The Federal Reserve has implemented four rounds of quantitative easing, which is equivalent to putting a large amount of cash into the market and significantly increasing the money supply. After the crisis is over, if the Federal Reserve fails to reduce the money supply in a timely manner, it may cause a greater risk of inflation. However, despite this, there is no obvious positive correlation between quantitative easing and inflation. The two correspond to each other. Not linear. 1. Quantitative easing generally causes greater inflation risks.

Quantitative easing is a concept first proposed by the Bank of Japan. The method of implementation is to purchase large amounts of long-term government bonds in the market to lower long-term interest rates, thus squeezing out a large amount of cash from the banking system and investing it in the market. In essence, it is equivalent to the central bank printing more money and occupying the investment areas of the banking system, thereby squeezing the original investment cash in these areas into the market.

After the 2008 economic crisis, in order to alleviate the dollar liquidity crisis in the market, the Federal Reserve decided to carry out quantitative easing, which is commonly known as printing money and spreading money into the market. When the global economy fell into obvious recession risk this year due to the impact of the epidemic, the Federal Reserve launched the fourth round of quantitative easing and turned on the money printing press more quickly. The picture shows that the fourth round of quantitative easing is faster than the first three rounds of quantitative easing.

After quantitative easing, the money supply of the US dollar will rise rapidly. This will have two consequences: First, due to the increase in currency, it will lead to relative depreciation of currency and relative rise in prices, which is what we call inflation. The second aspect is that due to the decline in the value of the U.S. dollar, asset prices denominated in U.S. dollars have increased, which often means a bull market in the stock market and rising prices of other assets.

However, this is also one of the most basic purposes of quantitative easing. The Fed implements quantitative easing in the hope of pushing up inflation and hoping that producers will be more willing to increase investment, thereby producing more goods. Promote economic development. It can be said that inflation is a normal result of the effects of quantitative easing. The picture shows that the increase in the U.S. dollar money supply drives up the price of gold.

But this also brings follow-up risks. If quantitative easing does not recover money in time after economic growth, then these asset prices may appear bubbles, and the inflation caused by excessive money will Devouring the dividends of economic growth will in turn restrict economic growth. It is also because of this that the Federal Reserve announced a balance sheet contraction after three rounds of quantitative easing to reduce future economic risks.

But the Fed may be overthinking. 2. Why did quantitative easing fail to cause severe inflation?

When we analyze the speed of inflation in the United States in the past, we can find that although the Federal Reserve conducted unprecedented three rounds of quantitative easing after 2008, it failed to significantly increase inflation in the United States. As a result, when the economy began to decline in 2019, the Federal Reserve found that core inflation pce still did not reach the 2% standard, and there was still enough room to start quantitative easing. The picture shows the inflation rate in the United States over the past ten years.

So will the monetary liquidity released by quantitative easing definitely cause inflation? This is not necessarily the case.

First of all, as everyone generally knows, since the U.S. dollar is the global currency, if the United States adopts quantitative easing to increase the money supply, the additional U.S. dollars issued will flow to the world and be issued by countries around the world** * Also bear the burden of inflation, so the pressure added to the inflation in the United States will not be that great.

Secondly, Europe has been caught in the European debt crisis since 2015. Since the debt crisis is a typical liquidity black hole, part of the world's currency liquidity has been reduced due to the pressure of the debt crisis. The United States has repeatedly Increasing the swap agreement corresponding to the euro helps the euro zone tide over the crisis from one perspective. This essentially provides an outlet for the U.S. dollar's money supply, thereby alleviating inflationary pressure. The picture shows the US dollar index being pushed up during the European debt crisis, proving that the liquidity of the US dollar has declined.

Finally, and most importantly, quantitative easing essentially increases the money supply, but simply increasing the money supply cannot effectively increase inflation, because inflation refers to the increase in money supply within a certain period of time. Compared with the total value of goods, if there are too many currencies compared to goods, inflation will occur, and vice versa, deflation will occur. While the money supply is increasing, if economic activities are too prosperous and the growth rate of the total value of goods cannot match the growth rate of the money supply, then inflation may not be significantly increased. Another possibility is that even if the money supply increases, these funds do not enter the commodity purchase market. Instead, more money pours into the capital market. In this way, the boost to the consumer market is not obvious and cannot be effectively promoted. inflation. The picture shows the relationship between money supply and prices.

What happened in the United States between 2015 and 2017 was more of the latter situation. U.S. listed companies continue to carry out repurchases in a low interest rate environment, pushing up the market value of the stock market, absorbing almost all the increased money supply, while U.S. companies are also increasing corporate liabilities in a low interest rate environment, both of which have an impact on currency liquidity. Therefore, the actual amount of funds entering the real economy is not very large, which restricts the further increase of inflation.

So here is the answer to the question in the title. The relationship between quantitative easing and inflation is not a completely linear correlation. 3. How strong will the inflationary pressure be after this round of economic crisis?

Since the relationship between quantitative easing and inflation is not linear, is it possible that after this round of economic crisis, the inflationary pressure in the United States will not be as great as before? I don't think so.

First of all, the fourth round of quantitative easing came too quickly, causing the Federal Reserve’s balance sheet to increase rapidly. Coupled with the huge repurchases taken by the Federal Reserve to avoid the debt crisis, the Federal Reserve The balance sheet has been under too much pressure, and the money supply flowing to the market is far greater than the previous three rounds of quantitative easing within a certain period of time. Therefore, after this round of economic crisis is over, the inflationary pressure faced by the United States will be greater than before. The picture shows the rapid increase in the Federal Reserve's balance sheet.

Secondly, this round of economic crisis is mainly caused by the impact of the epidemic, which will inhibit both the production and consumption sides. Now that the organization of logistics has caused prices to rise on the consumer side, suppressed consumption will explode after the epidemic is over, creating a round of compensatory upward pressure on prices.

Third, the U.S. Treasury Department provided credit guarantees by injecting capital into the Federal Reserve, thereby leveraging the Federal Reserve to release 10 times the credit guaranteed. Even if it is $1,200 per adult in the United States, it is a huge amount of money combined. These money supplies, along with quantitative easing, became a huge pressure on inflation after the economic crisis ended. The picture shows the rapid increase in U.S. fiscal expenditures and deficits.

Finally, although the epidemic burst the bubble in the U.S. financial market in advance, the risk of U.S. corporate debt did not explode. It was temporarily suppressed by the Federal Reserve’s strong liquidity. After the economic crisis ended, the U.S.’s The concentrated maturity of corporate bonds has just arrived. If the Fed reduces money, liquidity will cause a secondary risk of corporate debt explosion. Therefore, the Fed will face a difficult choice. It will be difficult to quickly reduce the money supply, which will have a negative impact on the market's long-term inflation. Expansion is expected to create pressure.

Therefore, after this round of economic crisis is over, the inflationary pressure faced by the United States may be very huge.

To sum up, quantitative easing can cause a rapid increase in money supply in a short period of time, but an increase in money supply may not necessarily cause inflation, so there is no linear correlation between quantitative easing and inflation. . However, inflation itself does tend to cause inflation risks, and the quantitative easing in the United States after this round of crisis may cause more serious inflation.