Patrick Schwerdtfeger is a motivational speaker who can speak about quantitative easing and inflation at your next business event. Contact us to check availability. The full transcript of the above video is included below.
Full Video Transcript:
Hi, and welcome to another edition of Strategic Business Insights. Just a quick video here to talk about quantitative easing and whether it leads to inflation or not.
Here’s the situation: Anyone who’s taken economics classes the way I have and so many others maybe you have as well know that if you’re going to print a bunch of money, it’s going to increase inflation. All you’re going to do is get inflation. Well, it’s not always true, as it turns out, and we are discovering this because what’s happening today has never—this is an economic experiment that we have never even come close to trying the kinds of things they’re trying right now to keep economies going ever since the financial crisis, and certainly in the case of Japan 10 years before that, which was when their crisis started [00:00:47] They’re lost decades. They’ve been floundering for a long time.
And the problem is that, and frankly if you actually look at it, it’s their population. The Japanese population is shrinking and aging, so their economy is stagnant. It’s not growing. The number of people in the economy is the biggest determinant in the GDP, in the domestic economy, because that’s who’s buying food and shelter and clothing and energy. Same is true in Europe. The reason the European economy is struggling is because their popular is stagnant. It’s not growing. The reason the United States economy is still growing a little bit is because our population is growing. But that’s not the purpose of this video.
Quantitative easing does not lead to inflation when capacity utilization is low, when there’s slack in the line, and that’s the case we have right now. Factories and companies could be producing more than they’re producing, but they don’t need to because demand isn’t there. They’re not at full capacity. They could be producing more without buying any extra factory, any extra machines. They could be producing more, but they don’t have the demand, so they’re not producing as much as they could. That means capacity utilization is lower. It’s like at 80% instead of 100% or whatever it is. When there’s slack in the line, it doesn’t matter if you do quantitative easing. It’s not going to lead to inflation.
This is one of the biggest reasons that the price of gold collapsed. Gold had had this crazy runup in the price of gold, and then it started consolidating. Usually, when there’s a consolidation pattern, 80% of the time it’ll eventually break out of that consolidation pattern and continue its original motion. So if the original motion was up, it’ll consolidate and then eventually go back up. Or if it was going down, same thing in reverse.
Not in this case. Oil went up. It well all the way up to like 1900 dollars at one point, and then it started consolidating, and then eventually it broke the pattern on the downside and came back down in quite a dramatic fashion just recently. Why was that? Because gold was seen as a safe haven to currencies when everyone was expecting inflation, because United States was doing massive quantitative easing, the UK was doing massive quantitative easing, and Japan has been doing quantitative easing for a long time, and Europe is doing it as well.
So everyone, what we’re really going to see is currency wars, and they’ve already started. Japan has deflated the yen by like 25% already because of what they’re doing. Now, you can’t really complain because their yen had raised and had gone up in value in recent years, so it’s back down to where it was before. But the bottom line is, they’re manipulating the currency, and the reason no one is saying “you’re a currency manipulator” is because we’re all doing the same thing ourselves and we’re using the argument of fighting inflation or trying to get some inflation as a means of doing—that’s why we’re doing this quantitative easing, is because we want to get some inflation in the economy, but it’s not really happening. It’s not really happening, and the reason is because capacity utilization is low.
So quantitative easing is a complicated subject. This is an experiment. No one knows how it’s going to end. I certainly don’t know how it’s going to end. But so far, it’s working out different than people expected. Number one, they were expecting banks to take their massive reserves of cash and lend it out to the business communities, which would stimulate the economy, but the banks aren’t doing that. And two, the money supply has stayed stable, so banks have just kept the reserves and not lent it out, because they know that if they lend it out, and then the Fed reverses the policy, they’re going to have to pull it all back again and reverse it. So they’re basically saying, “We don’t want to have a sugar high celebration today, and then have to have a bad day tomorrow. We’d rather just have average days consistently.” So they’ve held on to their reserves.
So that didn’t happen. The idea that they would lend the money out, that did not happen. The inflation is not really happening because capacity utilization is low, so there’s slack in the line. So prices are not going up the way they were expecting. Really, the only thing that quantitative easing has done is it has lowered long-term interest rates. Long-term interest rates have stayed low. That has happened, and it of course is stimulating the mortgage business and lending to some extent, but it has not been nearly as effective as people hoped, and the reason is because of capacity utilization.
Hope this gives you a bit more insight into QE and its effects on the economy. Thanks for watching this video. This is Patrick, reminding you to think bigger about your business, think bigger about your life.
Patrick Schwerdtfeger is a keynote speaker who has spoken at business conferences in North America, South America, Europe, Africa, the Middle East and Asia.