I haven’t bothered with this chap for a while, but he has an article out currently that is just simply bad.
I’m not going to reproduce all of his post as it is mostly a waste of time: here is the article.
As I predicted back in 2008 and 2009 QE did not cause high inflation, surging interest rates, high growth, and was not really all that impactful given all the fuss about it. Yes, I have argued that QE1 was probably very effective because it shored up balance sheets at a very unusual time, however, the future iterations of QE and the aggregate impact has been fairly small given how expansive the policy was.
Inflation is high, very high and it was [and is] caused by the expansion of the money supply by the Federal Reserve and other Central Banks around the world. As this plot is of ‘everything’, clearly inflation is widespread throughout the economy. There are obvious ‘bubbles’ again in real estate around the world. So Mr Roche is incorrect with regard to ‘inflation’ and his prediction.
The entire purpose of the Fed expansion was to create inflation. This is because with MBS losing value as the real housing market collapsed due to rising defaults, MBS securities were going to ‘zero value’ very quickly.
Who owned this trash? Banks, Hedge Funds, Pension Funds, worldwide. Suddenly everyone was demanding cash….There wasn’t enough in the system, thus the massive and very fast deflation that occurred. QE has been an exercise in [re] inflation.
Importantly, what this process was not akin to was “money printing”. This is due to the fact that operations like QE do not actually expand the quantity of net financial assets in the private sector. In other words, the Fed created reserves and traded them to the private sector, but the Fed also removed a T-bond or MBS at the same time. So you could say that they printed a super short-term instrument into the private sector and unprinted a long-term instrument from the private sector.
So again, pure nonsense.
The ‘money supply’ increased and has continued to increase as a result of QE. QE and the expansion of the money supply is what has caused the increase in the inflation data.
So the concern of market commentators about the ‘shrinkage’ in the Fed’s Balance Sheet is a very real concern, as, the commercial banks capital reserves are largely composed of Fed assets. We saw in 2008 what happens when the commercial banks become illiquid. Apparently, once again MBS securities are expanded. So all of the ingredients are again present for problems, particularly if the Fed’s shrinkage is too fast or too far. The castles are once again built on sand and people are worried what happens if the tide comes in.