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It might also be worth noting that the current practice of quantitative easing incorporates a potential corrective mechanism for inflation that the traditional

It might also be worth noting that the current practice of quantitative easing incorporates a potential corrective mechanism for inflation that the traditional monetary expansion associated with historical episodes of hyperinflation did not. When central banks engage in quantitative easing, they purchase financial assets (typically government bonds, corporate debt, stocks etc.) that can in principle be sold back to the market at a later date. When an initial central bank purchase is made, the amount of money in circulation increases, but that increase can be reversed if the asset is sold. If the asset is sold at purchase price, there is no net change in the money supply; if it is sold at a loss there is an increase proportional to the loss, and if it is sold at a profit there is a decrease proportional to the profit. If money creation is instead used to, for instance, purchase consumable goods and services or pay wages (this is typically what happens when hyperinflation occurs), then the monetary expansion cannot be reversed in the same way — some other mechanism like tax rises would be needed. The economic behaviour of the recipients of the newly created money is also significant. If consumers are the recipients then, all else being equal, the prices of the goods and services that consumers buy may be expected to rise. If banks and large corporate investors are the recipients of the money then, all else being equal, the prices of the things those organisations buy (principally investments like bonds and stocks) may rise. My understanding is that the experience with quantitative easing has been that it has caused a kind of price inflation, but primarily the prices affected have been those of the assets purchased by institutional investors (i.e. stock markets have risen, and bond yields and interest rates in general have been suppressed).

incrudible 6y ago
> The economic behaviour of the recipients of the newly created money is also significant. If consumers are the recipients then, all else being equal, the prices of the goods and services that consumers buy may be expected to rise. Furthermore, even when consumers are the recipients, inflation is not necessarily to be expected when that money is replacing lost income. In that case, spending (and thus demand) remains the same. Inflation would not occur unless there was a simultaneous drop in supply. People pointing at Venezuela or Zimbabwe as cautionary tales of money printing often ignore the decades of economic mismanagement that preceded the money printing.
- tastyfreeze 6y ago
  Are you implying that the US and the UK havent had decades of economic mismanagement? Ooh boy, that is rich.
  - incrudible 6y ago
    > Ooh boy, that is rich. Noblesse oblige.
zmachinaz 6y ago
I think its a good summary, but one should stress a key point: All this QE, aka money printing, can only be removed in a "nice" way if the additional liquidity is to a larger extend used to create additional value rather than consumption. De facto, most of the liquidity is consumed without added value (Zombie companies, certain government expanses,...) This can only work for a finite amount of time.
- incrudible 6y ago
  > This can only work for a finite amount of time. The economy of Japan is living proof that it can work for a very long time, with no clear end in sight. Nobody wants to be the one push the "reset" button.
neilwilson 6y ago
"that can in principle be sold back to the market at a later date" What's the material difference, in your opinion, between the threat of the central bank selling back existing government bonds, and the government just creating new bonds of precisely the same type. There is no money in circulation. All that has happened is that the type of savings has changed - from holding government bonds to holding bank deposits. And that just means the term and interest rate has changed on the financial instrument. The fundamental problem is the belief in interest rates and how they work is wrong in practice. People hold savings for a myriad of reasons.
- JProthero 6y ago
  > What's the material difference, in your opinion, between the threat of the central bank selling back existing government bonds, and the government just creating new bonds of precisely the same type. In the former case (where the central bank sells back government bonds it has previously purchased from investors as part of a quantitative easing scheme), all else being equal, money is withdrawn from circulation and the total stock of government debt remains the same. In the latter case (where the central bank does not sell any of the government bonds acquired from investors and the government issues new bonds of equal value instead), the total stock of government debt increases, and assuming the government spends the money raised from selling the new bonds as is usually the case, the amount of money in general circulation remains the same (though investors in government bonds have less of it, to the extent that they are not net recipients of the increased government spending). This is assuming the simplest model; in practice of course, the details will differ consequentially depending on how these processes operate in different jurisdictions. For example, to the best of my knowledge the central banks I'm most familiar with are required to remit interest payments on government debt back to their national treasuries; and in the European Union, direct central bank monetisation of government debt is supposed to be illegal — things like this complicate the picture in reality. I can see from your other comments that you are well-informed about these details, so I would defer to you there.

incrudible 6y ago

> The economic behaviour of the recipients of the newly created money is also significant. If consumers are the recipients then, all else being equal, the prices of the goods and services that consumers buy may be expected to rise. Furthermore, even when consumers are the recipients, inflation is not necessarily to be expected when that money is replacing lost income. In that case, spending (and thus demand) remains the same. Inflation would not occur unless there was a simultaneous drop in supply. People pointing at Venezuela or Zimbabwe as cautionary tales of money printing often ignore the decades of economic mismanagement that preceded the money printing.

tastyfreeze 6y ago
Are you implying that the US and the UK havent had decades of economic mismanagement? Ooh boy, that is rich.
- incrudible 6y ago
  > Ooh boy, that is rich. Noblesse oblige.

zmachinaz 6y ago

I think its a good summary, but one should stress a key point: All this QE, aka money printing, can only be removed in a "nice" way if the additional liquidity is to a larger extend used to create additional value rather than consumption. De facto, most of the liquidity is consumed without added value (Zombie companies, certain government expanses,...) This can only work for a finite amount of time.

incrudible 6y ago
> This can only work for a finite amount of time. The economy of Japan is living proof that it can work for a very long time, with no clear end in sight. Nobody wants to be the one push the "reset" button.

neilwilson 6y ago

"that can in principle be sold back to the market at a later date" What's the material difference, in your opinion, between the threat of the central bank selling back existing government bonds, and the government just creating new bonds of precisely the same type. There is no money in circulation. All that has happened is that the type of savings has changed - from holding government bonds to holding bank deposits. And that just means the term and interest rate has changed on the financial instrument. The fundamental problem is the belief in interest rates and how they work is wrong in practice. People hold savings for a myriad of reasons.

JProthero 6y ago
> What's the material difference, in your opinion, between the threat of the central bank selling back existing government bonds, and the government just creating new bonds of precisely the same type. In the former case (where the central bank sells back government bonds it has previously purchased from investors as part of a quantitative easing scheme), all else being equal, money is withdrawn from circulation and the total stock of government debt remains the same. In the latter case (where the central bank does not sell any of the government bonds acquired from investors and the government issues new bonds of equal value instead), the total stock of government debt increases, and assuming the government spends the money raised from selling the new bonds as is usually the case, the amount of money in general circulation remains the same (though investors in government bonds have less of it, to the extent that they are not net recipients of the increased government spending). This is assuming the simplest model; in practice of course, the details will differ consequentially depending on how these processes operate in different jurisdictions. For example, to the best of my knowledge the central banks I'm most familiar with are required to remit interest payments on government debt back to their national treasuries; and in the European Union, direct central bank monetisation of government debt is supposed to be illegal — things like this complicate the picture in reality. I can see from your other comments that you are well-informed about these details, so I would defer to you there.