Printing money is not inflationary, say the inflation hawks at Rob Arnett’s Research Affiliates.
But no, the Newport Beach-based firm is not suddenly going all wobbly on the Fed’s quantitative easing policy.
Rather, a recently published research note by the firm’s chief investment officer, Jason Hsu, explains the mechanisms by which loose monetary policy creates the conditions for inflation, paving the way for an inflationary future.
Titled “From QE to Queasy: Fiscal Policy and the Risk of Inflation,” the research note says that the now-dominant view of economists is that inflation is a fiscal phenomenon rather than a monetary issue. In other words, quantitative easing’s primary effect is not inflationary; indeed, there has been no “material inflation” yet, despite QE-financed spending.
But the policy will lead to inflation in the following way, Hsu explains:
“When a government can issue substantial debt at a zero interest rate—which is what QE or printing money accomplishes—it will spend more recklessly than if it had to roll over the debt at double-digit interest rates.”
In other words, interest rates impose fiscal discipline. Our current low rates remove an important market signal that would work to keep public spending in check.
“Bond investors are the vigilantes who ensure that fiscally conservative politicians are not brushed aside by electorates and by populist political leaders, who are all too willing to finance today’s welfare with tomorrow’s liabilities. Once that market control mechanism is lost, the public sector will slide down the slippery slope of excess spending, crowd the private sector out, and cause the economy to become ever less productive.”