This was probably the key point i made to @tomkeene and @flacqua on @BloombergTV this morning.
This QE is different from the QE in 2009....
This QE is different from the QE in 2009....
In 2009, the QE, in the US and elsewhere, was mostly an asset swap. The Fed (and others) bought bonds, and the market was given central banks reserves. The asset swap was not inflationary (many were totally wrong on that back then).
We have learnt over the last decade, that even huge (Asset Swap) QEs, such as Japan's, have a very hard time generating inflation. Japan never remotely reached their 2% target for example.
So, should we never worry about inflation? Is monetary policy irrelevant to the inflation outlook? Well, not all QEs are created equal.
The QE process we observe in 2020 is different from 2009 in that it is much more closely tied to fiscal policy. Policy makers are not afraid of inflation, and for that reason (and due to the magnitude of the COVID shock), there is much more fiscal/monetary coordination.
If the 2020 QE and QE in future years turns into a 'spending QE' as opposed to a mere Asset Swap QE, it surely has potential to be inflationary. What the specific level of spending needed to get there is hard to say.
But if the political mind-set changes to a degree where perceived and actual constraints are so different that fiscal policy can be fundamentally more aggressive, then the QE will also be totally different, and we can no longer say there is no inflation risk.
There is lots of debate about related issues in the MMT context. But the key point is that while it is understandable that bond markets are not pricing much inflation risk, based on past QE experience, this may not be fully appropriate if the QE itself is morphing into a new type
I will circulate the clip, when it is available. And it is probably a topic that will be relevant again, and again and again. Let me leave it at that.
