Why Did All this Money-Printing Not Trigger Massive Inflation?



Posted by Ed 9 mths ago
Asset-price inflation feels good to asset holders – until it doesn’t
I was asked two important questions in this mind-boggling era of QE: The Bank of Japan has monetized 50% of its national debt; so why has there not been a surge of inflation? And why can’t the Fed restart QE and do the same without triggering inflation?

“Inflation” can be a lot of things. Here we’re not talking about “monetary inflation.” We’re talking about price inflation – when the currency loses its purchasing power. There are several types of price inflation that are accounted for separately, including:

Consumer price inflation
Wholesale price inflation
Wage inflation.
Asset price inflation.
The questions were about consumer price inflation; but the answer lies in asset price inflation.

It’s true that despite QE globally – not just in Japan – there has been relatively little consumer price inflation in the countries whose central banks perpetrated it. But it has caused enormous asset-price inflation. We call it the “Everything Bubble” where practically all asset classes globally have become ludicrously inflated.

Asset price inflation means that the currency loses purchasing power with regards to assets, such as real estate. The house is the same, only a little more run-down, but now it takes twice as many dollars to buy than five years ago.

When asset-price inflation reverses, which it invariably does, it can be deadly for the banks and the financial system overall. There are plenty of examples, including the US housing and mortgage crisis that was part of the Financial Crisis.

Assets are used as collateral by banks and other lenders. When asset prices get inflated, they support larger loans. But inflated asset prices invariably deflate at some point, and suddenly, when the borrower defaults, the collateral is no longer enough to cover the loan. Asset price inflation feels good because it translates into free and easy wealth for asset holders, but when it deflates, it tends to bring down the banks – even or especially the biggest ones – and causes all kinds of other mayhem.

Asset price inflation means risks are building up in the financial system.

So central banks, while they try to stimulate some asset price inflation, are worried when it goes too far. The Fed has expressed this worry in various forms for two years. The ECB is now murmuring about it. And even the Bank of Japan is suddenly fretting about the “sustainability” of its QE program, and its impact on the financial markets.

This is why QE cannot be maintained without setting the stage for another, and much bigger and even more magnificent collapse of the financial system, the Big One if you will, and all the real-economy mayhem it would entail.

more https://wolfstreet.com/2018/10/09/why-did-qe-money-printing-not-cause-consumer-price-inflation/

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