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Err, yes….

We now know that $6.5 trillion of quantitative easing has not only failed to create inflation, but has actually led us to a point where there is no inflation at all.

QE has stopped deflation. Which is both rather the point and proof that QE is inflationary.

17 thoughts on “Err, yes….”

  1. @Tomsmith

    Why do we always wish to stop deflation? I can see why it is bad for banks..

    I believe the argument is that it’s easy to get trapped in a deflationary spiral where spending is delayed because it’ll buy more later, which causes more deflation, which causes more delayed spending and so on.

    It’s a long way until you hit the bottom.

  2. Alex B,

    No, very few people delay spending because things will be cheaper in future. Occasionally people say “I’ll wait til the sales”, “I’ll wait for the paperback”, or “I’ll wait until the new model is released then buy the old model at a discount”. But in those situations we’re talking about discounts ranging from 20 to 50%; whereas the damaging, devastating deflation the BoE has avoided would have been no more than -2%. Even Japan, the oft-cited model of what to avoid, rarely saw consumer prices falling more than 1% a year; and merely 0% in most years. Consumer price deflation is hardly something to be feared.

    Wage deflation is far worse. If your salary falls, you can’t service your debt: the loans default, the banks go bust, and we get another financial crisis. That’s the damaging deflation that QE is targeting.

    There’s only one thing which people (particularly in the UK) are desperate to buy as soon as possible, for fear of prices being higher next year. I’ll leave you to work out what it is.

  3. “Wage deflation is far worse. If your salary falls, you can’t service your debt: the loans default, the banks go bust, and we get another financial crisis. ”

    Curious how inflation, where prices rise, savings are destroyed, people can’t meet their needs & individual financial crises occur throughout the land is the preferred & managed option.
    It’s almost as if we’re all intended to serve the needs of the banks & the financial system.
    Can’t remember, but was Debtor one of the Four Virtues?

  4. BiS,

    When inflation is barely 2%, you can hardly complain of savings being destroyed. And having the banks stay open and people’s savings being slowly nibbled away by inflation is infinitely preferable to banks shutting their doors and savings being wiped out entirely. Just ask the Greeks and the Cypriots.

  5. Yes I can bloody complain, Andrew. 2% inflation is a transfer of 2% of wealth from savers to borrowers, annually. And artificially low interest rates are another transfer.
    And the Greeks & the Cyps are in trouble because of banks.
    Fuck the banks.

  6. @ bis
    Nobody cares about the profitability of thebanks until they actually go bust and depositors lose their savings. In the casae of Cypriot banks,that was because there wasn’t enough “risk-free” sovereign debt issued by the Government of Cyprus so they invested their depositors’ funds in the “risk-free” sovereign debt issued by the “mother country” – Greece.
    The damage done by the deflationary spiral is that when people defer purchase of consumer durables (no-one defers purchase of bread in the hope that it will be cheaper next week) businesses (i) stop investing to expand their production capacity – which causes the builders of factories and makers of plant to lay off workers and then (ii) start laying off their own workers. This then reduces purchasing power of those laid off and demand for goods falls further and more workers get laid off.
    In a normal environment, interest rates settle down at a level which compensates savers for the expected rate of inflation, so savers only get cheated if inflation is much higher than expected (e.g. under Gaitskell or Wilson and Healey) or if interest rates are artificially depressed by government intervention (e.g. under Dalton and Gordon Brown).
    Most people think that the effects of a deflationary spiral are far worse than modest inflation of 1-2%.

  7. “The damage done by the deflationary spiral is that when people defer purchase of consumer durables (no-one defers…etc.
    Good. Excellent! Because then we get down to the base level of what people actually need, rather than chasing their tales through successive rounds of inflation, debt & credit creation & all the other bollocks.
    If someone forgoes buying that new car & makes the old one last an extra year, we don’t get any poorer, you know? They’ve just increased utility. We all got richer. The productive capacity, would have made the car, can be employed somewhere else.

  8. BiS – the productive capacity that creates a Jaguar car as an example will be employed somewhere else?
    Doing what? Production line set up for car, not really set up to make bread, pills or grow apples.
    Pretty sure the production plant for particular items tends to be used for those items.

  9. I think the theory about 2% being ‘ideal’ (don’t shoot at me, only relating it) is because wage elasticity is almost nil in a downwards direction. So rather than wages contracting in a recession to clear unemployment, they stay static but fall in real terms. So ‘everyone’ sees their standard of living fall a bit rather than, say, 10% of the population seeing theirs collapse.

    I’m no economist mind. I’m not even a political economist.

  10. You may not be either an economist or a political economist but you’ve grasped the basics of the inflation target nicely there.

  11. “but has actually led us to a point where there is no inflation at all”

    So QE is deflationary.
    PQE has no affect on inflation.

  12. ‘Deflation is bad’ in churnalist articles annoys me. I work in automation. We have algos running on a server which do the same job 10 people did only 5 years ago. We pass the savings on in lower prices to the consumer – to compete. More cheap things for everyone is not a bad thing. Lower oil prices is not a bad thing – yet it’s included in deflation figures (in quite a few places down the production chain). Milton Friedman once addressed Keynes’s claim that in the future production would be so plentiful that we’d all stop working – Friedman pointed out that we will know when that time comes, when prices of these plentiful goods drop close to zero (and we’re already there for the likes of music, or journalism.) What I don’t understand is how we are ever supposed to reach this Utopia when it’s the actual remit of central banks to inflate away any signs of efficiency gains making it into prices?

  13. @ Rob
    Tim has spoken!!
    However, to clarify what I was saying – I don’t regard 2% as “ideal” but as the top of the target range of 0-2%. When productivity is rising then changes in wage relativities can be easily accommodated with no overall inflation by the greatest productivity increases (e.g when machine tools enable woodworkers to quadruple output) permitting wages to go up while prices for the product go down. However some of the benefits of the increased productivity get handed to workers whose productivity cannot rise significantly solely to persuade them to stay in their jobs while pay rises elsewhere. To illustrate – thirty-odd years ago Japan had a productivity explosion and one consequence was that Tokyo was the most expensive place inb the world if you wanted a haircut: if the price of haircuts hads not soared every barber would have quit to get an unskilled jom in a motorcycle factory. So price reductions for mass-produced goods are offset/balanced by price rises for services.
    In a recession, inflation reduces the level of “real” wages as you said (except for those in the public sector who are guaranteed annual salary increments).
    When productivity is rising only slowly and/or there is an external shock, such as a doubling of the oil price or a really bad harvest, then inflation is pushed above the “desirable” (what I regard as “tolerable”) level by ratchet effect of public sector pay deals which inject cash into the economy without any addition to goods or services.
    The FT says that during Her Majesty’s reign GDP has quadrupled. Coincidentally, despite the technological improvements in the equiipment used by hairdressers, the price of a haircut has likewise quadrupled, after adjusting for inflation.

  14. The advantage of inflation is that it keeps old people poor and therefore humble. Otherwise we wouldn’t tolerate anything you young uns say or do..
    Still we still have mattresses to keep money under when your banks go wrong. But , alas, no guns.

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