Discuss: Inflation & Deflation

Is QE inflationary? Is it deflationary? Or is it simply ineffective?

Air your thoughts, post links and generally discuss. Normal posting rules apply.

A reminder: if you're on twitter, check out the hashtag #qedebate for QE-related stuff. And use it yourself, of course, if you're talking about QE.

The links that follow will be updated as the debate progresses. 


Widowmaker of all widowmakers? - FT Alphaville

So much for high expectations of Abenomics. Yen strengthens and Japanese equities sell off. Inflation expectations (index-linked bond yields) now right back where they were in early April.

Unintended consequences of unconventional monetary policies - Dr. Ros Altmann

Write-up from Dr. Altmann's presentation to the LSE. Wide-ranging review of the consequences of QE from a broad social and economic perspective. Particularly interesting on intergenerational effects.

Monetary policy outcomes - Stephanie Bell Kelton

Kelton considers a number of reasons why expansionary monetary policy may have contractionary effects. Particularly interesting on portfolio effects similar to those noted by Toby Nangle and Ros Altmann. Not limited to QE.

Is the developed world following Japan's long and winding road? - Shirakawa

Important speech by Shirakawa, former head of the Bank of Japan, on the limitations of monetary policy in a highly-leveraged low-growth environment after the bursting of a bubble.

Initial thoughts from Frances Coppola: Inflation, deflation and QE

Related debates on twitter:
  Damaged banks, collateral scarcity and yield squeeze
  Inflation, deflation and QE
  Redistributive and wealth effects of QE (and other matters)
  QE effects on savings and pensions
  Effect of QE on UK housing market

Pawel Morski disagrees with Frances Coppola (and provides a neat QE flowchart).

"You can't grow an economy by making households poorer" - James White on the problems of debasing a currency to chase exports. Mercantilism is not the answer.

Martin Wolf reviews progress of Abenomics so far and warns of trouble to come - FT

Dr. Ros Altman's press release for Mark Carney pleading for no more QE.

Links from @wonkmonk_ on Twitter:
   QE as placebo - Warren Mosler
   Marshall Auerback: If stock markets begin to decline it's because of fiscal policy, not QE

Shaun Richards objects to higher inflation targets (not directly about QE but related)

Derrick Wilkinson's post from 2011 pointing out that there is no evidence that QE achieves anything at all and calling for a "rethink". Should be read in conjunction with Pawel Morski's post (link above), which essentially says that the reason why we still have QE is that rethinking didn't come up with anything better.

Thoughts on inflation - an old post from Frances Coppola (Feb 2012). 1970s redux? Not really. QE effective? Don't think so. Inflation a risk? No. Deflation is the game. Deal with it.

Is QE deflationary? A conjecture - Euronomist Blog,  Considers the effect of QE on velocity of money and time preference. Concludes that QE does have deflationary effects in the short run but will encourage greater spending in the medium term once people get bored with putting all their money into stocks & shares.

There's a problem with the transmission - Frances Coppola. QE not only doesn't work properly when monetary policy transmission is weak due to a damaged financial sector, it actually clogs up the transmission mechanism itself. This might help explain QE's apparent diminishing returns. Wonkish.

Does the Fed really control the money supply? - John Aziz (The Week). John looks at M0 money creation since the financial crisis, and M4 money creation, and concludes that creating lots of base money has had little or no effect on broad money (and may even be making matters worse). With very cool charts.

Why QE didn't generate inflation - Robert Wagner (Seeking Alpha), On the importance of trust in markets. If markets hadn't trusted the Fed, the effects might have been very different. Generally similar views to Pawel Morski (see link below), but also makes important point that monetary policy alone will not be sufficient for recovery.

The unintended consequences of QE - Izabella Kaminska. Kaminska predicted that QE might be deflationary long before anyone else, in this post from 2009.

Can (and has) monetary policy offset fiscal consolidation? - Jonathan Portes considers whether the Sumner Critique - that fiscal stimulus will always be neutralised by central bank inflation targeting - holds in practice. He concludes that it doesn't, and that therefore (by extension) monetary policy cannot be a sufficient offset to the contractionary effects of fiscal consolidation.

