Inflation Has Not Rebounded In The Context Of Strong Stimulus.

Although central banks have expanded rapidly, the underlying currencies have not entered the process of credit creation.

Take the United States as an example, since the 2008 financial crisis, the Fed's basic currency has increased by 3.5 times, but M2 has increased by only 65%, resulting in a monetary multiplier from 9.1 to 3.3.

Why? The central bank issued the basic currency is the central bank's initiative to increase the money supply process, but the creation of credit money needs credit expansion to complete, that is, enterprises and residents should take the initiative to lend to banks continuously, and this process is beyond the control of the central bank.

In the past 08 years, the US economy has been on the downhill step. The global economy is also in the doldrums. The demand for loans from enterprises and residents is not so strong. In addition, banks are reluctant to lend money in order to control risks when their economic prospects are not optimistic. Bank credit has increased by only 36% during this period.

That is to say, businesses and residents do not have leverage to buy goods, and inflation can not rebound naturally.

From the change of velocity of money, we can draw a consistent conclusion.

In the classical quantity equation MV=PY, if the velocity of money does not change, the short term supply of money will surge sharply, but in fact, the velocity of money circulation is rarely the same.

Over the past 08 years, the US has measured the circulation speed from zero to 1.7, which has been reduced from 1.3 to 1.7. That is, the number of money used in the economy has decreased after the increase in money volume.

According to the quantitative equation, inflation will not necessarily rise even if the underlying currency increases.

The example of Japan is more typical. It also faces the plight of the rising base currency, the reduction of the money multiplier and the rapid decline of money circulation.

Since the launch of the QQE stimulus policy in 2013, Japan's basic currency has increased nearly 2 times, while M2 has increased by only 13%. The result is that the monetary multiplier has dropped from 5.2 to the current 2.4, and the rate of circulation measured in the basic currency has decreased from 0.9 to 0.34.

Japan is facing structural problems such as aging, wealth gap and other structural problems. Although the central bank has provided many "money", enterprises and residents are unwilling to use it or the average number of times has been reduced. Therefore, inflation in Japan is hard to rebound, and monetary stimulus has little effect.

The effect of the soaring base currency in the euro area has also been written off by the decline in currency multiplier or currency velocity.

From 2008, the basic currency released by the European Central Bank increased by 1.35 times, while M2 increased by only 40%, M3 increased by 26%, the monetary multiplier decreased from 8.5 to the current 5.1, and the rate of money flow in the base currency decreased from 2.5 to 1.25.

There are more structural problems in the euro area economy, so the increase in the supply of basic money has made it hard for businesses and residents to take the initiative to leverage consumption and investment, and inflation is still in the doldrums.

The US, Japan and the euro area also illustrate from the side that the monetary stimulus of central banks does not necessarily bring about a rebound in economy and inflation. Especially when serious structural problems occur in the economy, monetary stimulus is even more ineffective: the effect of the increase in base money is written off by the decline of currency multiplier or currency velocity.

The liquidity trap theory can also explain the reasons for the increase of currencies and the low inflation.

There are two mainstream theories about liquidity trap, and the causes and solutions of the trap are analyzed.

The first is represented by Krugman and Bernanke. They believe that when nominal interest rates are low enough and inflation expectations are low, real interest rates are still high, so people are unwilling to invest and consume, resulting in inflation difficult to pick up.

In fact, in this case, banks are faced with lower income and greater risk and will also be reluctant to lend.

Krugman and Bernanke believe that the central bank should increase monetary stimulus to further reduce nominal interest rates or raise expectations for inflation.

This is also the reason why the Central Bank of the United States, Europe and Japan adopted QE and negative interest rates for 08 years. But in fact, it is difficult to get rid of the liquidity trap only by monetary stimulus.

Take Japan as an example.

Since 90s, the Bank of Japan has adopted strong incentive policies such as QE, QQE and negative interest rates. Nominal interest rates have indeed decreased, and yields on treasury bonds in each period are almost at a negative interval.

But inflation expectations are difficult to manage and control by the BoJ. According to a recent survey by the Bank of Japan, the 5 year inflation expectation of Japanese enterprises is only 1.1%, the lowest level since the 2014 survey.

Inflation expectations are too low for investment and consumption, which further leads to the current downturn in inflation.

Moreover, Japan's low inflation expectations are not only related to the credibility of the BoJ's stimulus policies, but also to structural problems such as aging.

The second theory of liquidity trap, proposed by Keynes, points out that when nominal interest rates are low enough, people tend to hold cash, because once interest rates rise, long-term bonds or asset valuations will be greatly reduced.

So when interest rates are low, holding cash is simply losing a little interest.

It may face huge capital losses caused by rising interest rates.

So Keynes thought it would be useless to increase the money supply simply because the increased currency was held in the form of cash.

He believed that while increasing the money supply, we should cooperate with expansionary fiscal policy and even direct employment creation plan.

The United States can be said to be a more successful practitioner of Keynes's thought, so the effect of QE is the best among the developed countries.

After 08 years of financial crisis, the United States not only adopted QE,

And other monetary policy incentives, but also implemented a more proactive fiscal policy.

The deficit rate in the United States was 9.8% at 09 years, but it has dropped back, but it is basically at a historical high.

At the same time, the proportion of government debt held by the American public in GDP has soared from 35% to 74% at the end of 15.

In addition, the United States has launched a direct employment creation plan such as EB-5.

Monetary, fiscal stimulus and job creation programs played a key role in the recovery of the US economy.

Although the euro area has implemented a more proactive fiscal policy after the outbreak of the 08 financial crisis, the deficit rate has reached 6.3%. However, due to the unified financial constraints, the fiscal stimulus has weakened.

Coupled with the serious debt crisis in Greece and Italy, the space for further fiscal stimulus is relatively limited.

Japan also implemented a proactive fiscal policy in the current round. The deficit rate remained above 6%. However, because of its government debt ratio above 200%, 24% of the fiscal expenditure was used for debt repayment.

Coupled with the structural problems of the Japanese economy, the implementation of QE is not effective.

So Europe, Japan

There is no marked improvement as the United States did.

Secondly, government financing is increasing and residents enterprises are on the low side.

In developed economies, even in credit based on the expansion of basic currencies, government departments also dominate.

Judging from the credit structure provided by financial institutions, the proportion of Japanese government departments surged from 29% to 43%, the US rose from 13% to 22%, the euro area soared from 26% in the 09 year to 33%, and the government debt rate of various economies soared.

In addition, some "banknotes" outflow and emerging markets become the focus.

The nominal interest rate has been reduced, investment opportunities are limited, and the developed currencies have a large amount of outflow to seek other investment opportunities.

The ratio of offshore net debt to total debt of US financial institutions rose from less than 1% in 09 years to 14%, the euro area rose from 15% to 25%, and Japan rose from 6% to 9%.

Emerging markets have become an important inflow of capital.