Huge Monetary Risk
Earlier today I posed a Q&A what if on QE: What Would Happen to Inflation If the Fed Announced $40 Trillion a Month in QE?
My conclusion was not even a further quadrillion in M1 via QE would matter.
I just added a couple of paragraphs to the post that are themselves worthy of a monetary spotlight update.
Please recall my August 18, 2020 post Bond Bull Lacy Hunt Warns of a Huge Monetary Risk (emphasis mine).
LH: When the Fed initiated QE1, QE2 and QE3, folks said those policies were very inflationary. There is a liquidity effect of what the Fed is doing, and the liquidity effect can be very powerful over the short term. But ultimately the increase in the money supply did not follow through after the rounds of Fed purchases of government securities because the banks couldn’t utilize the reserves
LH: The great risk is that we become dissatisfied with the way things are, and either de jure or de facto, the Federal Reserve’s liabilities are made legal tender. The Federal Reserve as it’s constituted today can lend but it cannot spend. Now, they’ve done some things that are different from what the Federal Reserve Act said under the exigent circumstances clauses, but so far they’re lending.
LH: There are folks who want to make the Fed’s liabilities legal tender. Now, if that happens, then the inflation rate would take off. However, in very short order, everyone would be totally miserable because no one would want to hold money. You would trigger Gresham’s Law — people would only want to hold commodities they can consume and commodities that can be traded for others.
Statistical Mirage
Please read the rest of the above interview because it’s very pertinent to the discussion.
Note that the QE related M1 deposits are not legal tender. They cannot be spent or lent. Thus, they are not really money in the first place.
To make sense of the hockey stick M1, one needs to subtract the Fed’s balance sheet.
Helicopter Drop?
There was no Fed-induced helicopter drop. There was lending and even some illegal speculation in junk bonds, but the real “helicopter drop” was Covid-19 stimulus first by Trump then by Biden.
In three rounds of stimulus, one under Trump and two under Biden, Congress did give away trillions of dollars that did get or will get spent as opposed to trillions in QE that didn’t and won’t.
The Congressional free money giveaways certainly contributed to speculation and price inflation.
The Fed’s interest rate suppression did so as well, but the main effects were on asset speculation and housing.
Please review What Would Happen to Inflation If the Fed Announced $40 Trillion a Month in QE? to see how this all ties together.
Mish
the way things are, and either de jure or de facto, the Federal
Reserve’s liabilities are made legal tender. The Federal Reserve as it’s constituted today can lend but it cannot spend.”
be spent or lent. Thus, they are not really money in the first place.”
I much appreciate Lacy’s views, but would argue again .
“LH: The great risk is that we become dissatisfied with the way things are, and either de jure or de facto, the Federal Reserve’s liabilities are made legal http://tender. The Federal Reserve as it’s constituted today can lend but it cannot spend. “
The idea that because a form of money is kept within the higher banking system with deposits so acting as reserve and stabiliser to value of money, is possibly flawed. The reason I say this is because no matter how the fed and banking system cut their equations, if people spend accessible deposits into hard assets due to loss of faith in the currency, then you end up with high/hyper inflation. It doesn’t matter if it is cash withdrawal as a type of physical asset to escape failure of the banking system/previous investment, or if it is electronic transfer of deposits within same system to buy monetary metal, food, or toilet paper to secure something more tangible. The posts on crypto make it clear you are aware that speculative frenzies develop under certain circumstance also, whether the investment in the crypto case is ultimately right or not being a different matter.
In the meantime important things are getting done and the world moves on.
QE just bought financial assets with the purpose of supporting their prices and in the case of govt bonds manipulating down their yields where in principle economic actors find it worthwhile to borrow money and spend it supposedly on productive investments allowing them to make money thereby stimulating the overall economy through trickle down. The reasoning was that it is an excellent way to get an economy out of the doldrums. As with many things with government it is a roundabout and obscure way of getting something done. It’s all about incentives and little about results. The first three steps are easy. Getting rates down to incredibly low levels is not rocket science. Patting yourself on your Central Bank back because you did it is ridiculous. The last step, getting investors to use the money for productive investments that benefit the economy is the hard part and it clearly didn’t work after 2008 neither in the US nor in Europe. They were giving the money to institutions and people who didn’t need to spend and if they did spend spent it on assets that don’t produce anything.
This time around I am glad that they seemed to have learned something. If the economy sucks give money directly to those who want to spend and who need to spend. It put money directly in their pockets. It eliminates the unnecessary middlemen. It’s a bold move and it will work.
Surprise! Democrats do not like Republican administrations and Republicans don’t like Democrat ones and that media outlets slant towards negative news to summarize the article.
Most of it was just electronic funny money that never worked it’s way into the real economy.
If the restraint on inflationary policies is only it hasn’t been inflationary yet, then there will be inflation eventually as a certainty. This is the whole deflation as a precursor discussion again.
I think that’s the correct takeaway. If QE were inflationary, we’d have been hit hard long ago now. But sending working class people checks in the mail is different.
The thing is that we really haven’t gone “full MMT” yet. But we seem to be heading in that general direction. More real helicopter money is likely, I think. In any new “existential crisis”.
The PPP money is interesting. I don’t think the PPP giveaways were as inflationary as the stimulus checks…but not everybody who got PPP money used it for the intended purpose of making payrolls….or, at least it freed up money that would have gone for payrolls….and there was some shameless retail….I saw lots of expensive new boats on the lake during the lockdown last spring, for instance ….so I think PPP money might have juiced inflation to the degree that the loans were abused.
I spent less money in 2020 than I have in any year in this century….I don’t have exact numbers, but I still have money from PPP 2 and the EIDL loan sitting in the bank. I put those funds in their own dedicated accounts to make it easy to track where we spent the money.
I got my actual letter today forgiving my 85K first PPP loan, which was a relief.
Congrats on the letter. No legitimate business should have to pay back PPP loans. Maybe government is not all bad.
The comment update was postponed (again) until tomorrow.