Questions on Emile’s July 2014 article:
Banks provide an essential service to the economy so is there a way of maintaining that function, while not designating them ‘too big to fail’?
How has QE affected the inflation rate if the extra money is being kept by banks and not being spent in shops?
I had no idea about the shrinking size of packaging, but come to think of it we do seem to be getting through our cereal quite quickly these days.
How can there be any serious risk of deflation in the current circumstances? No one is expecting prices to fall, are they?
Reply from Emile Woolf:
Remember that “the inflation rate” to which you refer is a measure in the nature of a consumer price index. “inflation” is shorthand for “inflation of the money supply”, which is what QE unquestionably is.
The two come together (ie prices consumer rise) as the fiat money hoarded by banks is released into the economy. There is a time lag, but it is unavoidable.
You have actually touched upon the only medium to long-term step that would avoid a repetition of the banking practices that got the economy into the mess in the first place – which is to require banks by law to reclassify all their “extra” reserves as mandatory reserves. This would force them to shore up their balance sheets by holding funds that they would otherwise set to work in their usual flagrant lending practices that “create” still more money.
A recent US report (“US banks must hold $68bn extra cash, say regulators”) shows that the Fed is sensibly doing this.
As to deflation – for reasons stated in my article, Draghi is petrified of it – at your leisure you could google “Draghi fears deflation”.