Practical analysis for investment professionals
19 April 2021

Myth-Busting: Money Printing Must Create Inflation


London ranks ninth on the UBS Global Real Estate Bubble index for residential properties. Like in many other countries, property prices in the United Kingdom reached an all-time high in 2020. A global pandemic with sudden mass unemployment should have forced UK citizens to sell their homes, but the furlough policies, stamp duty holidays, and record-low interest rates more than counterbalanced that.

A two-bedroom apartment with 1,000 square feet of living space in a posh neighborhood like Hampstead in North West London costs about £1.5 million. The rent is approximately £3,000 per month, which equates to a measly gross rental yield of 2.4%. After accounting for maintenance and taxes, it’s more like 1.7%. Many of the houses in that area are more than a century old and need lots of love.

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Although such a low yield may seem unattractive to buy-to-let owners, it was considerably worse throughout most of the last decade when the cost of financing was above the rental yield. Buyers were purely betting on price appreciation and willing to accept negative cash flow during their investment period.

Now, thanks to COVID-19 and the Bank of England (BOE), financing costs are less than the rental income, and the cash flow of property investors has turned positive. For those considering buying a property for their own use, paying interest and amortization is now often cheaper than renting. What an odd world.

But buying an apartment in neighborhoods like Hampstead tends to require at least 25% of equity as banks have become more conservative since the global financial crisis (GFC). If a potential buyer was successful enough to save about several hundred thousand pounds for a down payment, they’ll still need to eventually repay the £1.1-million loan. From a pre-tax perspective, this implies almost twice the amount of money that needs to be earned. 

Some potential buyers are actively betting on inflation to help reduce the debt load over time. The theory is that all the monetary and fiscal policies of the last decade will lead to higher inflation. Income and real asset valuations should increase along with inflation, but the loan amount stays the same and erodes in real terms. 

Is this the wishful thinking of property speculators or does the data support the theory?

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Central Bank Balance Sheet Expansion

Central banks are often credited with saving the world with their aggressive monetary stimulus during the GFC in 2008. But the crisis is more than a decade behind us and the same basic policies are still in place. Central bank balance sheets keep on expanding. In countries like Germany, this continuous money printing is viewed with pure horror given its association with the hyperinflation of the Weimar Republic in the 1920s.

With the COVID-19 crisis, the central banks have kicked their money printing into an even higher gear. The US Federal Reserve’s balance sheet has breached $7 trillion, which is comparable to the European Central Bank (ECB)’s €7 trillion. The central banks seem to have chained themselves to the public markets and feel forced to step in each time stocks drop meaningfully.

The unnatural consequences of this behavior are becoming more and more obvious. For example, the Bank of Japan (BOJ) owns more than 75% of the exchange-traded funds (ETFs) domiciled there. 

Central Bank Balance Sheet Expansion

Chart showing Central Bank Balance Sheet Expansion
Sources: FRED, Bank of England (BOE), FactorResearch

Money Supply

There are various metrics to measure the money supply. M1 represents all the physical money in circulation, both in cash and in checking accounts, and has been trending lower in the United States, Europe, United Kingdom, and Japan since the 1980s.

None of the monetary stimulus conducted since 2009 has influenced money circulation. That holds true even with broader money supply measures like M2 or M3 that include savings deposits and money market mutual funds.

In 2020, the US government issued COVID-19 stimulus checks which significantly affected M1 by vastly increasing the cash in circulation. The UK and EU governments responded differently and did not issue direct cash payments to their citizens, so M1 in these countries remained the same.

Increase in M1 Money Supply

Chart showing Increase in M1 Money Supply
Sources: FRED, Bank of England (BOE), FactorResearch
The change represents 10-year rolling returns.

Central Bank Expansion, Money Supply, and Inflation in Japan

Japan offers compelling insights into the relationship between central bank balance sheets, money supply, and inflation. The Japanese government and central bank have been at the forefront of monetary policy experimentation since Japan’s economy tanked in the 1990s after epic bubbles in stocks and real estate.

Today, Japan’s economy is fighting demographic headwinds, but the goals of the government and central bank have remained the same: create moderate inflation and positive economic growth.

After calculating the 10-year rolling returns of the central bank balance sheet, M1 money supply, and inflation, we have three observations:

  1. The BOJ’s balance sheet has increased by multiples since 2008.
  2. The central bank’s activity had little impact on the money supply or inflation.
  3. Inflation and money supply were sometimes highly correlated, but not always.

Intuitively, inflation should follow the money supply. The more money that circulates in an economy, the more demand for products and services, which should lead to higher prices. However, the economy consists of many interrelated variables and linear models frequently fail to represent reality.

Central Bank Expansion, Money Supply, and Inflation: Japan

Chart showing Central Bank Expansion, Money Supply, and Inflation: Japan
Sources: FRED, FactorResearch.
Axes show 10-year rolling returns.

