- $40 trillion a month in QE for 24 months, no matter what, announced upfront.
- 3-month bills at 0% rolling everything over each month while adding a new $40 trillion each month.
- Zero percent interest paid to banks on excess reserves.
What Would Happen?
- Hyperinflationists and inflationists would come out of the woodwork on the announcement screaming inflation or worse.
- In two years, M1 would rise by $960 trillion dollars, nearly a quadrillion dollars.
- Since M1 is currently about $18.7 trillion, M1 would thus rise by about 5,000 percent.
What About Inflation?
Q: What would a 5,000% increase in M1 over the course of two years under the parameters as outlined above do to inflation?
A: Not a thing
There is a stimulus impact of holding down short term rates, but the Fed was already committed to holding rates to zero indefinitely anyway. Other than what is needed to hold the short-term interest rates to zero, any additional amount does nothing at all.
I suppose there could be a temporary knock on psychological effect over the size of the announcement but that would be short-lived.
Today's question has the same answer as that of a thought experiment question I posed a decade ago.
Q: What would happen if someone invented a counterfeit machine so good the US Treasury could not tell the difference, then printed $100 trillion in bills, then buried the cash in the ground?
What About Lending?
A quadrillion in excess reserves or QE induced deposits would not spur lending because banks do not lend from reserves or deposits.
A quadrillion in short term bills would do nothing to long term rates and it would not put any money into anybody's hands to spend.
Loans and Leases vs Deposits
The Fed crammed money down the throats of commercial banks via QE policy although the banks have little demand for loans.
What About Tapering?
At the end of two years the Fed could shrink M1 by 98% and again nothing would happen.
I suspect the best way to avoid any psychological impact would be to suddenly do a reverse repo of a quadrillion in 0% yielding bills one fell swoop unannounced. As long as banks had the excess reserves, the sudden cash drain would not do anything either.
This is quite a bit different than tapering long-term bonds at some non-zero interest rate which would force up long term rates.
On a 98% decline in money, those who define inflation solely as an increase in money supply should then be screaming deflation, but they wouldn't be.
Instead, the entire episode would have the hyperinflationists hiding under a rock.
Inflation Is Always and Everywhere a Monetary Thing
Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
In my example, M1 would rise by a quadrillion, there would be zero increase in output, but literally nothing would happen that would impact anyone.
We need to rethink QE-induced increases in money supply.
Q: At the short end, is massive QE much of anything at all?
A: Other than what is needed to peg the short end to zero, no, it's nothing.
What the Examples Show
- How hard it is for the Fed to produce CPI inflation via QE.
- How silly it is to measure inflation as a measure of M1 money supply alone.
Money Supply Recap
Our thought experiments imply that QE is not really money. It won't be spent or lent.
Effectively then, one needs to subtract the growth in the Fed's balance sheet from the growth in M1 to get a better picture of money.
There is an inflationary impact of QE but that stems from suppression of interest rates. It would not take a quadrillion to suppress rates. The Fed is doing that with minimal amounts.
Note to the Fed: Any QE beyond what it take to hold rates to zero does absolutely nothing at all.
There is a tapering issue, but not on the short-term parameters I imposed.
Huge Monetary Risk
My observations are in line with a comment Lacy made last year.
Please recall Bond Bull Lacy Hunt Warns of a Huge Monetary Risk
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."
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.
The Fed's balance sheet needs to be subtracted from M1.
Discussion of a "helicopter drop" by the Fed is nonsense.
The Fed cannot give away money and would not if it could because it is beholden to the banks.
Congressional free money is another matter indeed. So are government deficits. 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.
Those giveaways certainly contributed to speculation and price inflation. So did interest rate suppression but the latter mainly to speculation.
Hello Fed, Inflation is Rampant and Obvious
My post Hello Fed, Inflation is Rampant and Obvious, Why Can't You See It? states the present inflation case.
Inflation is very understated but it is primarily manifested in asset bubbles, not prices of consumer goods.
Any Fed induced inflation was already baked in the cake and another quadrillion or even 100 quadrillion of short-term QE wouldn't add anything to the mix under the parameters I outlined.
If the Fed targets long-term rates it will be in response to a faltering economy or declining price inflation.
Explanation of What's Happening Now
Looking ahead, what's the Fed going to do for an encore if asset prices decline?
Nearly everyone is looking for significantly increasing price inflation. I am one of the few expecting otherwise.
For discussion that includes some big barbs at the Fed for blowing bubbles, please see Don't Worry, the Fed Says the Recent Jump in Inflation is Transitory.
In case you missed it, please see The Fed Can't Trigger Hyperinflation, It's Not Even a Monetary Event
Hyperinflation is best thought of as a political event that results in loss of faith in currency after which massive printing follows, not the other way around.