[quote=pri_dk][quote=SD Realtor]So necessary commodities like food, resources and other tangible goods will go up in cost.[/quote]
Why?
What will prompt my local Ralphs to raise prices?
Is the store manager going to read about QE2 and start remarking items on the shelves?
And what will stop the manager at Albertsons from lowering his prices? Because of high unemployment his cost of labor is lower. So he decides to get an edge on Ralphs…
Can someone explain exactly how current policy leads to massive inflation without simply using the premise that “printing money leads to inflation?”[/quote]
Prices at your local Ralphs have in fact been rising. They have at Albertson’s too (at least according to the CPI).
But to answer the question: Off the top of my head, QE can lead to somewhat higher inflation in the following ways:
1. Increasing asset prices, which is a stated goal of QE and seems to have worked for now, increases people’s propensity to spend via the wealth effect
2. To the extent that broad money supply does increase, that leads to an increase in aggregate demand in excess of what it otherwise would have been. (if times are tough, the demand will be more apparent in the “necessities” such as food, since we are using that as an example).
3. As a result of foreign currency pegs, QE here leads to looser monetary policy and thus higher demand in foreign countries. This leads to increased competition for commodities and many other items that could feed into our own domestic prices, regardless of our unemployment rate.
4. If #3 gets bad enough, foreign countries could let their currencies rise, which would lead to an increase in prices of items we import.
5. Commodity prices in specific could increase due to #1 (more money flowing into risk assets) or #3 (higher demand in foreign countries). They could also rise as foreign countries try to redeploy their excess dollar reserves. Commodity price increases do feed into inflation over time.
Notice that none of the above require either US employment or labor costs to be high or rising.
You asked how QE could cause “massive” inflation. I’m not really sure what that means. But inflation can be self-feeding in that if it gets past a certain point, inflation fears cause people to spend money faster, or to redeploy their paper cash into hard assets, which makes inflation even worse.
An abrupt rise in inflation is also possible, and could be caused for instance by a sudden drop in confidence in US debt or dollars. This would lead to all of the above list happening to a larger degree, and would also result in the supply of dollars growing as dollars come out from under mattresses throughout the world to seek safer stores of value and drive dollar-denominated prices up. We’ve seen that sudden losses of confidence in financial assets are possible, and we’ve even seen this happen with sovereign debt and currencies recently. Given the precarious debt situation faced by the US it’s entirely possible that could happen here. This is not necessarily an inflation being “caused by” QE, but it’s possible that continued debt monetization could be one of the items that causes global markets to lose confidence in US currency and bonds.
Speaking outside the QE2-as-direct-causation question, I think the premise who suspect high future inflation is that it is really the only politically expedient way to get our debt back to manageable levels. (The sub-premise being that it is only manageable now because it’s so unbelievably easy to roll over in this environment, and that ease is a result of markets mispricing the US ability/intent to pay back debt in real terms).
