EDITOR NOTE: The views in this piece take a somewhat radical and contrarian approach toward criticizing the Fed for its inflationary policies. The author doesn’t buy the argument that inflating the money supply will cause inflation. According to him, the Fed can increase the M1 supply by $40 trillion a month and its overall effect will be a net zero. It would be like printing $100 trillion in counterfeit money and burying it in the ground. Zero effect. However, the Covid stimulus payments directly to American households did make a difference. They contributed to price inflation and market speculation. Interest rate suppression also made a big difference, and so did supply chain disruptions and other events bottlenecking or reducing supply. As for hyperinflation, it's a result of citizens losing faith in currency after which more money printing follows. But he doesn’t see it as a result of money printing alone. His views turn a lot of the current arguments on their heads. Whether you agree with his position or not, his take on inflation is quite unique. And they’re also quite compelling.
Let's conduct a QE "what if" thought experiment with the parameters I specify below.
$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
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