Two economists at the Federal Reserve Bank of San Francisco, Reuven Glick and Sylvain Leduc have just reached the conclusion that Fed money printing doesn't cause price inflation. In fact they go one better, they claim that Federal Reserve asset purchases (which create money out of thin air) are deflationary. I am not making this up. Here's the introduction to their argument:
Prices of commodities including metals, energy, and food have been rising at double-digit rates in recent months. Some critics argue that Federal Reserve purchases of long-term assets are fueling this rise by maintaining an excessively expansionary monetary stance. However, daily data indicate that Federal Reserve announcements of large-scale asset purchases tended to lower commodity prices even as long-term interest rates and the value of the dollar declined.
What makes them so sure about this price deflation? They start off by telling us this:
...commodity prices have surged since Chairman Bernanke’s Jackson Hole speech. The Goldman Sachs Commodity Index, a heavily traded broad index of spot commodity prices, rose 35% between the Jackson Hole speech and the end of February. The increase was widespread, spanning a range of commodity categories. Industrial metals rose nearly 30%, energy prices climbed 35%, and food prices rose close to 50% during the six-month period.
So how with these facts do they reach their conclusion. They argue this way:
The LSAP [Large Scale Asset Purchases] announcements about monetary policy may have signaled that the Fed perceived economic conditions to be weaker than previously thought. Alternatively, they may have increased market worries about risk and made Treasury securities more desirable as safe-haven investments. Thus, an announcement that makes investors feel that conditions are worse than originally perceived or that heightens risk concerns may lead investors to increase their demand for Treasuries, lowering their yields. These concerns also could reduce investor demand for other assets, such as commodities, resulting in lower prices.
They then go on to report on an absurd empirical study that they completed
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