Severe INFLATION because of Feds?
I’ll admit, I’m not an expert on monetary policy, but I’m starting to get worried about QE infinity from the Fed and the $3 trillion stimulus bills passed by Congress in response to the COVID-19 pandemic. These are unprecedented measures take by our government. This time might be also different from the Great Recession because the government is putting money directly into citizens’ pockets. Should I be worried about widespread inflation in the coming years?
No - QE doesn't really cause inflation. QE is simply swapping the private sector's T-bonds for reserves (cash). The main effect here is that outstanding safe assets are reduced while private sector has excess cash. This pushes them into riskier assets which is why equity markets have surged so much. If we do see moderately high inflation (hyperinflation is extremly unlikely) it will probalby be a result of what Congress has done. Fiscal spending has been massive and we're going to see another trillion dollar stimulus deal pass this year. Would not be surpised to see inflation finally come in 21/22 but won't be the Fed's fault
But won’t swapping treasury bonds for cash still increase the money supply and cause inflation? What do these public corporation do with the money they get from selling their equities so it doesn’t enter the real economy? Do they prop up prices to prevent deflation?
Since most of the money was already held in assets in the beginning, we assume that the cash from the open-market operations will be re-invested somewhere else in the securities market.
We're seeing a type of inflation in equity and credit markets (an increase in the price level), but these operations are unlikely to lead to inflation as we know it "back in my day you could get a footlong sub for $5." Case and point, the S&P 500 is much closer to pre-COVID levels than the price of crude oil or the Dow Jones Real-Estate Index, so I wouldn't worry about our purchasing power being BRRRRRRRRd away any time soon.
Yes it definitionally causes inflation.
How? It didn't in 08 and hasn't in Japan for 20 years
The US is somewhat unique though given USD being the world's favorite currency.
So far
A bigger concern would be https://foreignpolicy.com/2020/04/29/federal-reserve-global-economy-cor…</a">deflation, not inflation.
This is a great read. It ties together a lot of the disconnect we've seen over the past 10+ years with record low unemployment, low inflation, and high growth in asset prices vs. a lack of real wage growth or economic improvement for the bottom 90%. Thanks for sharing!
Lack of real wage growth has been going on since the 70s. The Fed raised interest rates to their highest level during the 80s. What explains real wage stagnation since then?
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