Remaining Excerpts from
Lyn Alden's Primer on
QE, MMT, and Inflation/Deflation
Lyn Alden had written an article entitled "Quantitative Easing, MMT, and Inflation/Deflation: A Primer". Last updated on June 5, 2020.
I had started writing a series of Tweets to quote various excerpts. (That was a little over 2 weeks ago.) I had collected the remaining excerpts but instead of proceeding to present them as a series of Tweets, figured out that it made more sense to present them as a single document which is what I've done below. If anything in these excerpts doesn't make sense, it means that it's time to read the original article itself.
Recent History of Inflation in US, 2008-2020
“Broad money supply (M2) per capita increased by an annualized rate of about 5.0% [over 2008-2020].
Official consumer price inflation only increased by an annualized rate of about 1.6% during that timeframe.
So, trillions of new dollars were created on an absolute basis and a per-capita basis, with limited effect on many prices. This is unintuitive to many, but there are several reasons for this.
[T]his newly-created money from QE in 2008 to 2014 went up against several deflationary forces.”
What’s inflationary and what’s deflationary?
Increases in money supply are inflationary.
But, all of the following are deflationary:
Technology is deflationary. (E.g. smartphone as a tech Swiss Army knife)
Offshoring is deflationary.
Onshoring is deflationary. (E.g. cheap immigrant workers.)
Unprofitable businesses are deflationary. (E.g. Uber, WeWork)
Cheap commodity prices are deflationary.
Wealth concentration is deflationary.
Lower asset prices are deflationary.
Debt defaults are deflationary.
Aging demographics are deflationary.
Trade surpluses are deflationary. (Corollary: trade deficits are inflationary.)
“Before monetary policy is factored in, deflation is the natural order of a productive economy.”
“[In the aftermath of the 2008/2009 GFC, t]he $3.6 trillion in totally new dollars for QE that came out of the Fed’s void and injecting into the economy was small compared to this total initial base of existing wealth ($71.3 trillion), and small compared to the amount of paper wealth that had recently been lost ($11 trillion). The new money just offset a part of what was otherwise a large deflationary shock.”
Current Covid-19 Crisis
“We’re currently experiencing another huge deflationary shock from the impact of COVID-19 on a highly-leveraged global financial system, as many people have lost incomes and asset prices have fallen, but large fixed debts remain, expecting payment.”
“The United States went into this crisis with total debt (government, corporate, and household) equal to about 350% of GDP or $75 trillion in absolute terms, which is a very deflationary force. We began the 2008 crisis with about a 350% debt/GDP ratio as well.”
“In the years ahead, the possibility for broad inflation is back on the table.”
“As pandemic lockdowns ease and ongoing government stimulus tries to get the economy back up off the floor, consumer demand can increase while the new money supply remains in the system.”
“Over the multi-year longer-run, if we see a trend towards bringing a portion of our supply chains back to the United States, that could further raise inflationary pressures because it would start to undo one of the major deflationary outlets (offshoring) that has been in place for decades.”
2020 Starting baseline
“At the end of 2019, total U.S. household net worth was over $118 trillion, U.S. GDP was just under $22 trillion, and U.S. broad money supply was about $15 trillion, as reported by the St. Louis Fed with sources to the relevant agencies that collect those statistics. The Fed’s balance sheet ended 2019 a bit over $4 trillion. That’s our starting baseline, rounded.”
(But note $75 trillion in aggregate debt too! That’s government, corporate, and household debt altogether.)
“
Almost $11 trillion in U.S. equity wealth was wiped away from the Wilshire 5000 full-cap U.S. equity market from peak to trough in Q1 of 2020, although as of this writing we’ve partially rebounded from those lows.
For every 5% of the $118 trillion in U.S. household net worth that was or will be lost in this crisis from peak to trough, that would be $5.9 trillion in wealth wiped away.
[T]he Fed’s balance sheet is expected by many estimates to expand from $4 trillion to $10 trillion this year, and is already up to $6.7 trillion within two months of the crisis and is still growing at a swift rate. If we reach a $10 trillion balance sheet this year compared to the $4 trillion that the Fed came into the year with, that will be $6 trillion in new capital injected into the economy ...
Would $6 trillion in new capital lead to massive inflation this year, in the face of such a deflationary shock and wealth destruction? Probably not. This money-printing would counteract some of the deflationary shock of so much debt and lost spending and income, but not necessarily spur a lot of new inflation right away, ...
What if the Fed boosts its balance sheet to $15-$20 trillion by the end of next year or the year after, meaning it injects $11-$16 trillion into the system from its starting balance sheet of $4 trillion, particular [sic] if a significant portion of that is to finance crisis-level helicopter checks, extended unemployment benefits and other Main Street expenditures by the government? Well now we’re talking large numbers, and the possibility for intermediate-term inflation is more on the table. Not hyperinflation, but inflation.
It’s the next few years in the future, where we really need to think about broad inflation after so much aggressive policy response and expansion of the money supply.
[T]he bottom 50% of Americans have very little safeguards against total insolvency. Specifically, the bottom 50% of Americans collectively have only 1.5% of the country’s household net worth, which is down from 4% in the 1990s. Their assets and liabilities are nearly equal, resulting in a very low average net worth, ...
So, the combination of the Treasury and the Federal Reserve is injecting a 5% annualized rate of the country’s GDP of new money into the economy in an MMT-like situation right before we found ourselves in this virus crisis.
Going forward, the United States has a structural rising 5% deficit and then some combination of crisis intervention (already projected to be $2.7-$4 trillion or more this year, or 12-18% of GDP) and potential stimulus (infrastructure renewal and continued checks, and so forth going forward in the years ahead) on top of that 5% baseline. After this year with a deficit of 20%+ of GDP, there is a decent probability of several years of fiscal deficits of 10%+ of GDP, and mostly funded by new money from the Federal Reserve. That’s $4+ trillion this year and $2 trillion+ per following year for a while after that in new money injection into the economy.
“
“The biggest variable in the near-term and intermediate-term to monitor for broad consumer price inflation in my view (outside of targeted areas of supply chain disruptions) is the total amount of QE-funded money that makes it to Main Street, meaning to the public, as well as their ability to come out of quarantine and spend it.”
“Outside of food, healthcare, and other essentials which have inflationary catalysts at the moment, the trend is likely to be disinflationary for many discretionary goods and services until a large amount of helicopter-like money ends up on Main Street.”
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