“Filling the system full of money is insufficient to threaten a rise in inflation”
Citi’s US economist Steven Wieting is less than impressed by those who contend - with varying degrees of seriousness - that the country is heading for hyper-inflation because of the rapid expansion of the monetary base currently underway.
Wieting’s argument is based in part on the contention that there is unlikely to be any near-term recovery in demand (emphasis added):
What is most disturbing is the view that somehow, consumer prices simply move up because of the existence of more bank reserves, or actual measures of money. Money, left in a large room to rot will not make prices go up, no matter how much is stuffed in. The world’s producers and retailers don’t get a call from the central bank telling them it is time to raise their prices. Even commodities produced abroad require demand, meaning sales, to set a price for available supplies. After all, what is price, other than “what someone will pay for it?”
Many have decided that there will be a renewed bout of inflation, even as they’ve ruled out the potential for demand recovery. But we can’t simultaneously suffer inflation and deflation. Counter-cyclical fiscal and monetary policy actions are mere offsets to private restraint, which is a deflationary force. While one can call the expansion of bank reserves printing money, banks are not increasing lending in a proportionally large way, and should never be expected to. While the collapse in securitized credit markets away from traditional bank balance sheet lending is the larger driver of credit tightening, commercial banks won’t be able to double their balance sheets as the Fed has, even if boom times return.
On the first point, Wieting notes that “in every year since 1955, the stock of printed or coin money (currency in circulation) has gone up,” and that “unless the data are truly tortured with lags and transformations, there are no strong correlations between measured money growth and measured consumer price inflation over medium term periods of time.”
He also dismisses any suggestion that the money supply may expand beyond the country’s productive capacity, leading to a classic demand-pull inflationary cycle caused by too much money chasing too few goods. At present, Weiting says, money isn’t doing anything of the sort:
Consumer purchases are falling at lower price levels. The CPI posted record post-war declines in the fourth quarter. Retail expenditures also posted record declines, and nominal incomes are slowing while precautionary savings rise.
…the expansion of money and its precursors have yet to succeed in truly turning consumer demand
Moreover, he says, the expansion of the monetary base has not translated into more cash in consumers’ wallets, since the increase has largely been in Fed funds held on reserve.
this is not money in shopper’s hands. This is not money in the precautionary accounts of households or nonfinancial firms. It is not capital available to the banks to help them offset their losses.
And this money has also done little to increase nominal output - its velocity has in fact collapsed, as the chart below shows.
But Wieting does not believe inflation is gone for good, although its impact will be muted in the near to medium-term since it is a “long road back to conditions of easy credit, strong demand and rising consumer prices”:
The long history of fiat money and the current policy response, much different from the 1930s self-imposed austerity, suggests the longer-term risk is indeed inflationary, not a continuous sharp rise in the value of dollars relative to goods and services (deflation.) But we imagine that readers already can feel the increased value of their dollars against consumer goods prices, and certainly financial asset prices (in portfolios or not).
Time to retire the Zimbabwe analogy, then.
Related links:
Hyperinflation is a possibility, say Morgan Stanley - FT Alphaville
All QEs are not created equal - FT Alphaville
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