QE = Inflation?

Money base v Money SupplyAs John Maynard Keynes stated:

“The long run is a misleading guide to current affairs. In the long run we are all dead.”

Should investors focus on the short run or long run? The majority are looking at short run gains rather than a long term focus as they are most likely driven by instant financial rewards after the GFC.

Investors are also looking to see if the significant monetary expansion over the last 5 years will lead to inflationary pressures. Niels Jensen of Credit Writedowns has been writing on this for awhile and has come up with a couple of reasons why we shouldn’t be worried about it. Firstly many investors don’t seem to have grasped the difference between the monetary base and the money supply.

The monetary base is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves.

The money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts.

See above for some figures from Neils Jensen

As he points out it is the money supply, not the monetary base, which influences inflation. The chart below shows that there is no growth in bank lending despite the QE measures of printing money.

Monetary base Bank lending

“As so aptly demonstrated in a recent IMF paper, the interaction between inflation and the economic cycle is very different today when compared to the 1975-1994 period. Whereas inflation back then was pro-cyclical, it is largely non-cyclical today with inflation well anchored around 2% regardless of the underlying economic conditions – see chart below. The obvious implication of this is that inflation should behave relatively well even as (if) economic fundamentals improve.” Source: Credit Writedowns

Inflation cy unemp

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