US inflation is still low. Is everything we know about macroeconomics wrong?

The US consumer price inflation rate in August was -0.2 per cent. Negative inflation in the month and up just 1.7 per cent in the year. Despite the US Federal Reserve moving heaven and earth to avoid such an outcome.

The Fed has cut interest rates to near zero and done over $3 trillion worth of “quantitative easing” in order to try to lift inflation up into positive territory. That’s “loose” monetary policy where the government pumps money into banks. Their ultimate goal is to get higher inflation to give the economy a boost.

But there is another school of thought. That maybe the reason they’ve failed to cause inflation is that quantitative easing actually causes deflation.

This idea is shocking. When I first saw it getting serious attention, I had to check to make sure I wasn’t on The Onion. Surely QE is an increase in money supply, and so should cause inflation.

The list of governments engaging in QE includes the US, UK, and Japan. If it doesn’t work, then how in holy hell has the global economy not collapsed by now?

Here’s the data since 2000 on inflation in those countries

US inflation
US began QE in late 2008; really ramped up with unlimited QE3 in Sept 2012
Japan INflation
Japan was doing limited QE over a decade ago. It really ramped up its QE in 2013. That recent blip in the chart is mainly due to a rise in GST/VAT, however.
UK Inflation
UK did limited QE in 2009/10 and 2012.

To me, these graphs look ambiguous. If QE causes deflation, how?

There are a few answers floating around, with the most often cited one being this (and it’s slippery):

“Quantitative Easing increases the total amount of money in circulation. That money has to belong to someone. It has to be in someone’s wallet or in some bank’s vault or somehow “held” by some person or institution. With the interest rate stuck at zero the only way that folks are going to agree to this  if the inflation rate goes down. That’s because high rates of inflation make people want to hold less money and more tangible assets. This is what economists call an equilibrium condition.”

– Forbes summarising Stephen Williamson

If the causation in this seems to run a bit backwards, that’s because the logic started off in mathematical identities about the economy, not in a verbal argument. (“the only way folks are going to agree to this” seems to be the verbal version of taking a variable from one equation and substituting it into another).

It depends on something called the “liquidity premium” which has to do with how much compensation people want to hold their assets in cash. To me, the causation runs the other way. You control your cash holdings, not the inflation rate. The idea agents can hold down the inflation rate just because they currently have a lot of cash seems silly.

But my belief in mathematical economic proofs is at the zero lower bound anyway, and you can’t argue too hard with the data (at least until you make a fail-safe counterfactual generator).  Some sensible people are giving this idea credence, others not.

The idea that QE causes deflation is controversial. But the idea that it does not do much to lift inflation is more widely accepted. And that makes some people angry, because QE is not exactly costless.

One side effect is lifting the amount of assets the US Fed holds. It doesn’t just give out the cash under QE. It swaps cash for assets. So now the Fed owns a lot of “mortgage backed securities” – the same things that sparked the GFC – and that has some people arguing its solvency is at risk.

Another side effect is exchange rates. US quantitative easing can shoulder the blame for the high Aussie dollar over the last few years. That killed a lot of Australian businesses.

The last side effect is a big rush on assets. All this loose money has pushed up asset price worldwide. The return on a 10-year Portuguese government bond has fallen to a comically low 3 per cent, from over 15 per cent. (Returns are the inverse of price).

Portuguese bonds


Australian house prices have seen inflation too, although not to the same extent. These trends have the Bank of International Settlements – the central banks’ central bank – in a flap:

“By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility.”

But the US QE program is finally coming to an end in October. The program which once added $85 billion a month in liquidity to the global economy is nearly at an end. It seems doubtful we will get a clear picture of what the effect was on inflation from this one program.

We may need many more iterations of financial crisis and government response to figure it out, and that may be just what we are going to get.

Could US college football be a precedent for the rise of the VFL?

As AFL comes to dominate the Australian sports landscape with its multi billion dollar TV deals, glorious stadiums, own media arm and huge paycheques for star players, a surprise competitor is rising.

Football without glitz or glamour (or tickets) is having a resurgence.

VFL and SANFL growing on Google trends
Interest in VFL and SANFL growing on Google trends
AFL ebbing on Google trends
Interest in AFL stagnant and even ebbing on Google trends

I am seeing a lot more mentions of semi-pro football on social media. People on Twitter are barracking for the Box Hill Hawks. People on Facebook are getting behind the Norwood Redlegs. And they are as enthused about the price of the beer as about the quality of the football. It’s a holistic assessment of the quality of the experience.

If you go to a game in one of these leagues, you might be able to walk there. And at quarter time, instead of being insulted by advertising, you can go onto the field and listen to the coach address the players.

Photo credit: Simon Arden
Half time entertainment, VFL style. Photo credit: Simon Arden

Interest in AFL seems to have waned a little. The AFL has seen average crowds fall back to the levels of 15 years ago.

afl attendance

Is the AFL experience good value? I paid $40 to see a finals football match last weekend and you can’t deny the view is good and the atmosphere is vibrant. But a pie and a drink will set you back a further $15. It’s not exactly cheap family entertainment any more.

Overall, AFL has been growing its audience through broadcast. But even it admitted falling viewership on the free-to-air stations in its 2013 annual report:

“Seven Network audiences were slightly down year-on-year (0.7 per cent), a smaller decline than the decline for Australian free-to-air television ratings generally, while viewership on subscription television increased by 6.3 per cent year on year. FOX Footy in 2013 remained the best performing channel on the Foxtel platform in five capital cities (Melbourne, Sydney, Brisbane, Adelaide and Perth)”

TV ratings for 2014 are not easy to analyse, but the first data point I compared did not look good. The 2008 2nd elimination final attracted 1.1 million viewers, (Sydney v North Melbourne) while the 2014 equivalent got 654,000 (Essendon vs North Melbourne).

As any music artist can tell you, having a product that is consumed via broadcast is no way to make money. And AFL tickets cost so much now that the game is a premium product. Is there space for a challenger? Could we end up like US football, with two popular leagues of different standards?

In the US, College Football is a $6 billion industry, barely smaller than the $9 billion NFL.

This Stephen Fry video gives a sense of its scale:

Despite its amateur status, US college football is highly commercialised. Ticket prices can actually be up to $200. But then again, NFL tickets can cost up to $300, so perhaps the comparison with the VFL, SANFL and WAFL is fair, just on a much smaller level.

In any market, there is always room for a competitor. This is especially the case when an incumbent has been making big bucks, licking the cream from its whiskers and looking self-satisfied.

The AFL is Apple, and the smaller leagues are China’s XiaoMi, offering a product that’s never going to satisfy the die-hards, but will tempt many on price. If you are thinking about taking a handful of primary-school-aged kids to the football for the experience of it all, there’s no doubt VFL offers a pretty compelling alternative.

The VFL (then the VFA) has offered competition to the top league before.

“In 1960, the VFA first allowed premiership matches to be played on Sundays. After years of losing ground to the VFL, the VFA’s launch of Sunday games was a turning point for the better, as it allowed matches to be played without competing the VFL for spectators. Within a few years, clubs found that Sunday matches were as much as three to four times more lucrative than Saturday games.” (Wikipedia)

The only hiccup in this whole competitive narrative is the fact that the AFL and VFL are actually associated. But the SANFL is independent, and so is the WAFL. And the VFL and AFL have only been associated since 2000, so the link is not necessarily written in blood.

Is Australia ready for two separate, popular Aussie Rules football competitions in each football-loving state? I suspect the answer will be yes, especially if the AFL doesn’t do more to cater to grass-roots spectators.