Skip to content

Edward Harrison: A Libertarian on Inflation and the FED’s Quantitative Easing

January 31, 2011

I don’t normally do re-posts of this nature outside of the Economics Headlines for the Week Series, but I thought this article deserved a longer look. While I don’t necessarily agree with the author (Edward Harrison) on all of his policy approaches to economics issues; I find his analysis is often well thought-out and accurate, and in this case he shares a similar skepticism on the efficacy and effects of quantitative easing.

What I am presenting below are excerpts from his piece: Economic Code Words and Quantitative Easing. I hope it helps serve to continue the discussion and dialogue about Quantitative Easing, inflation, and the Federal Reserve’s fiscal policy, and ideology aside I wouldn’t have posted it if I didn’t think a lot of the content was true.

On Quantitative Easing and Inflation:

This is an asset swap that does not create net financial assets because the bonds have now been replaced by the dollar credits. When interest rates are effectively zero percent, this is the asset swap equivalent of issuing treasury bills to replace whatever the Fed has just purchased (see On Liquidity Traps and Quantitative Easing for a more in-depth discussion). Think of this as a barter between the Federal Reserve and some bank in which the Federal Reserve finds a willing seller of financial assets for the dollar credits it has just created. It then takes those assets out of circulation when it buys them. For the financial system as a whole, the monetary base has expanded (reserves are up) but net net, financial assets have not.


This whole song and dance about QE not being inflationary misses the point. QE is about asset prices. The true believers – retail customers and the inflationistas – may not be on to the pump and dump here – but guys like David Tepper know that this dash for trash has a sell by date and they will be out of risk assets in due course. Ordinary Americans will be left holding the bag when the economy relapses. Moreover, as commodities have been financialized, you can already see the pass through of the (temporary) asset price inflation into commodity prices in the US and around the world.


What People See and Think about Inflation:

The layman sees the Fed’s balance sheet expanding, banks making lots of money, but credit growth subdued, unemployment high, etc, etc and the only conclusion one can draw is that the Fed is printing a bunch of money and handing it out to their cronies on Wall Street. That’s what people in America are thinking. And, of course, there is some truth to this. So, at a minimum, politically, this is radioactive. And that’s why the Quantitative Easing Explained video has hit a nerve – despite some technical inaccuracies (the Fed cannot buy bonds directly from the Treasury in order to maintain the Fed’s independence, for example).


Why it Won’t Cause Inflation and Instead is an Asset Transfer

And while the Fed is not going to be successful in debasing the currency because QE is just an asset swap, it is clearly trying to do so. At a minimum, it is creating currency revulsion and this will end the dollar standard rather sooner than later. The Fed has this wrong. They are ruining any shred of credibility they have on a monetary policy that does not work except via asset markets. Bernanke knows this too. It’s the ultimate financialization Ponzi response to a financialized debt-ridden American economy. It is an attempt to debase the currency and drive up asset price inflation. It is a tax on ordinary people who do not benefit from this asset price inflation in a world where real wages are stagnant or declining. It fosters a surreptitious transfer of wealth to the most wealthy. Other than that, it’s just fine.


and from another of his articles

What Inflationary Effects the FED is Really Having

And where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency.

So, people like me look at large government deficits in a fiat currency system as an invitation to print money and inflate the money supply. If you take this way of thinking to a logical extreme, you end up with what Marc Faber is talking about: hyper-inflation.

But, this is ideology – not economics. The claims of hyperinflation awaiting the US or the UK seem hyperbole at best, misinformation and deception at worst.  Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. So, it simply isn’t credible to claim that Hyperinflation in the US or the UK is in the offing now or anytime in the immediate future.

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: