Quantitative Easing and Inflation: A Response to Russell Lamberti


First off, I’d like to give thanks to Russell Lamberti for taking the time to respond to my previous article. In a world where people are immensely apathetic to economic debate, it’s soothing to know that there are still those who take heed of economic issues and are willing to engage in critical discussion about them. I’d like to return the favour to Lamberti, and respond.

“Supply doesn’t create demand ‘for the specific product supplied’. By saying this, you’re interpreting Say’s Law to mean that production of something is the source of demand for itself BY OTHERS. No.”

I suspect that on this particular issue we agree wholeheartedly, but that I fumbled in articulating my point.

Supply cannot create a demand for a specific product supplied. It is, indeed, not a source of demand for itself by others. This is what I was aiming to convey to readers. Merely supplying something to the market does not create a demand for it. There needs to be value attached to it in the market. Again, I misrepresented the argument and I appreciate the fact that Lamberti pointed out the mistake.

“And no, Keynesianism has not been proven to have validity.”

When I say that is has validity, I’m not saying that it is valid in its entirety. As is the case with literally every policy stance in economics, there are advantages and disadvantages to Keynesian quantitative easing (QE). I’ll elaborate:

QE obviously spurs individuals to spend the excess cash that they hold on bonds and stocks amongst other things. This obviously drives down interest rates, in that it lowers the yields on bonds and stocks. This lower interest rate stimulates borrowing and investment which, in turn, stimulates the economy. The first two rounds of QE in the US stimulated economic growth by about 3% and created roughly 2 million jobs.

The disadvantages and risks of QE are obviously deserving of mention. The excess liquidity pumped into the economy can lead to high levels of inflation if banks decide to lend most of it out and not keep it as excess reserves with the reserve bank, as they are currently doing. Savers were also hurt tremendously when QE caused interest rates to drop. Between $360 billion and $470 billion worth of costs were incurred by savers.

Time will be the telling factor in determining beyond reasonable doubt whether the Obama administration’s stimulus package was worth it or not. In my opinion it has been worth it so far. The fiscal stimulus prevented the GDP of the US from contracting much more and also further into 2009 and only starting to recover from 2010 onward (that is if the whole system did not implode without a stimulus; the forecasted unstimulated GDP is strictly quantitative that depends on economic entities continuing to act relatively rationally under the harsh economic circumstances). The stimulated US GDP and the projected unstimulated US GDP seem to be converging, but preceding this convergence, the effect of the fiscal stimulus covered massive losses in GDP.

Again, the long-term effects still remain shrouded in speculation, with the risks of inflation and financial instability still looming, as is always the case with artificial stimuli.

“This concept was explained in deeper and more sophisticated terms by Mises and Hayek in their business cycle theories.”

I do believe that the Austrian business cycle theory has a lot of merit, and I also believe that the Great Recession was, in fact, by and large caused by the US government’s policies regarding mortgages. Almost two-thirds of mortgages that were defaulted on were bought by government agencies or required by government regulations.

However, seeing as the government was largely responsible for setting the scene for arguably the biggest financial crisis the world has ever seen, I think it would have been asinine for them not to have intervened and regenerated millions of jobs lost largely due to their own actions. We have to consider the alternative if banks “too big to fail” weren’t bailed out, and economist Tim Harford articulates it quite well in his book The Undercover Economist:

“But there is one scenario in which all of these systems would fail simultaneously: if the banks that stood behind them collapsed. What then? Imagine waiting for your salary to arrive in your bank account, and it never does – not because your employer is bankrupt, but because your employer’s bank is. Imagine going to the cash machine and getting no cash, because the cash machine company doesn’t believe your bank is good for the money. You go to the supermarket with your debit card and meet with exactly the same response. It’s not much of an exaggeration to say we’d be looking at the end of western civilisation.”

I highly doubt a market correction would have even been possible under the uniquely destructive conditions when the crisis was in full swing.

“Keynesianism therefore can only ‘stimulate’ an economy out of recession by destroying wealth.”

Wealth can indeed be destroyed through inflation if banks decide to forego their excess reserves at reserve bank and pump it into the economy via loans, but to date the QE measures have not in fact caused a destruction of wealth.

Source: https://seekingalpha.com/article/4036846-stagflation-recession-risk-2017

US inflation levels are relatively stable at the moment due to the fact that, because banks are holding large excess reserves, money velocity has in fact sharply decreased, even though the aggregate money supply has essentially skyrocketed.

Had the government not intervened in the crisis, I think the long-term effect would not have been a “healthy correction” but a total collapse.


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