The price of Education / Healthcare / <thing> is going up! Isn’t that QE-driven price inflation I’m feeling?

No, it’s just QE-driven price distortion!

A thread unpacking the difference.

All around Twitter, very smart people are saying inflation is coming. Also, a bunch of other very smart people are saying that deflation is coming.

How can all the smart people disagree?

First let’s start with some basic definitions. Inflation happens when the total amount of money increases, increasing the cost of all goods at once.

The equation is like this:

(Stuff we buy) divided by (all the money)

If we add to the “all the money” side, prices go up because the divisor went up. If we subtract from “all the money” prices go down because the divisor goes down.

It’s literally that simple.

Price *distortion* happens, generally speaking, when some price agnostic buyer enters the demand equation and, crucially **price becomes irrelevant.**

Let’s walk through a couple examples of distortion so we’re all on the same page, ‘cause this one can be a bit more subtle.

Stocks prices during a speculative frenzy is price distortion, as people buy stocks not because they want to own that company, but because they believe the price will go up.

Because only this belief matters, purchase **price isn’t relevant** -- only the belief it will rise.

As @profplum99 points out, 401ks create price distortion too: we blind-buy into “target date XYZ fund” without zero consideration for what’s in the fund.

Because “what’s in the box” is often stocks, the price of stocks in that box get distorted since **price isn’t relevant.**

There can also be weird stuff in that box (since nobody is looking in there), like negative yielding foreign bonds or other garbage assets. That kind of “financial mystery sausage” is how we get stuff like the mortgage crisis.

But I digress...

Monopolies (hi Facebook!) also create the same effect - “albums of people I hate” is only available thru FB and there are no other sellers, so I either purchase at the asking price (my privacy) or I don’t.

With take it or leave it pricing **price isn’t relevant.**

Price distortion can either raise or lower prices, and it often raises them. There is a lot of price distortion in the world, and because no single human can track the price of all goods, it’s very reasonable to mix up distorted prices with true inflation.

But, to quote Milton Friedman the god-emperor-economist:

“Inflation is always and everywhere a monetary phenomenon”

and so 'purist' inflation really only happens when the quantity of money goes up.

In our monetary system (and, frankly, all modern ones), the chief way that the quantity of money increases is via *credit issuance* -- you can read more about this mechanism in the following thread where the concept has been beat to death: https://twitter.com/coloradotravis/status/1296853677253124096?s=20

That same thread suggests that QE doesn’t increase money supply (because, factually, it doesn’t).

But that doesn’t mean QE can’t increase prices...

To quote @LynAldenContact exceptional post linked below, “QE does affect Main Street, either by maintaining promises (like the solvency of Medicare), or by being able to send everyone $1,200 checks and extra unemployment benefits during a crisis…”

https://www.lynalden.com/quantitative-easing-mmt-inflation/

Lyn’s observation here is correct and very relevant to the prices we all pay - they are going up, as she observes.

I would still pedantically insist (being a notorious pedant) that this is not inflation since no money is created -- it’s QE-fueled price distortion!

How so?

Well, while QE doesn’t increase the total volume of dollars (see other thread), it *does* maintain the market’s appetite for treasuries by continuously taking a bunch of treasuries off the market, thus reducing the total supply available.

This act of maintaining the buyer appetite (by reducing available supply) ensures that the Treasury can continually sell treasuries to the market for money, giving them perpetual spending power.

And because the Treasury has infinite purchasing power, they are not a particularly price sensitive buyer when they purchase things leading to… wait for it…

A state of affairs where **price isn’t relevant** for the things the Treasury purchases!

Classic price distortion!

If we look deeply at stuff the Treasury purchases, that’s where we see prices going up. And they buy a lot of stuff, so lots of things have upward price movement.

But also lots of things aren’t bought by the Treasury, and those things, you’ll see, have less price distortion.

From a strict, classical perspective QE is not inflationary. Still: the effect of QE is to increase prices. But not all prices, just some.

Just the things the government (read: us as a society, collectively) have decided to purchase **no matter what.**

So yes, you are seeing prices go up -- particularly in some areas.

But that’s price *distortion* and it’s either “the exhaust of trying to build an equitable society” or “ government spending turning us into socialists” depending on your politics and how angry you are about it.