A conversation in response to USYD seminar on macroeconomic policymaking - Modern Money and Public Purpose. Coordinator: Rohan Grey. Contributors: Joseph Halevy, Jan Toporowski, Marshall Auerback, Massimo Cingolani, Mario Seccareccia, Bill Mitchell, Warren Mosler. And a link to Scott Fullwiler.

Wounded heart - Bill Gross at PIMCO explains how not only QE, but very low interest rates have a depressing effect. Financial markets require "carry" to function properly: without it, transmission of money around the economy grinds to a halt. Related also to this post from Frances Coppola:

The slow death of banks - Frances Coppola at Pieria. Damaged banks are being kept on life support by very low interest rates, QE and extended term repo operations, and covert and overt government subsidies. But these treatments have toxic effects for both the economy and for banks when used long-term. The end may be that banks as we know them die.....

Stock markets and money creation - Euronomist Blog argues that QE raises inflation expectations due to higher prices on stock markets. (Doesn't explain how inflation expectations translate into actual inflation, though).

A fresh harvest of widowmakers in the widowmaker trade  - Traders Crucible. Mike Sankowski's brilliant explanation of how expectations of higher inflation from QE can turn out to be very expensively wrong. Especially in Japan. Follow the links to great posts by Warren Mosler, Cullen Roche and Izabella Kaminska, too.

Chart: Japan still mired in deflation - via @Wonkmonk_. Despite extensive QE, it seems Japanese CPI is still headed downward....

Some simple LSAP/QE accounting - Ramanan at Case for Concerted Action provides a simple and clear explanation of how the accounting for QE works when assets are purchased from banks and from non-banks. Essential reading.

QE: The Case for the Defence - Tomas Hirst at Pieria reminds us of the positive effects of QE.

The Fed's Flawed Model - Lacy Hunt puts forward case that QE makes matters worse, not better. Unfortunately appeals to the 90% public debt "tipping point" that has recently been debunked. But his critique of wealth effects and the impact on financial markets is informed and informative.


  1. From Shire Blogger on Twitter:

    The portfolio rebalancing channel was suspect from the get-go @notayesmansecon & myself long complained.

    The key target of M4x was the inflationary indicator. Its been weak. Leaks given some analysis here:


  2. This comment has been removed by the author.

  3. Increasing the monetary base does not necessarily mean increasing money supply, particularly in a deleveraging economy in which real incomes are falling, people are unwilling or unable to borrow and banks are unwilling to lend, either to individuals or to SMEs which represent the backbone of the real economy.

    Also, in a balance sheet recession for the Govmt to also deleverage is total madness (deepens the recession instead of helping recovery) as well as actually being counterproductive. Someone should explain the basic principles of macroeconomics to Osborne, let alone the concept of fiscal multipliers. Coincidence that the borrowing requirements of the UK Gvmt are higher than initially planned by some 40%? I don't think so.

    The alternative to QE (although it has to be said that some QE may have been necessary to backstop the financial system per se, without which the economy cannot survive in the first place), is a rebalancing of the economy towards renewable energy (through tax incentives), technological innovation, re-skilling and re-training of the unemployed, improvement in infrastructures particularly the technological ones (internet etc) but also better access to and efficiency of transport with some level of subsidies possibly to improve affordability for the ordinary people.

    As an extreme measure potentially some level of debt restructuring for the more indebted individuals, particularly in relation to existing mortgages (not subsidies to new ones which stoke up demand and increase the risk of another property bubble), may be desirable. But this is more controversial and potentially destabilising in terms of creating a precedent and thus inducing some level of moral hazard in the future. Also, probably not sure it's possible - or a good idea anyway - to 'forgive' credit card debt, of which there is lots in the UK.

    Filippo Gioia

  4. Printing money IS inflationary. But bust banks are black holes for money as you can give them money and they are still worth zero. Then there are interest rates that might as well be zero. So, banks are receiving money they would normally pay out as interest to savers - on balance they lose 70 billion on lower mortgage rates and gain 150 billion from not having to pay interest to savers - in the UK alone. So imagine that worldwide? The saver is being squeezed by receiving no interest, and house prices over the last 10 years were too high leading to excessive mortgages, and so the debtor is also squeezed even though interest rates are at historic lows. Savers who own stuff get nothing for their bank deposits. Those in heavy debt are scraping by. This is why prices are not really rising much. Nobody has the disposable income. The banks have soaked up all the money. Worldwide this is the biggest transfer of wealth from individuals to banking institutions and governments in world history, and one day will be seen as outright theft from a banking/govt cartel. All, that money is being recycled back into bond markets, stock markets and being hedged with credit defaults etc.

