We’re now 7 years out of the grand monetary experiment and there’s still no inflation on the horizon. In fact, we seem to be coming to an increasing consensus that monetary policy and QE just hasn’t done much. These are all things I expected from the start of QE – it wouldn’t cause high inflation, wouldn’t cause rising interest rates, wouldn’t really do much of anything. If you worked through the accounting and the scenario analysis of the flow of funds, high inflation just didn’t add up. But some people still believe the risk of hyperinflation from “money printing” is real. For instance, here’s a Bloomberg view writer saying that hyperinflation could break loose like a bank run if the government spends too much money.¹
The Bloomberg article says that the deficit could cause hyperinflation in the case where the Fed just prints up money to finance the deficit directly or pay off the national debt because expectations could get out of control. Basically, if people believe the US government is bankrupt then it becomes a self fulfilling prophecy. But this is a misleading comparison. First, the Fed can’t legally fund the Treasury directly and the Treasury can’t just issue cash directly. Second, a bank run does not occur because people merely believe a bank is in serious financial trouble. Bank runs occur because banks actually are in serious financial trouble. It’s not like someone just walks up outside the bank and starts spreading nasty rumors. That’s just not how this works. This idea that currencies just collapse because people get emotional about them is not backed up by sound empirical evidence. Hyperinflations always have logical fundamental reasons for occurring.
The same point is true at the government level. If people believe the government is just printing up worthless notes then the equivalent of a run on the currency could occur. But anyone who has a good understanding of the US government’s finances and the strength of its revenue sources knows that the government is not bankrupt. In fact, the US government is probably the most credible entity in the entire global financial system which is why its liabilities are seen as a global safe haven.
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