QE vs Hyperinflation: Are You A Victim Of Hysteria?
You might have come across headlines or articles with click-baity titles along the lines of: “The Fed is printing the USD to oblivion! Hyperinflation is coming! Buy gold!”.
Don’t worry, none of it is true.
All of this hysteria is simply a consequence of people extrapolating their misunderstanding of QE.
The hyperinflationists’ argument rests on their belief that the Fed’s printing of reserves increases the amount of USD in circulation.
It does not, because banks do not lend reserves. Consequently, the money that the Fed has printed does not reach the economy (can it then really be considered to be money?).
Reserves that do not reach the economy are USDs that are not in circulation, and dollars that are not in circulation do not increase the money supply – how can they if they are stuck on banks’ balance sheets?
Needless to say, this is not supportive of the hyperinflation narrative, at all.
The other required ingredient in any good hyperinflation (a la Weimar) is a collapse in confidence in the currency, leading to money velocity skyrocketing.
This happens as the general population no longer believes in the currency’s ability to hold on to its value, leading to everyone spending currency as soon as it arrives in their hands/bank accounts.
How does money velocity look like in the United States?
As you can see, velocity is low, very low.
Perhaps, at this point, it might be appropriate to ask “What velocity?”, instead of “What hyperinflation?”.
There will be hyperinflationists who will raise the possibility of the whole world going on monetary strike and refusing to use the USD in international transactions, resulting in a precipitous fall in confidence in the currency.
Unfortunately for them, that just isn’t the case.
The USD has strengthened ever since retesting the bottom made just before the Great Financial Crisis struck (if you’re of a technical bent; the USD made a textbook double bottom).
Put another way, the USD has strengthened over the decade-plus that the Fed has been engaging in QE, not weakening, as the hyperinflationists would have you believe.
Ultimately, the USD remains the world’s reserve currency, and this position is not in danger of being compromised anytime soon, as the Eurodollar market attests.
However, this does not mean that the USD will always be the global reserve currency; this status has been conferred onto many different currencies throughout history, and it will change again.
It just will not happen immediately, and definitely not because of QE’s hyperinflationary effects – simply because these effects do not exist!
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