There’s been a substantial amount of criticism thrown in the direction of those who predicted high inflation since the financial crisis. Yesterday’s piece by Bloomberg sparked a lot of conversation on the matter as it shined the spotlight on some very prominent investors and economists regarding their 2010 “open letter to Ben Bernanke” which said QE would cause high inflation and dollar devaluation. The Bloomberg reporters asked the original signatories if they thought their prediction had been wrong and they almost universally responded by saying “we weren’t wrong, we are just early”. Let’s be blunt – they’re not early. They’ve been wrong. And it matters. A lot.
First, in addition to high inflation the signatories also cited market distortions. This is a concern I actually agree with, but the whole market distortion aspect of QE shouldn’t surprise anyone. After all, the Fed itself has stated clearly that one of the main purposes of QE is to keep asset prices “higher than they otherwise would be”. In other words, the Fed is explicitly trying to distort markets. That’s basically the whole goal of the portfolio rebalancing effect. It’s something I’ve criticized the Fed for and I think there’s a reasonable argument that this sort of policy could have negative consequences.
The inflation predictions are more problematic in my view because they’re often the result of obvious misunderstandings that have directly led not only to poor investment decisions, but poor policy decisions. For instance, I’ve harshly criticized this list of economists for their predictions about how QE could result in inflation at some point. In essence, there was a huge list of prominent people who said QE was the equivalent of “money printing” which would lead to high inflation because they thought the reserves the Fed was creating would somehow “get out” or be “lent out” and flood the economy with excess money. I’ve noted, ad infinitum, how this is based on an incorrect understanding of the monetary system. There was absolutely no merit to the idea that QE would cause hyperinflation or high inflation following the crisis and those who understood the operational realities of QE knew this in advance.
This matters because many of these inflation predictions were based on misunderstandings of the monetary system and models that are simply wrong. Oftentimes these predictions were highly politicized and the result of how politics has invaded our economic understandings. So it’s not surprising that many of the original signatories don’t want to admit being wrong because it could mean that their ideology is based on serious underlying flaws. That’s a tough pill to swallow. But it’s important that we indentify these mistakes because we should all learn from them and ensure that we don’t repeat them. There’s too much politics in economics and these sorts of ideologically driven misunderstandings are directly hurting the economy. And we’re all worse off because of it.