Does quantitative easing cause inflation?

Is QE an inflation fan?

It's an awesome proposition that the Bank of England will inject £75 billion initially to kick start the economy again. This will go a long way to curbing the downturn, but many commentators are saying that it will require another £75 billion.

Also, the mistake a lot of commentators are making is that they're assuming that quantitative easing automatically leads to high inflation. This is a false association, any property investor with some investment education can realise the benefits.

Yes, if it's not managed well then inflation will be a by-product of the extra money in the economy. But managed properly, it will mean that once the economy is showing signs of recovery they can turn the tap off slowly and over time, reducing the supply of money, and eventually we'll be back into the next boom cycle.

Now let's get this straight quantitative easing is aimed at increasing the supply of money into the economy. If left unchecked it can lead to high inflation, but managed well will soften the downturn.

Could we end up like Zimbabwe with the highest rate on the planet?

Zimbabwe is a classic example of quantitative easing gone horribly wrong. In fact, it's a textbook example of how not to do it. I totally discount Zimbabwe as a comparison as they have so many other factors in play such as political unrest, a third world economy, lack of basic provisions and large population dependent upon agricultural and farming industries.

We're more likely to follow Japan

Japan is a more suitable example of how to increase the supply of money into an economy. It's the world's 2nd largest economy behind the US and has a stable political environment. They began their quantitative easing program in 2001, and it certainly hasn't led to hyper-inflation and collapse.

Finding the biting point…

The real question is how much will be required and how long before they have to stop the easing and reduce the supply of money? (effectively turn the tap off) This is very much the same as learning to drive a manual car and having to use the clutch and accelerator pedals for the first time – you may stall a few times, but eventually you'll get the hang of it and find the right biting point to take off.

The only problem is that traditionally the Bank of England is slow to act, and this may not necessarily be a good thing at the moment. It's essential that the Bank of England listen to the markets, notice changes and have a level head.

In my opinion, too much easing and hyper-inflation will arrive; too little and the whole exercise will be worthless.

Live with passion,
Brett Alegre-Wood

Brett Alegre-Wood
March 8, 2009

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