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Other Voices: A return to boom and bust
Thursday, July 30, 2009

This article was written by Bryan Goh, First Avenue Partners LLP, London: Does the printing of money by central banks inevitably lead to inflation? Is there good inflation and bad inflation?

Quantitative easing is now underway in most developed countries in some form or other, most notably in the US, UK and Europe. It hopes to make up for the decline in transactions for a given stock of money by increasing the stock of money for a given level of transactions. In fact it hopes to more than make up for it. If successful, what does it create in growth of price level and output? It should result either in higher prices for a given level of output, or a higher level of output for a given price level, or both. While on the one hand the stock of money and rate of transactions are scalar quantities, on the other hand the prices and outputs are vectors whose product is scalar. That means that not only are we uncertain about whether the impact of success of quantitative easing is on price or output, we don't know which markets are reactive to it.

Common sense would imply that capacity constrained markets are more likely to see price inflation as opposed to real growth while the impact in markets with excess capacity are likely to be on output. Income and substitution effects complicate the analysis of the system as a whole. There may be no impact in some markets either in price or output. However, there must be at least one marke......................

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