When central banks buy bonds and mortgage-backed securities, doesn’t that add more cash to the financial system? If no inflation results, could they simply buy all the debt? IIRC Germany couldn’t find enough buyers for their 30 year negative yield bonds, so their central bank ended up buying most of them. If that’s possible, why wouldn’t a country want to run up the deficit and fund it via QE?
In: Economics
So what is inflation? Simply put inflation is the increase in prices which occurs as the result of the increase of the supply of money. So an increase in the supply of money alone is not enough to trigger inflation. Inflation occurs when that increase then triggers a chain reaction which results in an increase in the prices of goods.
So to understand why QE doesn’t always increase prices you have to understand the processes that trigger price increase. When the price of most things is in fact fixed then it doesn’t matter how much money you print. And this is why QE is so dangerous: it allows the few who get the newly injected supply of money to buy anything they want with it, in the context of fixed prices.
Now we get to the key point: QE increases prices in the situations in which a bidding context occurs. So what’s a bidding context? Let’s assume you and I just got off from seeing daddy central bank and he was so generous in giving us some newly printed dollars to play with. Now suppose we both walk into a car dealership to buy ourselves some nice cars. In this case it doesn’t matter how much money we’ve got, the only thing that matters is if we’ve got enough money to cover the price of the cars we want to buy.
So here the money we have does not influence price, because we’re dealing with fixed prices.
But say now both of us want to buy a house. And the asking price is 1 million USD, let’s assume that daddy central bank gave me 800K of the newly printed dollars, and he gave you 900K. At which price do you think the house will sell? Most probably at 900K if you really want the house. Now suppose I really do want the house and I go back to daddy central bank and convince him to give me an extra 300K because I so want that house really badly. Then now I have 1.1 million USD and I could buy the house straight up for the asking price of 1 million USD and have me a nice 100K left to play with.
Now assume that you really are determined to get the house and go back to daddy central bank and guilt him into giving you an extra 400K because after all you’re his favorite kid. In that case you would come back to the realtor and say you’ll take the house for 1.3 million USD right there and then. Then essentially now the house price went from something like 800K-ish to 1.3 million USD.
Essentially what’s happening here is that we’re locked in a bidding contest, and in this case the more money we have – the more money is printed to allow us to play our silly games- the more the prices will increase because we’re constantly trying to outbid each other.
QE’s is most dangerous not because it creates inflation, but because in the context of fixed prices it allows somebody to get something for nothing. Don’t let the term fool you QE means we’ll give a few people a bunch of made up money so they can buy stuff with. Generally they’ll give money to banks and banks will loan the money to citizens. Then citizens will pay interest on those loans, and that’s where reality is injected back into that made up money. Essentially **QE preys on the average man and woman because it forces them to pay interest on something that’s completely made up.** It’s a complex and really intricate system, but that’s what it really comes down to.
Every single time you hear them doing another round of QE, understand that they’re giving somebody permission to get something for virtually nothing or they’re giving nothing to hardworking people to later force them to pay interest on it.
Remember quantitative easing is simply increasing the money supply, and when the money supply increases without a concomitant increase in value created then that is a clear sign that the economy is running on lies and make believe.
That’s my two cents. Hope it helps!
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