Central Bank Expansion, Money Supply, and Inflation in the United States

The same three economic variables in the United States, show the same increase in the central bank balance sheet as in other markets and only muted effects on money supply and inflation. Furthermore, inflation can occur without meaningful changes in the money supply, for example, during the oil crisis in the 1970s.

Some investors are betting on inflation to follow the spike in the money supply in 2020. While this is possible, the money supply has been increasing for more than a decade but inflation has fallen consistently over the same time period.

Central Bank Expansion, Money Supply, and Inflation: United States

Sources: FRED, FactorResearch.
Axes show 10-year rolling returns.

Central Bank Expansion, Money Supply, and Inflation in the United Kingdom

The BOE has time series that go back to way before the Middle Ages. It is an El Dorado for economists and financial data aficionados.

The UK data highlights a strong positive correlation between the BOE’s balance sheet, money supply, and inflation between 1947 and 1995. But thereafter, the relationships broke down. Money supply and inflation still moved in tandem, but the central bank activity seemed largely irrelevant.

We are not economists and do not know why these relationships changed. It could be due to the type of central bank activity. Maybe central bank activities used to be directly linked to the money supply while modern policies are more focused on influencing financial markets.

Central Bank Expansion, Money Supply, and Inflation: United Kingdom

Chart showing Central Bank Expansion, Money Supply, and Inflation: United Kingdom
Sources: Bank of England (BOE), FactorResearch
Axes show 10-year rolling returns.

Further Thoughts

Similar analysis on the eurozone reflects the same trend: Central bank money printing is largely irrelevant to money supply and inflation.

Given their typical mandate to create moderate inflation, the all-powerful central banks seem quite powerless. Or they are simply fighting forces they cannot overcome: namely, the negative demographics and negative productivity growth that contribute to low economic growth.

Should investors worry about the mass money printing by central banks? Certainly. It has distorted financial markets and inflated prices across asset classes. But perhaps this simply leads to lower future returns rather than higher inflation.

Still, if more direct fiscal or monetary stimulus is delivered on an ongoing basis, investors may have greater cause for concern. History shows that this is a recipe for disaster for renters and owners alike.

For more insights from Nicolas Rabener and the FactorResearch team, sign up for their email newsletter.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / M_D_A

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About the Author(s)
Nicolas Rabener

Nicolas Rabener is the managing director of Finominal, which provides quantitative solutions for factor investing. Previously he founded Jackdaw Capital, a quantitative investment manager focused on equity market neutral strategies. Previously, Rabener worked at GIC (Government of Singapore Investment Corporation) focused on real estate across asset classes. He started his career working for Citigroup in investment banking in London and New York. Rabener holds an MS in management from HHL Leipzig Graduate School of Management, is a CAIA charter holder, and enjoys endurance sports (100km Ultramarathon, Mont Blanc, Mount Kilimanjaro).

25 thoughts on “Myth-Busting: Money Printing Must Create Inflation”

  1. M. Teutsch says:

    “Should investors worry about the mass money printing by central banks? Certainly. It has distorted financial markets and inflated prices across asset classes. But perhaps this simply leads to lower future returns rather than higher inflation.”

    This seems self-contradictory. Why is asset inflation not a form of inflation? Or by “inflation” do you mean CPI? CPI is one basket of goods, not necessarily the basket that everyone cares about. Besides, if interests are close to zero and assets are inflating as a direct consequence, there is an obvious arbitrage opportunity. Isn’t that the point to focus on, rather than CPI?

    1. Greg Sommer says:

      Agree CPI is a bad measure of inflation. Hedonic adjustments skews CPI lower than the actual costs of the goods being measured. For example a Toyota Camry price hasn’t increased in 15yrs in CPI terms but has increased substantially in absolute price.

      Inflation is also very different for baby boomers who mainly own their homes & get a wealth tailwind from currency debasement vs millennials & younger who have to deal with housing prices up 2-3x in 10 yrs.

    2. Viral Desai says:

      This drama will continue as long as Emerging Markets ‘s Currencies remain weak. The end game is a stronger Emerging Currencies on a sustained basis. And for this to happen it may take 20 or more years. Depreciation of currency is also an inflation. Emerging markets are facing inflation hence Stocks Markets & Real Estate are not in bubble zone. This needs to reverse.

  2. Jon says:


  3. Kirk Cornwell says:

    Watch the “shortages” – of chips, lumber, sea containers, and other surprising holes in shelf space – and look for more as Modern Monetary Theory takes hold. The slowdown in the velocity of money doesn’t make it worth more. Being the best house on a bad block (of fiat money printers) will only save us temporarily.

  4. Paul OBrien says:

    Hi, Nicolas. I agree that this is an important topic for investors. But I have a big definitional quibble: Central bank bond purchases are NOT money printing.

