance|1 year ago
Financial conditions tightened after 2008, despite QE. The money supply in the broader sense (global liquidity) tightened significantly because of banking regulations limiting balance sheet size, and because of collateral requirements massively tightening up. No more sending CMBS into repo to originate systemic leverage - it's treasuries or nothing. Repo within the US is about 5 trillion today, and probably about 20 trillion globally (with USD assets at the core of the chain), so the 2008 style collateral crisis was massively deflationary despite the various liquidity injections.
There is also a cost for the QE activity - the central bank takes on interest rate risk, essentially putting on a giant prop trade on short-term interest rates (and the results of such an unwind were seen post 2020, especially in areas like the housing price surge and the banking collapse).
QE is not money printing though. It's a misconception. In some ways it can tighten. It takes high quality collateral out of the system and exchanges it for bank reserves which are extremely limited. As the QE "money printing" got obscene, banks had massive amounts of excess reserves and further reserve accumulation from QE was not an injection of liquidity at all. It really had almost no effect. If you remember, trillions of dollars of reserves were parked back at the Fed in Reverse Repo, and when inflation forced interest rates up, the inflationary loop was accelerated by the interest on reserves - the risk never goes away, it transforms and slashes around. In the '10s though, there was arguably collateral scarcity from QE, and indeed it is undeniable that a giant bond bubble was built up with 0% (negative in Europe) long term debt. Meanwhile leverage was zero cost or even negative real cost, which showed up in massive asset inflation (bank reserves from QE mostly don't propagate to the real economy. Even bank lending post 2008 has little to do with reserves.)
btilly|1 year ago