For a decade and more I’ve been saying that QE was fine until. It’s the until that matters.
The money equation is MV=PQ, this is definitional. The amount of money, times the number of times we use money, equals the price of things we use money for times the number of times we use money for things. It’s not possible to argue with that.
So, if V falls dramatically we can have lots more M without having P rising. Indeed, wed might actually want to engineer that in order not to have deflation and thus a depression.
OK, So we print lots more M and go spend it, happy days. But that all works until V turns. And only until V turns. Once it does, and MV starts rising, then we get the inflation.
M can also be thought of (not wholly accurately, but well enough) as base money, M0, MV as broad money, or M3, maybe M4.
By popular demand (Sid and Doris B.), here’s an update of an favourite, relating UK broad money growth and #inflation… 👇
(It’s not working as well now as I would like, but was only ever meant to be ‘illustrative’ 😉) pic.twitter.com/D4mShoRKKW
— Julian Jessop (@julianHjessop) June 25, 2023
Hmm, OK. And yes, I know this is from the US but the UK will be roughly the same, in directions at least. V has been recovering.
The thing I’ve been telling you all these years was true. Expanaind ghe money supply, QE, doesn;t cause inflation while V is falling. But once V starts rising again you’ve got to sell those bonds back into the market – reverse QE – so as to kill off the increase in M and thus the inflation.
This description isn’t right but it is useful.