    Basically, QE is not that important because interest rates being effectively zero are the big issue. How many sovereign countries go bust if interest rates go to their historic average? Or how much money would they have to print then? How many banks could not afford to pay their savers that historic average? Or how much interest would they have to charge their debtors in order to pay higher rates to their creditors?

    Smart savers will have already withdrawn their money from banks and put it into something else - a diversified portfolio of some kind of stocks, corporate bonds, precious metals etc to protect them from investment bank shenanigans. But when most people with some kind of nest egg realise they are being fleeced the banks will lose a vast amount of capital to stock markets and precious metals markets.

    At that point, interest rates will have to rise, or more money will have to be printed. Sooner or later, if banks want to keep savers depositing their money, they will have to raise interest rates. That is when all hell will break loose.

    1. Yes it is but in these cases it is deflationary because it has driven down the the bond yields and thus the savings interest rates to a little above zero per cent. High Street prices, energy prices are up mages are down savings returns are down. Consumers no longer have the disposable income to go out and buy so they save. Money velocity falls, deflation sets in and boom, we're bust again.

  5. It was clear to me that from the outset, QE was not going to do its proposed job. There remains zero net growth in UK GDP even after years of pumping in billions of magic money but that should be of no surprise to us consumers.
    We, apparently, are responsible for around 70% of our GDP yet QE never arrived in our accounts for us to make use of.
    Instead, it was used to buy Bonds from the banks that held them in the forlorn hope that these same banks would actually lend out the money, realised from their Bond sales, to SME's and the general public. The consumers.
    Merv King, the BoE and the Government must have been pretty naive to believe that the already hugely indebted Banks would risk such a venture with their newly found wealth. No, instead they opted for the safe way out. They used this money to purchase more Government Bonds and when they ran out of funds they merely borrowed more at 0.5%.
    Using Government(Tax Payers) money at 0.5% to buy Government Bonds yielding 2%, was and still is, the greatest investment return in British history. A 400% return on outlay, Triple A secured, for doing absolutely nothing but sit on those bonds. Now what would that money have done for the UK if applied to tax cuts for businesses and the consumers and to boost training programmes? QE has already failed in the past, so why do these dangerous people, in charge of our economy, believe that it would work this time? There are bad times ahead and even worse for our offspring and all because arrogant incompetents think they know best.

  6. QE is a smart name for printing money and fools some of the people some of the time. The effect of it can easily be overshadowed in the short term by other more dominant factors. Lack of faith in fiat currency has caused a flight into equities and the obscene Buy to Let market. Prudent people, [labelled 'savers' for some strange reason] are deprived of a capacity to pay tax on deposits and are disinclined to engage with the economy - they outnumber hapless borrowers seven to one. The alchemists in government and the BoE think eternal debt leads to success. An incredible belief, in a circle that can only be squared with rampant inflation.

    1. QE does not necesserly cause inflation. Inflation is only caused if money is spent into circulation. If the government prints £2 million and does nothing with it, no inflation.

  7. Natural Logarithm26 February 2015 at 05:25

    Thank you for starting this discussion. It lead me to looking for definition for QE actually was so I looked it up. What a vague name.

    I googled, "definition of quantitative easing"

    Bank of England has a video: http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx

    I think the definition and video makes things a little clearer. The video describes their theory of what some of the effects of QE.

  8. Natural Logarithm26 February 2015 at 07:13

    RE: My observation of the data plotted on same graph and wondering what it shows.
    (Does the Fed really control the money supply? - John Aziz (The Week))

    He uses some data I have been looking at. I include links to three plots of the M2, Monetary Base, and MB time 9 for comparison with monetary base. It is multiplied by a factor as if we had a constant reserve ratio and thus constant money multiplier. Note: the divide by 1000 factor is convert millions to billions so ever time series is in billions.

