27 March 2020

from the archives: Money

In a press conference in January 2015, the then President of the European Central Bank, Mario Draghi, was asked whether the ECB's programme of quantitative easing ("QE"), intended to boost the ailing eurozone, might eventually lead to damaging price inflation. His response:
I think the best way to answer to this is, have we seen lots of inflation since QE programmes started? Have we seen that? And now it's been quite a few years since they started [...] And somehow this runaway inflation [predicted by some] hasn't come yet.
   What I'm saying is that certainly the jury's still out. But there must be a statute of limitations. Also for the people who say that there will be inflation, yes, when, please? Tell me, within what? *
Mr Draghi was correct to point out that there had at that time been negligible impact on reported inflation numbers from American, British and Japanese QE programmes. Five years later, there is still little sign that the implementation and subsequent reversal of QE has generated long-term problems for financial markets — though there were rumblings last year about possible trouble in the repo markets.
   Whether there is a period of time after which it is safe to assume the risks have disappeared, thus making it legitimate for governments to try similarly dramatic remedies again, is more debatable.
   If one looks at the Great Inflation of the 1970s, one could argue that the associated expansion of the money supply began in the 1960s. It required the trigger of a specific exogenous shock, in the form of the 1973 oil crisis, to turn the fuel of excess money into the fire of an inflationary spiral.
   In the absence of such exogenous shocks, and while global demand remains relatively depressed (the prices of many key commodities are still well below their pre- and post-meltdown highs), the fuel of excess money may be capable of remaining in a prolonged state of dormancy.

This is an edited version of a post published in 2015 and reproduced in The Ideology of the Elites.
* Mario Draghi, 'Introductory statement to press conference', 22 January 2015.