Many economists predicted that unconventional monetary theory, especially “quantitative easing” (QE) would lead to a dramatic rise in price levels, so-called price inflation.
A quick perusal of the normal measures of price inflation, e.g., consumer price indexes (CPI), suggest that nothing could be farther from the truth. Indeed, most central bankers are engaging in continuous handwringing over price deflation, going so far as to coin a new term, “slowflation” to depict worryingly-low changes in CPI or GDP price deflators.
It turns out there is more to all this than meets the eye.
Economists worry about the effect of excessively-loose monetary policy on rising price levels because it involves an erosion of purchasing power and a decline the value of saving. As it is, zero-interest rate policy (ZIRP) has been the cause of a massive collapse in the value of deferred consumption.
Central banks forcing of nominal interest rates ever closer to (or exceeding!) zero around the world has had the same corrosive effect on living standards as out-of-control increases in consumer prices. Collapsing yields on financial assets has much the same effect as price inflation since lower earnings on a stock of saving requires more capital or a longer time to accumulate earnings to maintain a given living standard.
Consider that you have $100 in capital assets earning 10% such that this yield allows you to consume goods worth $10 at current prices. Even if price levels remain unchanged, an impossibility in a fiat-money world, yields of .01% would require 100 years of accumulated earnings to buy $10 worth of goods. Alternatively, you would need to have $10,000 in capital.
Clearly, this is no different in effect than if there had been (hyper) inflation.
Looking back over the past 40 years, interest rates have been on a downward trend that has continuously undermined the value of saving, especially in the hands of the middle class.
Ending “financial repression” arising from ZIRP & associated central bank policies may be the most important first step to bring an end to the slow-growth recovery that has been underway since 2009.