Saturday, 14 December 2013

Why Isn’t QE Causing Inflation?

Our monetary czars lecture us to be unconcerned about their unprecedented expansions in base money and the money supply, since there has been little sign of inflation in the economy. For the purposes of this essay, we will assume that there has been no inflation, although John Williams at and anyone who tries to make ends meet on the same money income will tell you a different story. Our purpose is to explain the theory behind the price level and how theory can explain the so-called miracle/mystery of an increase in monetary aggregates with little or no inflation.

There is no miracle or mystery as to why prices have not gone significantly higher. Our monetary authorities have not found the magic formula that allows the government to engage in noninflationary spending sprees, funded neither by an increase in taxes nor an increase in interest rates. Our monetary masters remind me of the story of the man who jumps off the Empire State Building. As he is passing a floor on the way down, an office worker leans out a window and asks him how he’s doing. He replies: so far, so good!