QE is not deflationary… 2014 is 100th anniversay of the $5 a day wage
To even think that QE would cause deflation shows that some economists are simply confused about the economy. They do not understand why inflation is falling. Why try to pin it on QE? QE is simply limited in its ability to inject money into the hands of consumers (labor). QE is for those who own capital. QE will cause inflation in capital income. Deflation around labor income is separate story. Capital income and labor income used to be in the same story, but now they have been disconnected from the excessive power of capital income to set wages and move money globally as they see fit, for example, tax havens offshore.
Wages are low. Import prices are falling. Just think that China in the last year invested $4 trillion into fixed capital while the US and Europe each just invested $3 trillion. China is increasing supply into the world and keeping prices low and lower.
QE is not reaching the people, neither as investment nor as purchasing power. Trickle-down has transformed into vacuuming up the liquidity of labor. QE does not cause deflation. There are causes from supply and demand in many markets.
- Low liquidity of consumers in from the labor and credit markets.
- Low import prices on oil and consumer goods from the international trade market.
- Monopoly power to lower prices in the goods market.
The specter of deflation is a signal that labor has no power, no purchasing power, and that they are concerned about their future. The best answer is to start raising wages across the board.
“QE is for those who own capital. QE will cause inflation in capital income.”
By definition capital income is dividends, interest and rent. There’s four major episodes of QE at the zero lower bound where we have sufficient data to put this claim to a test: 1) US 1933-41, 2) Japan 2001-06, 3) US 2008-13 and 4) UK 2008-13.
Unfortunately the US uses a different accounting standard (NIPA) from the rest of the planet (SNA). The simplest comparable measure is the proportion of the sum of income from employee compensation, proprietorships and capital income that is from capital income. In NIPA terms this is the proportion of personal income less personal current transfer receipts that is from capital income. In SNA terms this is the proportion of the total resources side of primary income that is from property income.
Here’s a graph of annual US capital income share and the monetary base during 1932-41:
Note that the proportion of capital income fell every year with the sole exception of 1938. The US had a recession in 1937-38 that followed on the heels of the decision to sterilize gold inflows in late 1936 through 1937, which effectively meant temporarily freezing the size of the monetary base. The correlation between capital income share and the monetary base is statistically significant at the 1% level, and is of course negative.
Here’s the monetary base (billions of yen) and capital income share (percent) for Japan in 2000Q4 through 2006Q2 (QE ran from March 2001 through March 2006):
2000Q4 64,759 9.0
2001Q1 66,217 9.4
2001Q2 66,904 7.6
2001Q3 69,230 7.6
2001Q4 74,857 7.6
2002Q1 84,616 7.4
2002Q2 87,765 7.2
2002Q3 85,972 7.6
2002Q4 90,091 7.2
2003Q1 95,013 6.9
2003Q2 101,887 7.0
2003Q3 103,671 7.1
2003Q4 105,145 7.0
2004Q1 108,171 7.5
2004Q2 108,141 7.2
2004Q3 108,537 7.1
2004Q4 109,768 7.6
2005Q1 110,737 7.5
2005Q2 110,663 8.1
2005Q3 110,099 8.8
2005Q4 111,692 6.7
2006Q1 111,618 8.4
2006Q2 96,399 8.7
The bottom line is there is no correlation.
Here’s a graph of quarterly US capital income share and the monetary base during 2008Q2 through 2013Q3:
Again, the bottom line is there is no correlation.
Here’s the monetary base (millions of pound sterling) and capital income share (percent) for the UK in 2008Q2 through 2013Q2:
2008Q2 77,216 14.9
2008Q3 81,272 14.4
2008Q4 97,472 14.1
2009Q1 93,429 11.4
2009Q2 152,466 11.1
2009Q3 198,777 11.1
2009Q4 201,465 10.1
2010Q1 210,419 11.2
2010Q2 207,913 10.1
2010Q3 205,420 11.1
2010Q4 199,782 10.8
2011Q1 196,064 11.8
2011Q2 190,177 11.4
2011Q3 186,656 10.3
2011Q4 210,006 11.1
2012Q1 249,933 10.6
2012Q2 287,678 10.7
2012Q3 312,807 9.9
2012Q4 340,808 10.6
2013Q1 341,065 10.9
2013Q2 353,115 10.7
The correlation between capital income share and the monetary base is statistically significant at the 1% level, and is of course negative.
To be more explicit
“In SNA terms this is the proportion of the total resources side of primary income that is from property income.”
“In SNA terms this is the proportion of the total resources side of primary income that is from property income in the household sector.”
Although the following paper confirms what other papers have found concerning the negative effect of contractionary monetary policy on inequality (and the positive effect of expansionary monetary policy on equality) via the earnings heterogeneity channel, its most significant result, in my opinion, is that concerning the impact of contractionary monetary policy on inequality (and the positive effect of expansionary monetary policy on equality) via the capital income (dividends, interest and rent) channel (what the paper calls “financial income”). Pages 20-21:
“Second, these results suggest that the response of income inequality would likely be even more pronounced if the top 1% of the income distribution were included. This is because the source of income for the top 1% is quite different from that of other groups. The CBO (2011) reports that the top 1% received only 40-50% of their total non-capital gain income from labor earnings between 1980 and 2007 while financial income and business income accounted for approximately 30% and 20% respectively. Because financial income rises persistently while business income declines only briefly after contractionary monetary shocks, and because their labor earnings are likely to rise at least as much as the 90th percentile, one can reasonably speculate that the total income of the top 1% would rise by more than most of the households in the CEX.”