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@Greenbackd @BillBrewsterSCG @farnamjake1 - Heard you guys discussing inflation on VAH and wanted to offer my thinking. (1/n)
Let’s consider what inflation is at a fundamental level: too many dollars chasing too few goods. The “chasing” aspect is crucial as there are always enough dollars around to drive inflation if everyone simply spends them fast enough. 2/n
Imagine bezos and the rest of the Forbes list deciding to spend their fortunes on goods all within one year. That would drive inflation. The point I am making is that we could see inflation without any increase in usd with just an increase in desire to spend. 3/n
Historically, war is the biggest cause of inflation which makes sense in this framework. War can be thought of as a nation taking a large portion of its productive capacity and diverting it to weapons. This often leads to insufficient consumer goods production and inflation. 4/n
Technological progress has been a major enemy of inflation in modern times because it expands the productive capacity of the economy. Robots can produce more goods per year than can humans and we can scale the number of robots arbitrarily. 5/n
Another enemy of inflation is inequality. If we redistributed the nations wealth perfectly evenly more goods would be demanded as money sitting idly in the net worths of the wealthy would be spent by those less fortunate who have not already bought everything they wanted. 6/n
Another potential driver of inflation is a shock higher in the price of a crucial commodity. The spike in oil was a major contributor to the inflationary regime of the 1970s (the Vietnam war likely contributed as well). Similarly, the shale revolution has been deflationary. 7/n
How does QE fit into all this? It is much less inflationary than many think, and this is clear in the experience of Japan, Europe and the US in modern times. Let’s consider what QE is. 8/n
QE amounts to a swap of cash (an interest bearing liability of the gvmt) for tsys (interest bearing liabilities of the govt). This puts modest downward pressure on interest rates beyond what can be achieved by cuts and also converts tsys on private balance sheets to cash. 9/n
Imagine you are a large entity (say a pension or bank) holding tsys pre-QE. Imagine that the Fed now starts QE and interest rates begin to move lower. When interest rates of your tsys move below your expectation of the avg cash interest rate over the term of your tsys... 10/n
...you will convert to cash. Perhaps this is 0.5% lower on tsys than would be the case without QE. What will you do with this cash? Perhaps you see better return potential in equities and buy some of that until the price of equities is too high to beat cash risk adjusted. 11/n
Perhaps you will get tired of earning 0.15% on cash with inflation running at 1.5% (a -1.35% real return) and you will move to gold or Bitcoin in the hopes that these entities will at least match inflation. 12/n
Perhaps you will even spend some incrementally that you might have otherwise left in tsys...this is what the fed hopes you will do as it would be inflationary. But will a move of 50bps lower in interest really be your reason to consume/invest when you weren’t before? 13/n
To summarize, QE is best thought of as a substitute for a handful of rate cuts, and is not any more inflationary just because it is called “money printing”. What is much more inflationary are stimulus measures like sending checks directly to people. 14/n
If we sent enough money to the lower half of the wealth distribution we can count on them to spend it and eventually drive the economy beyond its productive capacity causing inflation. 15/n
Even better than sending checks is direct spending by the government on things like infrastructure (why guess at how much private citizens will spend when you can just spend it directly yourself). 16/n
The precedent set by sending checks directly to citizens, which was quite popular, along with the growing popularity of MMT and the realization that the budget is not a binding constraint on govt handouts, perhaps sets the stage for inflation in the future. 17/n
A lot rides on the GA elections...if repubs take the senate, the potential for more radical pro-inflation policies like UBI is deferred another two years. 18/18
