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Does This Make A Lick of Sense? Wikipedia Says No Inflation Risk in QE3

October 31, 2012, 8:20 pm

I know, I know -- this is Wikipedia.  But there is a line there in the quantitative easing article that makes even less sense than other political topics at that site:

It should be noted that mortagage-backed securities such as are being purchased as part of the QE3 program are not based on liquid assets, and their purchase [by the Fed] does not entail inflation risks

This makes zero sense to me.  But maybe I am missing something.

First, I don't understand why the fact that the assets purchased with the printed money are liquid or not liquid.  If anything, I would have assumed that purchasing less liquid assets would have more inflation risk than the other way around.  If one puts more currency into the economy, the more currency-like the asset one pulls off the market, ie the more liquid, the less the inflation risk, I would have thought.

Second, while mortgages may not be liquid, mortgage-backed securities are very liquid.  If liquidity of the asset matters here, I am not sure why the underlying asset would matter as much as the asset itself being purchased.   I mean, by this metric, treasuries are based on a really, really illiquid asset, simply the full faith and credit of the US government.

Third, printing of money would seem to always have inflation risk, no matter what the government is purchasing with the still-wet dollars.  (yeah, I know, it's all digital).

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Category: Economics
  • Kevin Dick

    Standard macro theory is that stimulus (either fiscal or monetary) is designed to shift the Aggregate Demand curve to the right. If you have a non-horizontal Short Run Aggregate Supply curve, this must increases both prices and output. In fact, the whole reason the Fed is willing to do stimulus is because inflation is below their implicit target. So the way you know QE3 is working is if the inflation rate (or better yet, the _expected_ inflation rate) increases.

    The key question is whether a given amount of stimulus will increase inflation by more than you're willing to tolerate (in this case, the change in TIPS spreads say that QE3 didn't increased expected inflation too much). But regardless of the asset channel used, any _effective_ stimulus that increases Aggregate Demand and Output must necessarily increase the rate of inflation (unless you think the SRAS curve is horizontal, which is crazy).

    I assume you already know about it, but http://www.themoneyillusion.com/ is a go-to source for monetary policy.

  • Artemis

    Check the history and discussion. Very often on things that get political attention there will be wave of updates where the "theory" (biology, economics, whatever) is brought into line with political dogma. It would be worth checking to see the comments and direction of the various editors.

  • sabre_springs_mark

    The better wiki articles do not inject much opinion, and there has been a move to make the articles neutral - at least when it comes to political figures. You don't find, in Glen Becks reference, for instance that he is scum sucking jerk any longer.

  • sabre_springs_mark

    Agreed, the more political the subject the worse the wiki article. If you look up an article about the larch it is pretty good. But they are making progress. For instance the Hank Johnson Guam reference was frequently expunged completely with liberal "guards" keeping it off the article but now if you look there is a relatively neutral reference to the Guam incident, even though it gives a bit too much credence to his staff claiming it was a extremely deadpan joke.

  • http://twitter.com/CMTinPHX CMTinPHX

    I think the point the author is (incorrectly) trying to make is that the Fed is only buying MBS that are "stuck" on bank balance sheets (i.e., not liquid). Just as with all QE to date, if the banks don't lend the funny money they get from the Fed, then there is no direct inflation risk. The Fed is simply shoring up the banks' balance sheets by changing their asset mixes from "crappy bonds" to "funny money." Of course, this in no way changes the facts that: (1) paying interest on reserves is a deliberate attempt to quietly subsidize banks, and (2) that doing so both keeps inflation risks low and makes the stimulus aspect of the program worthless. See generally, "the past four years."

  • obloodyhell

    It's a hot button topic, like Abortion, McCarthy, Nuclear Power, AGW, and so forth.

    You cannot rely on Wiki at all on these topics on any level except that they'll promote the most liberal idiotic interpretation of "facts" as it can. This is because the OWS types living in Mom's basement have nothing better to do than to protect their worldview from outside influences, like Reality, or Common Sense (The Horror!!), and so they think that if they can point to Wiki and parrot what it says, then It Must Be So.

  • NormD

    I am not an expert, but I have been listening for years to predictions of hyperinflation that have not happened.

    So many people assert that "printing money" will always lead to inflation but this seems overly simplistic.

    It seems to me we should define inflation as price increases not driven by "normal" supply and demand. Food prices going up because of a drought are not inflation and NatGas prices going down due a glut of supply is not deflation.

    There are three inputs to any business labor (wages), raw materials and capital. Printing money, by which I mean adding a trillion dollars to some bank's balance sheet, does not automatically make any of these go up, there are other considerations. Take wages for example, could your workers come to you and say "the fed just printed a trillion dollars, you need to give us a raise"? My guess is you would point out that there are plenty of unemployed people waiting to take their jobs, or you could move some jobs to overseas. Even more to the point, you could ask, "how has the Fed printing money caused your cost of living to go up so that I am morally obligated to raise your pay?"

    What really bothers me about Fed money printing is that they are allowing the government to continue to spend without discipline. This does not seem right, but I am not sure exactly why.

    I am just waiting for someone to make the argument that the Feds should fund CA's high speed rail project by printing money.

  • SamWah

    Of COURSE there's no inflation risk; the risk is losing all your money by being stupid.

  • http://profiles.google.com/ruralcounsel Jim Ferguson

    But once the banks have ditched the bad assets and have cash, they can then put some or all of that cash out into the world, where it can drive up prices - like housing. They aren't obligated to sit on the cash the same way they were forced to sit on the illiquid MBS. Just reinflating the housing bubble.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Correct, it makes no sense. Inflation does not arise from the purchase of "illiquid assets." Those 2 parts of the sentence joined by "and" are completely unrelated.

  • MeMyselfAndI

    Addressing wiki rather than QE3.. I tried to edit an article about a subject I had a lot of knowledge on and which included a description of an event I helped organize and attended (9/12/2004 Vietnam Vets rally at US Capitol).

    It was a frustrating and literally sickening experience. Some Stalinist, with either an infinite amount of time on his hands or left wing funding, stymied my every effort to make the article more accurate. I discovered as part of this the bizarre and complex Wikipedia rules. For example, in my case, a movie review article in an obscure left wing San Francisco area rag was considered a reliable source, while copies of US government documents of an investigation (FOIA result) were not allowed - even though the article at issue was that government investigation (see CID investigation in article, which is grossly misrepresented). I eventually gave up, sickened by how hard it was to combat lies.

    Wikipedia seems to follow O'Sullivan's law: any organization that is not explicitly conservative will end up dominated by the left. [note for Libertarians - that law assumes a bi-polar political scene, and is reasonably accurate within that framework].

    The subject is rather obscure history related to John Kerry, but anyone interested in seeing an example of propaganda masquerading as truth can check out the article at http://en.wikipedia.org/wiki/Winter_Soldier_Investigation.

  • http://www.facebook.com/brian.mcnary.9 Brian McNary

    I don't think the inflation risk lies with the type of asset they purchase. The inflation risk is in the member banks who have been hoarding trillions and buying equities. I have been saying for three years that if the economy rebounds...and banks start lending again...thats when we will see inflation go supernova. I still don't think we can afford a recovery. Really.