Monetary policy

QE prevented deflation

I finished reading the book “Lessons from the Great Depression” by Peter Temin. A graph on page 4 striked me. According to the graph, in the U.S., from 1929 to 1932 the deflation as measured by whole prices was 30%.

I believe the Great Recession since 2008, if had had no Fed and government rescues, the economic and financial damages would have been at the same magnitude as those during the Great Depression, i.e. we would have suffered 30% or a close number deflation. We did not get there and rather have average annual inflation 1.5%, or almost 10% inflation from 2008 to today.

It is fair to say that it was the rescues that helped fighting against the deflation potentials. The Fed’s easy monetary policy is thus equivalent to 40% inflation since 2008 and this is achieved by printing money. Here is the list of QE so far:

  • QE1 engineered in March 2009: $1.75T
  • QE2 engineered in Nov 2010: $600B
  • QE3 engineered in Sept 2012: $40B per month

I think QE3 will likely be enhanced after Operation Twist is over at the end of the year and continue for the most of next year. QE3 will keep focus on buying mortgage backed asset to rock solid housing recovery in the U.S. We will know more from the Fed policy meeting next month.