Taps Coogan – November 6th, 2020

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Jeff Snider, head of global research at Alhambra Investment Partners, recently spoke with Real Vision in a fairly technical discussion about monetary policy and why quantitative easing (QE) is not really ‘money printing’ and why deflation, not inflation, is the biggest risk for markets and the economy if QE continues.

Mr. Snider speaks to a dynamic of QE that we have discussed over the years here at The Sounding Line. Namely, past QE programs from the Fed really didn’t add significantly to the broad money supply for a range of technical reasons that Mr. Snider discusses. That dynamic has long been visible through the close relationship between excess bank reserves held at the Fed and the Fed’s balance sheet or, viewed form the other end, the failure of banks to grow lending relative to their growing reserves for the last decade. Instead of QE leading to broad inflation, it has actually tended to lead to narrower asset price inflation and excessive borrowing, which is arguably dis-inflationary in the broader sense.

With all that in mind and considering that ever more QE is the most certain thing in the financial universe, Mr. Snider believes the future will continue to be dis-inflationary.

Of course, official inflation measures have become increasingly irrelevant to average households which spend most of their income on non-discretionary items with much higher inflation rates than the official numbers suggest. Furthermore, a lot of how the Fed does QE has changed since the Covid pandemic. The Fed is now monetizing corporate bonds, supporting direct lending to businesses, and federal deficits are now being used to do the practical equivalent of helicopter money. All of a sudden money supply growth has doubled the fastest rate seen since at least the 1980s. In other words, Mr. Snider is likely right about QE’s failure to create inflation over the past decade but at lot has changed this year and comparisons to the pre-Covid era should be viewed with skepticism.

Enjoy the full discussion above.

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