I had a debate this week with a colleague about QE and why we have no inflation (CPI).
QE goes directly to the banks. By banks i mean the BIG banks, generally speaking it isn't the little ones.
When i say banks receive the money i mean the institution itself owns the money, not Bob CEO of Big Bank. The money sits in the account of 'big bank'.
The banks then have the ability to decide where they put that money. The Govt doesn't force them. Politicians don't force them. 'Big Bank' decides for itself and the first port of call is the sharemarket because that is the first to liquidate itself in tough times. After they pump money into the sharemarket and any other market causing them pain, the money is made available to average joe in the form of loans.
When you see trillions of QE pumped into the money supply, the answer to the question 'where is it?' is primarily the sharemarket. The sharemarket took a 30% dump and is now 5% past it's all time high during a pandemic. That takes Trillions to achieve.
The sharemarket is not part of the CPI. The sharemarket is not a metric used in order to justify to your boss why you need a wage increase (that metric would be CPI). When i say there is no inflation, this is what i am talking about. The sharmarket is not purchasing loaves of bread, milk, clothes, furniture, mobile phones etc and thus is not influencing the CPI . Therefore, you can have trillions and trillions injected into the financial markets and virtually none of it will hit the inflation figures, GDP or velocity.
With me? Ok, so we have trillions of money sent into the money supply. We now understand that it has gone into the financial markets (as we can see). In order to begin sending that money into the economy and raise GDP and the CPI, banks need to begin spending and also providing loans. On the spending front they need to begin hiring people for projects for upgrades, new processes, regulation etc. On the loan front they need to offer lower interest rates and relax lending criteria just like they did prior to the GFC........
Currently the banks are not spending. They are not running projects and are not hiring people.
The banks have relaxed interest rates and also relaxed lending standards........ but we know from published central bank data that Average Joe has been paying off debt and saving money. Average Joe is scared of losing his job. With high unemployment numbers putting downward pressure on wages this also means many have taken a paycut in the current environment.
This is why we are not seeing crazy levels of CPI. Bread costs the same. Fuel is cheaper. clothes are cheap, internet is cheap. All the money is sitting in the big bank's account and nobody is wanting to borrow nor are the big bank's wanting to spend. Afterall, if you are a bank and your bonuses are paid on sharemarket performance, you would simply jack it to the moon and get a bonus.
Stalemate.
Right now the central banks are all tapering down QE. They believe they have done enough and it's all up to average joe to bail the economy out by taking on more debt (i'm not kidding).
What we face in 2021 is the risk of a sharemarket collapse because the banks having jacked prices of shares, without the ability to force people to take on greater debt they won't be able to float the GDP and bring the economy back online in order to validate the share prices. Without validation, you have a loss of faith and eventually capitulation as shareholders leave the market.
UBI and/or job subsidy will become very real, very quick. The govt and central banks need to address the fear they created and make average joe feel like they can spend and borrow once again.
Central banks will end up initiating trickle up economics policies to make this happen which will improve 3 key metrics - GDP, CPI, velocity. That is the solution. These are the core metrics of the health of an economy, not the sharemarket. For whatever reason some key people decided the sharemarket was the beacon of hope...... how are we doing today?
