In a discussion the past few days an educated, knowledgeable, articulate friend, was professing the effects of Quantitative Easing (QE) on inflation. His position being QE is devaluing the US dollar and inflating prices for those on fixed income. Mine being it has not. Inflation occurs when demand exceeds supply, nothing more, nothing less. But in this case more importantly I simply have to ask; what inflation?
Inflation over the past few years, specifically since early 2009 when QE began, has been nearly zero. It actually dropped toward deflation in 09 then has hung in the lowest of single digits since. 2012 for example inflation ran just two decimal zero something percent. Oh how we would love to have seen that in the 70s verses that decade average over seven percent! So I have to ask again; what inflation?
My friend went on to point out how several metals have gone up significantly since QE, how the price of heating oil has shot up along with fuel. All true of course, then went on to point out how the only heating product that has not risen in price is natural gas because of the improvements in technology making it more abundant. I believe he just made my point. Where oil demand is outpacing production, we have seen price inflation, where gas production has outpaced demand the price is neutral, even lower. Sure sounds like supply and demand to me.
Metals; of course have gone up. With the inflation mongers howling inflation due to QE for now nearing five years, a lot of wealth has migrated toward precious metals. Ah there is that pesky demand exceeding supply again with the price inflation. But again nothing to do with QE.
So back to the point; what inflation? We can slice this a couple ways first by looking at annual inflation data over the past decade. Yup, miniscule.
Or we can look at the dollar value relative to other currencies. Well nothing there either. We can however see big drops beginning in the 80s and again in 01-03. No QE going on then.
So where is the argument coming from? Well a lot of mainstream “experts” have been yelling about inflation fears as I mentioned earlier for about five years. I’m really torn as to whether this is just big dollar politics where if you yell loud enough and long enough people will just believe it on faith. Or whether the inflation mongers had once studied blues progressions. I remember one of my blues instructors telling me “don’t worry if you hit a wrong note…just hold it until it gets right.” Meanwhile; show me the inflation.