The Shocking Truth About QE2

Here’s the shocking truth about QE2. QE2 Did not bring Inflation. Simple as that. This may sound like an outrageous statement, but as your’e going to see,  there has been no permanent inflation effects from QE2. What QE2 (Quantitative Easing 2) actually accomplished was an asset swap. The $FED does not even print money (the treasury technically does that). With QE2, They didnt print money, they just swapped treasuries with deposits. This was done in order to create demand for loans, but as Japan has showed in the past and as the economy is showing now, interest rates do not matter if the private sector is indebted and is deleveraging (which is inherently deflationary).  So as you can see, QE2 itself can’t even create inflation. Banks need to lend out in order to create any kind of demand that would cause inflation. So you can throw this Monetary Base chart out there all you want, there was no major lasting inflation effects from QE2.

The Stats and Facts

The Dollar

Let’s take a look at some stats on the US Dollar. QE2 started on November 12, 2010. The dollar index ($USDX) stood at $78.23. At the end of QE2 (June 30,2011), the dollar index stood at $74.64. Currently, we are at 81.29. This is over 2 points higher. If QE2 was supposed to destroy the dollar? How come the dollar is higher now? All that money printing was supposed to kill the dollar right? Wrong. Yes, as you can see, the dollar trended down very nicely for the 1st part of 2011, but this is easily explainable by the psychological mechanisms of the market. People think QE is inflationary, so they buy risk assets (commodities, stocks, Euro) and sell safe assets (Treasuries, Dollar). But after both QEs ended, the dollar returned near to the levels it was at  when the QEs started.

The dollar (and its mechanics) is one of the most heavily misunderstood things in finance out there. The dollar has no value, yes, but to say it has no buying power is ridiculous. What gives the dollar its buying power is our productivity and efficiency. You can keep claiming the dollar has lost 95% of its value, but in reality, its stronger than ever as our living standards have skyrocketed.


$USDX ($DXY) Weekly chart




Commodities were supposed to skyrocket because of QE2. They temporarily did as everyone played the “risk on” trade and bought inflationary assets. However, as QE2 ended, it was “risk-off” and back to reality and commodities were heavily sold off. Honestly, the only thing keeping commodity prices from going down much further are emerging and growing markets like Brazil, China, East Asia,etc. Otherwise with Anemic growth from the US and a possible recession in Europe, its hard to see commoditiy prices staying at inflated levels.

QE2 was a little over a year ago. If this was supposed to bring (Hyper)inflation, why are most commodities down or flat on the year? And only a select few are up over 10%.  Even Crude oil, with all the Arab Spring events, is only up 7%. The select few that are up over 10% are the Meats category-which tells me it has more to do with a fundamental issue than a inflationary issue. Gold (which is a bad inflation bet) and Heating Oil are the only two others that are up 10%. I’ve warned all year commodities would deflate, so don’t tell me I didn’t warn you!

Also, the 30 year bond being up 21% this year tells me nobody is worried about inflation, and instead people are worried about deflation. Yields are at an all-time low!




Even in the non-commodity sector, things have deflated or have barely inflated YoY.

Housing Prices

Homes, arguably the #1 factor that determines the wealth of Americans (NOT Stocks), has been trending down. In an nominal sense, the average house price has come down and has not stopped coming down from the height of the bubble (im not even looking at YoY change, which is down big). You can’t have high inflation if the average American’s net worth is coming down.

Services and Other

Here is a chart from David Rosenberg from a presentation he did in August. It shows some special details in the CPI. Stuff like Medical care, computer equipment, household appliances, gasoline, books, etc. This is an outdated YoY graph. However, as you can see, even in August, most of the things were not even up 2% YoY. If you take a look at the changes now (4th column shows % change from Sept ’10 to Oct ’11), its hard to find many items up more than 5%. Only a few items are up more than 7-8%, and they mainly have to do with energy, which has come down significantly since October (check out the $RB_F chart).

I bet if you take a look at this chart in a few months, it will show more disinflation.



Inflation Metrics

CPI – All Items

This is the Quarterly Consumer Price Index (CPI) which is typically used to measure inflation. As you can see, we are registering about a 3.0% reading, hardly inflationary considering some of the past readings. In fact, the trend has been down since the big drop from 1980, meaning we have decelerating inflation. If QE2 was supposed to create inflation, why are we barely seeing only a slight increase? This is surely going to come down as inflation has dropped off considerably in the 2nd half of this year.


CPI – All Items less Food and Energy 

This is the quarterly CPI if you take out food and energy. As you can see, this is barely positive and is showing decelerating inflation as well. Why is this (core inflation) looked at? Because as David Rosenberg explains (~6:00 mark), the bond market reacts better to core inflation vs headline.


Money Supply – M3

As you can see, the M3 (via Shadow Stats) YoY is finally back at positive levels. This isa very weak inflationary reading despite the FED’s ‘massive money printing’ scheme.

Final Thoughts

QE2 did not create any high or let alone permanant inflation. We right now are seeing heavy disinflating around all parts of the economy, and it fully makes sense as we have global deleveraging going on. The inflation we saw early this year was from two things. One was psychological. Big funds with massive money played the risk-on game and bought up commodities & stocks as they pushed out of the dollar and treasuries. Financialization of commodities makes it easy for big massive funds (as a herd) to move prices (think momentum). This is what happened in late 2010-2011. The second reason was a global macro scare because of the Arab Spring (a ONCE in a lifetime, scratch that, once in a millenium event) which caused oil to spike (which in turn spikes everything else). The massive misunderstanding of modern monetary economics to go along with psychology caused the small inflation scare we saw earlier this year. We are now disinflating and have seen no destruction to the dollar, no massive spike in prices, and most importantly no hyperinflation! My sandwich at the my school deli still costs me $5, the same as last year and the year before!

Productivity and efficiency will keep rising thus keeping the dollar stable. It will take time for the US to finish this deleveraging  stage, and once we do, only then can we see the possibility of high lasting inflation.




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.

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