Did QE2 Really Cause Inflation?
- Posted by TheArmoTrader
- on May 16th, 2012
A lot of people who misunderstand the modern monetary system think Quantitative Easing (“QE”) is money printing. All QE does is swap assets. The The Federal Reserve ($FED) buys treasuries while in turn crediting banks with reserves. If you owned $100 million in treasuries, and I gave you $100 million in cash, how does that change what’s in the system? It doesn’t. Whatever the $FED takes back goes into what I call a “Black hole”, where none of the financial assets are the real economy. Now, there are psychological and structural changes that arise from QE, but for the most part, there is no fundamental economic change, as in, there is no inflation resulting from QE (Here’s an approach of QE from a “MMT” perspective).
One of the first things people say when they talk about $FED “money printing” is that commodity prices have gone up. Well, have they really? Prices (Overall Inflation, $CPI) may have gone up, but that has more to do with than just commodity prices. So, lets check if QE2 really caused any inflation. QE2 started on November 12, 2010. It’s been 1.5 years since the start of the monetary operation, obviously most commodity prices are up huge since then right?
(Note: Using the closing price of the first day of QE as my starting base price. I believe this is a fair starting point.)
- Gold = +12.6%
- Silver = +6.15%
- Copper = -10.25%
- Platinum = -14.7%
- Palladium = -12.2%
- Crude Oil = +9.4%
- Natural Gas = -34%
- Heating Oil = +23.7%
- RBOB Gasoline = +33%
- Live Cattle = +17%
- Lean Hogs = +24.6%
- Feeder Cattle = +37.7%
- Corn = +11.2%
- Oats = -2.3%
- Soybeans = +10.8%
- Wheat = -9.2%
- Soybean oil & meal = -2.3% & +22%
- Cocoa = -18.8%
- Cotton = -41%
- Orange Juice = -27.5%
- Coffee = -12.8%
- Lumber = +12% (Rough estimate, was not able to get exact prices)
- Sugar = -22.4%
Currency, Bonds, Market
- US Dollar ($DX_F) = +4.1%
- US 10 year = = +15%
- US 10 year Yield ($TNX)= Down about 100 basis points (Won’t use % here since it is VERY misleading)
- S&P 500 ($SPX) = +11%
As everyone was screaming about money-printing inflation back when QE2 was in full effect, I knew most of the run-up was caused by some type of financial speculation/psychological shift in thinking (This was before I even fully understood the modern monetary system) . As I stated here, QE2 effects were mostly short-to-intermediate term which caused no fundamental changes on the real economy. Yes, some commodities are up, however as shown above, some commodities are down as well. At the end of the day, long term fundamentals (have you ever heard of supply and demand?) take control. A lot of commodities are very sensitive to China. Oil and gold are up because of basic fundamentals (Not enough Supply, Strong demand). Natural Gas is down because of the huge glut supply. Orange Juice is ‘hyperdeflating’ because of warm weather. I can’t say this enough, but
“INFLATION IS NOT JUST A MONETARY PHENOMENON!”
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry Khachoyan is currently an undergraduate student at UCLA pursuing a degree in Political Science. He started trading in September of 2008. He concentrates on using technical analysis and reading the tape to enter the best risk/reward trades. The stock market to him is one of the greatest inventions by man.
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