    When central banks buy government bonds they are just performing an asset swap: trading typically zero yielding liquid bank reserves for (nearly) zero-yielding liquid Treasury debt. Consolidated public sector liabilities (Treasury plus central bank), or the yield/liquidity of private sector assets are little changed. Of course there are no inflation consequences.

    Real “money printing” would be just that: mailing everyone a brick of $100 bills. That would work. (And that is sort of what the US Treasury and Fed have done this year, which is why inflation has become an issue.)

    1. Carl says:

      But MMT is also, in a way, an asset swap: it’s money used to ‘spend’ now in exchange for a dollar that will be taxed later. It’s a slippery slope and ultra-low rates have allowed us to go so far.

      1. Paul OBrien says:

        That’s a fair point, Carl. But my understanding of MMT is that it does not require a larger deficit today to be offset by a larger present value of future government surpluses. It’s just a permanent increase in government debt that will never be repaid. Hence the inflation risk….

        1. Carl says:

          The ‘permanent’ increase in government debt concept reminds me of the ‘permanent’ high plateau that Mr. Irving Fisher described when certain animal spirits were alive. In the course of human events after, he developed the debt-deflation concept. The idea that credit can be ‘regulated’ (volume and where it goes) on a permanent basis does not consider that private market participants may not participate at a certain point.

  5. Rob says:

    Much of (~80%) of the increase in US M1 was due to reclassifying savings accounts as checking accounts throughout the COVID19 crisis to give citizens access to their cash, rather than simply printing money.

    1. Joe says:

      No it wasn’t close to 80%

  6. Ryan Ogmoan says:

    This has aged exceptionally well

  7. Dave says:

    Nice, Nicolas Rabener went full clown mode.

  8. Brendan says:

    Good call that the Fed’s printing wouldn’t lead to inflation lol

  9. Private guy says:

    Lol. This article has aged horribly. And will likely age even worse in coming years. There is no such thing as a free lunch. The bankers said inflation was transitory, that it is just base effects, that it’s the supply chain. That is all non sense. Inflation is by definition expansion of the money supply.

    1. Sayer of sayings says:

      checking back in, I was blown away with what they were saying like “do you not see that most goods increased by 20-40%?? then I realised how old the article is. Aged like milk

  10. Mark Anderson Rogers says:

    It’s May 2020 – how wrong you were…..
    And this is just the beginning!

  11. Garrett says:

    This is not looking like it’s holding true in the spring and summer of 2022.

  12. John says:

    It’s easy to make fun the article because there’s inflation now. However, it is also easy to read the article carefully to realize that Europe did not pump so much money in the economy as the U.S., yet, they have inflation. There’s been other periods where lots of “money printing” have not led to inflation, in different countries, and other periods where inflation has been caused by things unrelated to money printing.

    Current inflation, was mainly caused by supply chain problems, the war in Ukraine and corporate greed (profit margins have been at the highest in decades and many CFOs have recognized they have increased prices because they can get away with it).

    I wish there are some brilliant economists out there studying, with many years of data for many countries, the real effects of money supply on inflation. It’s time to stop blindly believing in Milton Friedman and find empirical evidence that backs him, refutes him or even gets to a middle point.

    Great article. Inflation is coming down, probably more because oil prices went down and supply chain problems are being solved than because of the Fed’s actions. In fact, there’s charts showing that the Fed panicked and started raising rates when inflation picked. Unfortunately, inflation might go up again because of Opec’s decision of cutting oil production and the stubborn war.

    1. John says:

      I mean “when inflation peaked”, not “picked”. My bad.

  13. Mark Koerner says:

    “Printing money” doth not cause inflation. Most money is virtual (checking accounts, etc.) so the amount of currency being printed and minted is a side-issue, really, and it has been for several hundred years. This may seem obvious to the writer, but as a retired high school teacher, I know that a lot of people take things in an over-literal way. Also: it does not “cost more to borrow money” when interest rates go up; the costs of borrowing (closing fees, etc.) remain about the same. It’s the paying it back that costs more.

  14. OC says:

    Go to the Mises Institute for sound economics, not this website and uninformed articles like this

  15. Yasar Ali says:

    I am an Economics Student and I believe that printing more money has its own Pros & Cons. In the Pros, we can say that it will improve the Growth of the Country, Stimulate Spending, Reduce Unemployment, and much more but the Cons are too many such as Increase Inflation, Decrease in the Value of Currency, Decrease of Confidence in the Currency & Goverment etc.

    BTW, Thank you for the indepth article. I am researching myself for an upcoming exam and found this resource very much useful.

  16. David says:

    Don’t forget though… that (fiat) money when borrowed actually got ‘printed’..

    To put it simply.. i want my 10 apples for the labour i put in not 8 apples 🤬

    The system is evil! Gold standard please i do consent to paying for proxy wars and not for our human advancement.

  17. Tom says:

    MMT is a virus and needs to be stamped out.

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