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The Forum > Article Comments > Central bank ‘quantitative easing’ is not inflationary > Comments

Central bank ‘quantitative easing’ is not inflationary : Comments

By Saul Eslake, published 23/4/2010

One of the sillier propositions which has been propagated on the internet and in a range of investment newsletters over the past couple of years is the idea that ‘quantitative easing’ strategies lead to higher inflation

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Oh good, the central banks only created $1 trillion so as to 'provide liquidity' for government-favoured bankers. Nothing wrong with that - after all, what are friends for?

Can they "provide" me some "liquidity" too, or does one have to be a zombie bank in cahoots with a government-privileged cartel slurping profits at the public trough to qualify?

"What happened ... is that the Fed has injected over US$1 trillion [of money substitutes it created out of thin air] into the market for mortgage-backed securities; the sellers of those securities deposited the proceeds, directly or indirectly, with their banks; and those banks have held the cash on deposit with the Federal Reserve (as opposed to lending it out again)... There’s simply no way that this can be inflationary.

Uh-huh... and what if they do lend it out again? Can it be inflationary then? If not, why not? But I suppose if they keep the money in a sock, and the sock in a mattress, we have nothing to worry about, right?

Even granted that the circumstances of Weimar, Zimbabwe etc. are different from the circumstances of the USA today, that of itself neither proves nor disproves the proposition that copious money-printing by the central inevitably leads to massive inflation.

But are you suggesting that we can increase the supply of anything that is of value, without the marginal utility of each incremental unit falling? How do you figure that?
Posted by Peter Hume, Friday, 23 April 2010 12:11:47 PM
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Saul Eslake

An Economist is one who gets a degree from a School of Economics.

An Economist is one who believes in the law of supply and demand: he/she supplies hot air and demands a life in easy street.

Hot air is in your balloon; ‘Central Banks money-issuing is not inflationary’.

The self-funding retiree believes you.

Who does not are John Cassidy, John Lanchester and, hear…hear Benjamin M. Friedman who do not write for the age of innocence.
Posted by skeptic, Friday, 23 April 2010 4:27:24 PM
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I don't understand the writer's reasoning. Debt is debt and has to be paid back with interest whoever it is issued to. The only difference is that private debt has now become sovereign debt. The government has lent Wall street copious amount of money at low interest rates to provide liquidity and Wall street promptly reinvests the money back with the government at a higher rate, so the tax payer is subsidising the banks. It is becoming a vast Ponzi scheme with the government having no way of covering the interest on all the paper it has issued, so lends even more to cover itself.........This is without all the unfunded future commitments it has in pensions, aged care and health. The only solution is the printing press to reduce this liability. When fiat currency loses its value as it always has done throughout history, the only true money is bullion. How is Greece ever going to pay back what it owes. Like other countries in similar circumstances, all it is doing is mortgaging its future in the hope that everything "will come good" by some miracle in the future. You just watch governments start to print money with consequent inflation. There maybe a short initial deflationary cycle, but it won't stop the inevitable destruction of confidence in a paper currency. Even now the yield on US treasuries (and other countries) is starting to climb as the government has problems with their sale
Posted by snake, Friday, 23 April 2010 8:55:46 PM
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The US Federal Reserve bailed out all it's mates like Goldman Sachs.How can Goldman Sachs make billions in profits on a shrinking economy? The money has not created much inflation yet, since it has not yet reached the real economy.

The ordinary people get to pay for the interest the Fed Res charges the Govt for counterfeit money.They will also lose the value in their currency,loss of jobs,production,increased taxes etc.

Many countries around the planet are holding US $ mainly because you have to buy your oil in US $.eg China holds a $ trillion and they cannot afford for it to collapse so they keep trading and are working with Russia on new economic projects. China probably gives us our stimulus loans in $ US.Everyone is slowly trying to rid themselves o the $ US .Once the $ US begins to slide ,nothing will stop it.

Saul is not confronting the reality here.You cannot double the money supply in any economy and not eventually get serious inflation.

This farce is all about the big end of town.They should never have been bailed out the big banks.They are stealing people's wealth by the creation of more fiat money.There is no such thing as too big to fail.The depression has just begun.We will see rising interest rates,more unemployment,loss of production all for the greed of a few.

The Stimulus money here mostly went to the big end of town.The schools debacle is a case in point.No small contractors were asked to tender and thus structures cost 4 times the going rates.Could it have been that those who donate to the labor Party get to tender? This money then goes into the share maket and inflating house prices and we get the interest bill and depreciation of our currency.It is really quite disgusting
Posted by Arjay, Saturday, 24 April 2010 7:10:48 AM
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