By early 2013, it became clear that QE was a deflationary drag
By the time we entered 2013, it was becoming apparent that the Fed’s quantitative easing program was not as inflationary as once expected. In fact, it was clear to me that quantitative easing (QE) was actually adding a deflationary drag to the economy. The money was not moving to the person on the street and the economy was just being saddled with more debt. I wasn’t the only one who thought this way. In early February 2013, the prices of gold and silver broke through support levels and by April they had collapsed. All those fears came to naught.
With this mind, I wanted to share a Bloomberg article titled, Low Inflation Is Federal Reserve’s Maddening Unsolved Mystery. I find its findings peculiar, because the author indicates that the Fed seems to be completely baffled as to why inflation is so low. I submit that the very programs that the Fed promulgated to help grow inflation have actually provided a deflationary force. The slow-growing economy has been handicapped with a huge amount of fresh debt over the past decade and a greater percentage of economic activity has been devoted to servicing outstanding debt. Just because the Fed guarantees low rates and a sea of federal government red ink does not mean higher prices.
It’s like a cold case that still baffles investigators. After years of rock-bottom interest rates and with unemployment at 3.8 percent, where is the inflation? It’s a whodunit that hangs heavily over the Federal Reserve.
Since the Fed set 2 percent as its explicit inflation target in January 2012, its favorite gauge of prices — the personal consumption expenditures price index — the has averaged just 1.4 percent. Exclude volatile food and energy prices, and it noses up to 1.6 percent.
To be fair, unemployment was high for some of those years, but even in the months since March 2017 when joblessness fell below 4.5 percent, core inflation has averaged 1.7 percent. Moreover, the puzzle pre-dates the recession. Going back to 1993, that gauge has averaged 1.8 percent.
Low Inflation Is Federal Reserve’s Maddening Unsolved Mystery – Bloomberg (March, 12th)
You can read on in the article to see that it points out a few ideas as to why the CPI has faded, including labor market slack, secular disinflation, and expectations of lower inflation. But at the core of the issue is one idea that will never be discussed; the loads of new debt generated during QE have helped to foster lower inflation trends.
Bonds and stocks are telling us that QE and lower prices are coming
Lower interest rates reduces the cost of capital and thus, it is profitable for producers to continue to supply markets at lower price points. Think of low interest rates as a supply subsidy to manufacturers. Moreover, inefficient producers continue to stay in business. If we ever wonder why there is a fast food joint on every street corner, we have low interest rates to thank. If we wonder why gas prices remain muted, we have low interest rates to thank.
There is a reason why the results of QE will never be blamed for lower consumer price growth. This is because QE has been chosen as the route the Fed will take once again to fight a slowing economy. Indeed, it is the preferred route for the elites to gobble up the global wealth.
We don’t have to contemplate why Jerome Powell has been making more appearances lately. His latest 60 Minutes interview can be included. I suspect the Fed knows that their new rounds of QE will be much greater than what has already been announced. The elites need to keep the governments in business for the indefinite future and they will never renegotiate debt to their disadvantage. The tax payer always loses on this one.
Don’t be astonished when we observe stocks and bonds rising at the same time. The markets are telling us something the Fed will never admit. Deflationary forces are mounting, interest rates are lower than they should be, and the Fed is about to embark on monetary policy that will only reinforce that trend.