Why hasn't there been high inflation in recent times despite all the money printing?
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Why hasn’t inflation been high despite the quadrupling of the Federal Reserve’s balance sheet since 2008? There are many theories, but this is venturing beyond mainstream economics into more debatable territory.
First, is that the mechanism by which the Fed "prints money" is by issuing a credit to commercial banks in exchange for their existing Treasury holdings. We call these credits central bank reserves, and they are basically deposits of the commercial bank with the central bank, i.e. they can be withdrawn for cash. Theoretically, if that reserve is withdrawn and lent out into the real economy by the commercial bank as loans, it should create inflation. However, that doesn't seem to have been the case. When a commercial bank holds reserves in excess of their regulatory requirements, we call them excess reserves. Systemwide excess reserves have risen from single digit billions pre-GFC to few trillions of dollars today. The simplistic interpretation is that banks haven't been on-lending out the "printed money" into the economy. They've just kept it on their balance sheet, likely to boost their capital ratios in light of Basel III regulation changes. Excess reserves have now gotten so large that one of the newly minted mechanisms for controlling inflation is by adjusting IOER (interest on excess reserves) to reduce the velocity of money in the economy.
We've actually seen this before in the 90's in Japan. After the start of the (first) Lost Decade, we saw similar propping up of unprofitable firms by the central bank, and at first there was inflation. But starting around the 2000's, inflation kind of flatlined. Why? Because banks had switched from lending out loans in the real economy to investing in government bonds, when oversupply of J-Bonds started pushing up yields to rates with comparable risk:reward. So even though the BOJ was pumping out cash like there was no tomorrow, inflation wasn't happening because the money went into financial assets rather than the real economy. Which is pretty much what happened in the US in 2019 after Powell halted tapering.
In Europe, we saw with LTRO how the ECB allowed commercial banks to exchange long-term bonds instead of short-term repos as collateral for borrowing from the discount window (i.e. borrowing from the ECB). This pushed down yields of long-term bonds, supposedly creating incentive for governments to borrow more and perform more Keynesian investing in the economy. But governments are not rational actors (perhaps the furthest policymakers from such), and they are influenced by many other factors than purely economic ones (e.g. Brexit, socialist 2017 European elections). The result is that yields have gone negative in Europe, which leads to deflationary expectations which is kinda the opposite of the intended effect.
Much of global demand (GDP growth) of the last decade has come from China. Increasingly we are seeing that China's balance sheet is not as sound as they appear on the surface. You can watch Kyle Bass' interview(s) with Real Vision on YouTube for all the gory details. The short version is that the expected demand-pull inflation from China's GDP growth has not met expectations, perhaps because the numbers aren't what they seem. Last year, the PBOC did their own version of the LTRO by allowing commercial banks to exchange perpetual bonds as collateral to borrow at the discount window. At the same time, China's insurance regulator allowed insurance companies to issue perpetual bonds for the first time. Talk about coincidence. On top of that, quite recently rules have been changed to offer payment processers (e.g. WePay, AliPay - massive e-wallet companies) interest on their mandatory cash deposits at the central bank (previously zero). The sum of all this is to allow greater flexibility for the central bank to adjust the money supply.
There is a good reason why economics is commonly referred to as the 'dismal science'. The rules haven't been fully understood yet, and central bankers are basically doing the adult version of pushing buttons to see what works. The minefield of economics at the central bank level is literally 100x wider in scope and much more theoretical compared to mainstream economics. Everything you've learned about economics from textbooks is very plausibly not a 1:1 reflection of reality. On top of that, the rules keep changing, e.g. the Philips Curve has been pretty flat since the 80's (one of the justifications used by MMT proponents). Also, the consequences of printing money as predicted by Austrian economics just hasn't happened. There is just so much happening in reality that mainstream economics has not captured, so as to render it nearly useless for the purposes of central bank administration of the economy. That's why recent reality has not appeared to follow the rules from the perspective of the layman observer.
Why hasn't there been high inflation in recent times despite all the money printing?
