Why hasn’t quantitative easing caused inflation?
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There's a relevant comment on this question that was discussed at our Party Conference last month in an article in this weekend's Financial Times by Ken Fisher, who wrote:
Quote:Only growth in money in circulation can stimulate, inflate, currency debase or whatever else you think it does to the economy.His point is that "quantitative easing" (QE) has not led to an increase in money in circulation and so has not done any of these things. Not, as far as our debate was concerned, led to inflation/currency depreciation/a rise in the general price level (all different ways of describing the same thing).
Economics textbooks and official statistics have various definition of money, ranging from "base money" (formerly M0) through M1, M2, and M3 to M4 (which is base money plus various degrees of bank lending and so what they call "credit money" or "bank money"). The difference is that while M0 (base money) is issued by the government, M1. M2, etc depend on how much banks and other financial insttutions lend.
"Base money" is made up of two elements: notes and coins in circulation + "reserve balances" held by commercial banks at the Bank of England. QE is popularly described as the Bank of Englnd "printing more money". In one sense it is, but this is misleading if the "money" that is "printed" is understood as notes and coins. In fact, with QE, it is the commercial banks' "reserve balances" (and they are created electronically rather than literally printed). But these are not "money in circulation" (not even "bank money")
Under QE, or to give it its official name the Asset Purchase Facility, the Bank of England buys bonds (mainly government bonds) off banks and other institutions and pays for this with "reserve balances". So what happens is that this part of base money increases, but the part that causes inflation if issued in excess of the economy's requirements does not. In other words, QE does not increase "money in circulation". That's why it hasn't caused inflation.
It hasn't led to an increase in M1, M2, etc either, as the Bank may have intended, but that's because, with a depressed, flatlining economy, the opportunities for commercial banks to lend has not increased. Also, the amount of notes and coins in circulation has increased as part of the official policy of trying to create 2% a year inflation, but this has nothing to do with QE.
Quantatative easing, AKA keynesianism, unless it is computer generated "money"!. Whatever will they think of next? Steve.
I thought the reason was that it was creating inflation: when they started, it looked very like a catastrophic fall in prices would occur, so falling prices plus inflation means actual prices retaining the same denomination. And inflation certainly did run up above the 2.5% mark (up to about 3.6% IIRC), and considering that inflation remains higher than interest rates, it seems we have a slow destruction of capital going on.
Yes, one of the aims of QE was to avoid a fall in "asset prices", i.e to inflate them but without causing a rise in the prices of ordinary consumer goods and services. In other words, its aim was to cause "inflation" (in the sense of a rising prices) but in only one part of the economy.It does seem to have achieved the aim of avoiding a fall/ensuring a rise in the "assets" traded on the stock exchange. The government and the Bank of England believed that this would help stimulate the economy or at least prevent it getting worse. They don't seem to have achieved thisOn the other hand, general inflation has more or less been avoided. True, "inflation" has risen above the 2% target, but the problem here is one of definition. Strictly speaking, inflation is a rise in the general price level due to an over-issue of the currency, but prices rise for other reasons which will also be recorded as "inflation". For instance, increases in the price of imports, which does in fact seem to a major explanation for "inflation" rising above 2%. According to this:
Quote:The Bank of England has consistently said that it believes inflation will fall back to its 2% target. It is pinning its hopes on lower oil prices and import prices.If all the extra "base money" created by QE had been created as notes and coins (rather than as banks's "reserve balances") inflation would have been many times higher than the 3-4% you mention. In fact, it would have been like in Zimbabwe.
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