Banks, QE, and Money-Printing
Lately, it has become fashionable to debate what is, or is not, “money-printing” by central banks.
This debate is natural, due to the extreme policy nature of 2020, with massive fiscal expenditures, huge increases in central bank balance sheets, and changes in central bank inflation targets. It’s important to know what is inflationary, and what isn’t, and to what extent.
Because people have very different understandings of how central bank policy and fiscal policy work, there have been analyst calls this year ranging from hyperinflation to deep deflation, and everything in between.
The outcome has of course been somewhere in the middle as measured by CPI or PCE, with inflation that rebounded from March lows in response to policy, but neither much of an overshoot or undershoot, and still generally below long-term central bank inflation targets.
Many inflation categories for the most essential and non-outsourced goods and services, however, have risen faster than the overall basket this year, and in recent years.
The crux of this article is that quantitative easing on its own, and quantitative easing combined with massive fiscal deficits, are two very different situations to consider when it comes to analyzing the possibilities between inflation and deflation, and what constitutes “money printing”.
The Deflationary Backdrop
Before diving into the mechanisms of money-printing, it helps to set the stage. Context is key.
Source: Lyn Alden