What Would Happen to Inflation If the Fed Announced $40 Trillion a Month in QE?


by Mish Shedlock, The Street:

Let’s conduct a QE “what if” thought experiment with the parameters I specify below.
QE Parameters

  • $40 trillion a month in QE for 24 months, no matter what, announced upfront.
  • 3-month bills at 0% rolling everything over each month while adding a new $40 trillion each month.
  • Zero percent interest paid to banks on excess reserves.

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What Would Happen?

  1. Hyperinflationists and inflationists would come out of the woodwork on the announcement screaming inflation or worse.
  2. In two years, M1 would rise by $960 trillion dollars, nearly a quadrillion dollars.
  3. Since M1 is currently about $18.7 trillion, M1 would thus rise by about 5,000 percent.

What About Inflation?

Q: What would a 5,000% increase in M1 over the course of two years under the parameters as outlined above do to inflation?
A: Not a thing

There is a stimulus impact of holding down short term rates, but the Fed was already committed to holding rates to zero indefinitely anyway. Other than what is needed to hold the short-term interest rates to zero, any additional amount does nothing at all.

I suppose there could be a temporary knock on psychological effect over the size of the announcement but that would be short-lived.

Today’s question has the same answer as that of a thought experiment question I posed a decade ago.

Q: What would happen if someone invented a counterfeit machine so good the US Treasury could not tell the difference, then printed $100 trillion in bills, then buried the cash in the ground?
A: Nothing

What About Lending?

A quadrillion in excess reserves or QE induced deposits would not spur lending because banks do not lend from reserves or deposits.

A quadrillion in short term bills would do nothing to long term rates and it would not put any money into anybody’s hands to spend.

Loans and Leases vs Deposits 

Loans and Leases at Commercial Banks vs Deposits Detail 2021-03

Please note The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed.

The Fed crammed money down the throats of commercial banks via QE policy although the banks have little demand for loans.

What About Tapering?

At the end of two years the Fed could shrink M1 by 98% and again nothing would happen.

I suspect the best way to avoid any psychological impact would be to suddenly do a reverse repo of a quadrillion in 0% yielding bills one fell swoop unannounced. As long as banks had the excess reserves, the sudden cash drain would not do anything either.

This is quite a bit different than tapering long-term bonds at some non-zero interest rate which would force up long term rates.

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