The economics world has gone gaga for monetary stimulus. Not too long ago, 2006, a good part of the economics profession was saying good bye to the business cycle and was settling in for perpetual growth. They attributed that anomaly to innovation especially in the financial sector. Today another crazy idea gets embraced by economists of all levels, Nobel prize winners to students: long periods of easy money do not lead to (hyper) inflation.
Their basic idea here is that the FED, ECB, BOE (even our local NBR) should just buy assets from the real economy or keep money at zero real rates for very long periods of time. They have different targets or objectives in mind but in the end all believe that more and more money will not lead to inflation. I am sorry but this is just a myth that in the next few year(s) will be destroyed by the reality, much like the other myths( i.e. ever growing house prices).
In what follows I will show you that QE has lead to dramatic money printing with no real effect on the economy ( no surprise here ). Also, I will show why we are not seeing any hyper inflation YET.
First, here is the measure of money M1 in the US. Low interest rate in 2008 increased the money stock somewhat but QE1 and QE2 have added the exponential dimension to this development.
If you are not convinced by that graph here is another showing that there are too much money around: velocity of M1. This one shows that money now changes hands at a worrying decreasing rate eroding its purchasing power.
Did the flood of money help the real economy? As expected no. Ironically, the lack of response from the real economy the reason for why we are not seeing hyperinflation in the US as of yet. Below is the employment number which is on the right track but still far away from the peak of 2008.
On the other hand the unemployment story looks bleaker as it can be seen from the graph below.
But, to me the graph below says it all. It shows both that the QE and money printing did not help real growth but also why we are not seeing hyperinflation in the US yet. To some this graph shows that the FED has not done enough, but put in the context of the money supply and money velocity I would say that the FED has done too much and it needs to stop the nonsense.
And here is the inflation. Yes it is not at hyperinflation levels but in one year , 2011, it moved from 1% to 4% which is close to the high of 2006 in the middle of strong economic growth. So, US managed the performance to have an inflation level in a year of low growth – way below potential – with high unemployment and barely no credit at the level from a year when the economy was booming.
What will happen when the economy will be growing close to potential?