Why hasn't there been high inflation in recent times despite all the money printing?
Why hasn't there been high inflation in recent times despite all the money printing?
Why hasn’t inflation been high despite the quadrupling of the Federal Reserve’s balance sheet since 2008? There are many theories, but this is venturing beyond mainstream economics into more debatable territory.
First, is that the mechanism by which the Fed "prints money" is by issuing a credit to commercial banks in exchange for their existing Treasury holdings. We call these credits central bank reserves, and they are basically deposits of the commercial bank with the central bank, i.e. they can be withdrawn for cash. Theoretically, if that reserve is withdrawn and lent out into the real economy by the commercial bank as loans, it should create inflation. However, that doesn't seem to have been the case. When a commercial bank holds reserves in excess of their regulatory requirements, we call them excess reserves. Systemwide excess reserves have risen from single digit billions pre-GFC to few trillions of dollars today. The simplistic interpretation is that banks haven't been on-lending out the "printed money" into the economy. They've just kept it on their balance sheet, likely to boost their capital ratios in light of Basel III regulation changes. Excess reserves have now gotten so large that one of the newly minted mechanisms for controlling inflation is by adjusting IOER (interest on excess reserves) to reduce the velocity of money in the economy.
We've actually seen this before in the 90's in Japan. After the start of the (first) Lost Decade, we saw similar propping up of unprofitable firms by the central bank, and at first there was inflation. But starting around the 2000's, inflation kind of flatlined. Why? Because banks had switched from lending out loans in the real economy to investing in government bonds, when oversupply of J-Bonds started pushing up yields to rates with comparable risk:reward. So even though the BOJ was pumping out cash like there was no tomorrow, inflation wasn't happening because the money went into financial assets rather than the real economy. Which is pretty much what happened in the US in 2019 after Powell halted tapering.
In Europe, we saw with LTRO how the ECB allowed commercial banks to exchange long-term bonds instead of short-term repos as collateral for borrowing from the discount window (i.e. borrowing from the ECB). This pushed down yields of long-term bonds, supposedly creating incentive for governments to borrow more and perform more Keynesian investing in the economy. But governments are not rational actors (perhaps the furthest policymakers from such), and they are influenced by many other factors than purely economic ones (e.g. Brexit, socialist 2017 European elections). The result is that yields have gone negative in Europe, which leads to deflationary expectations which is kinda the opposite of the intended effect.
Much of global demand (GDP growth) of the last decade has come from China. Increasingly we are seeing that China's balance sheet is not as sound as they appear on the surface. You can watch Kyle Bass' interview(s) with Real Vision on YouTube for all the gory details. The short version is that the expected demand-pull inflation from China's GDP growth has not met expectations, perhaps because the numbers aren't what they seem. Last year, the PBOC did their own version of the LTRO by allowing commercial banks to exchange perpetual bonds as collateral to borrow at the discount window. At the same time, China's insurance regulator allowed insurance companies to issue perpetual bonds for the first time. Talk about coincidence. On top of that, quite recently rules have been changed to offer payment processers (e.g. WePay, AliPay - massive e-wallet companies) interest on their mandatory cash deposits at the central bank (previously zero). The sum of all this is to allow greater flexibility for the central bank to adjust the money supply.
There is a good reason why economics is commonly referred to as the 'dismal science'. The rules haven't been fully understood yet, and central bankers are basically doing the adult version of pushing buttons to see what works. The minefield of economics at the central bank level is literally 100x wider in scope and much more theoretical compared to mainstream economics. Everything you've learned about economics from textbooks is very plausibly not a 1:1 reflection of reality. On top of that, the rules keep changing, e.g. the Philips Curve has been pretty flat since the 80's (one of the justifications used by MMT proponents). Also, the consequences of printing money as predicted by Austrian economics just hasn't happened. There is just so much happening in reality that mainstream economics has not captured, so as to render it nearly useless for the purposes of central bank administration of the economy. That's why recent reality has not appeared to follow the rules from the perspective of the layman observer.