    I wish to point out particularly the graph of the logarithm of each of the series. The log. graphs show almost constant upward slope. If it was constant slope the lines would be strait. Almost constant exponential rate of dilution or number of M2 and MB monetary units.

    Here is what I noticed. If one takes a strait edge and puts it on the M2 line at 1960 and 1985 the projected line from the strait edge eventually meets the jump in the green line MB x 9. As if M2 catches up with the monetary base.

    A possible speculation is that M2 might have been under accounted for in later times.

    An other speculation is that taking cash out of the banking system changes the reserve ratios, thus cash might have been taken out.

    (M2/MB is approximately = credit money/base money when one is a lot larger than the other such as 9 times. ln(M2/MB)=ln(M2)-ln(MB) distance between blue and red line) My approximation here is not exact. M2 might include cash outside banks and reserve ratio counts what is only on the reserve banking systems books. Yet that cash should be on the books of at least one of the central bank and treasury, but not in the private bank reserve account. As the currency would be in private hands as an asset on their books.

    Or, possibly QE as defined above.

    I am not sure any of the speculations fit as a good interpretation. But there is the data in comparison.

    Three graphs of the same data: (except the log graph has additional GDP line.)

    *** Natural Logarithm of time series data *****
    *** Constant exponential growth is a strait upward slope, slope proportional to exponential growth rate. Shows money roughly grows exponentially over long periods of time.
    Why use natural logarithm or log of base e? e=2.7182818284590.... If you take the 100 divided by the time to climb 1 unit that is the geometric mean of the continuous compounding rate. An easy way to figure it. Just divide 100/by the time. From 1976 to 1988 the log of M2 (in billions) went up one unit from 7 to 8. 100/(1988-1976)=100/(12 years)=about 8% continuously compounded for the year. {In 1976 M2=1 Billion*e^7. }

    Regular liner plot, had to see what goes on at earlier time. Shows exponential curves, growth of Monetary base and M2.

    Percent change graph. from 1960~1985 annual percent change of M2 is mostly faster than the Monetary Base.

    1. Natural Logarithm26 February 2015 at 07:52


      As if monetary base catches up with the M2.

    2. Natural Logarithm26 February 2015 at 20:37

      Some sources of information on log scale graphs:

      (I had given her some reasons to use log graphs. She has made a very beautiful demonstrations using economic data. )


      "There are two main reasons to use logarithmic scales ... the second is to show percent change or multiplicative factors. "

      School math and science text books, or people who should know.

  9. Natural Logarithm26 February 2015 at 07:17

    should have written:
    Regular liner plot, hard to see what goes on at earlier times. Shows exponential curves, growth of Monetary base and M2. Detail lost at lower end.

  10. Natural Logarithm26 February 2015 at 07:29


    about 8% continuously compounded for that period of time.

  11. Natural Logarithm26 February 2015 at 07:44

    This occurred to me. There might be an effect if QE purchased of loans were at a discount. Then if the loans were marked at historical value on the bank books. A loss against bank's capital would occur when the loan is sold at a discount.

    That would not help minimum capital ratios if they are already near the minimum. I'm not using tiered capital. Simple accounting Capital ratio=Equity capital/Assets.

    Even though it would increase the reserve ratio=(currency held+deposit asset with the central bank)/Owed to depositors. Where reserves are the numerator. Because it converts the banks loans to reserves.

    Correct me if I am wrong any where.

  12. Natural Logarithm26 February 2015 at 07:50

    When the crisis happened I saw banks with capital ratios of 3% or 30:1 assets to capital. Now I have seen more near 10:1.

  13. Natural Logarithm26 February 2015 at 07:57

    In conclusions, the banks reserve ratio constraints might loosen and capital ratio constraints might increase or stay the same with QE loan asset purchases.

  14. Natural Logarithm26 February 2015 at 08:20

    I have 2 important questions.

    1. What is are good ways to protect from loss of purchasing power. Any excellent books or articles?

    2. Does any one know of any clear books or articles on inflation accounting? When the unit of account fails as an accurate measure of value over time? We are using an exponentially changing ruler. When it is rapid, historically in other countries they will change their book's unit of a account to a foreign currency or specie.