On quantitative easing and the EU bailout.

Quick Overview of Quantitative Easing (aka money printing)

The EU decides to engage in quantitative easing and the TSX rallies 255 points.  Are we out of the woods yet?  I have my doubts.  Like the Federal Reserve in 2008, the EU has commited to money printing to provide a backstop to the debt markets.  I'm not so worried about the inflation that many claim is going to be inevitable.  Inflation is not going to occur in an environment of falling money supply:

Stats are for the US but the statistics for the money supply in the EU is even lower.  For people that don't already know, the monetary base is not the same as money supply.  Although the monetary base has exploded,

the money supply is the actual amount to money circulating in the economy.  Just because the a Central Bank prints money doesn't mean that the money is actually making its way into the real economy.  And for that to happen, people actually have to go to the bank and borrow money, which is clearly not happening in the US, nor Canada:

Without getting too technical, the issue is that despite all the credit the Central Banks around the world is issuing, the money is not getting into the hands to the Average Joe.  I suspect that the reason is that the interest coverage on the existing debt prevents people from borrowing more.  The only way for consumer debt to increase again is for debt to be reduced.  In previous cycles, lowering interest rates would successfully kickstart the economy because lower rates would allow for increased debt servicing.  Now with interest rates at already at effectively zero, the potency of monetary stimulus has waned.  When you are maxed on you credit card and the rate you are paying is 3%, lowering it to 1% is going to have a negligible impact on spending.  As for the immediate impact of declining money supply in the real world, the result is less money circulating in the hands of people.

If Quantitative Easing won't cause inflation, why are prices increasing?

Some prices are increasing because although the freshly minted dollars are not making their way into the hands of people, they are definitely finding their way into commodity markets.  Oil has rebounded from the March lows of 2009 of about $30 to over $80.  This is despite the fact that currently, WTI oil storage is at a record high.  The end result is reflation of input costs for some producers without the benefit of pricing power.  In other words, some producers are unable to pass on higher input costs in their prices.  The suppliers that can increase their prices will find that increased prices will have a short horizon before they hit the wall of decreasing money supply and high unemployment.  Can you imagine what would happen to the economy with oil prices at $150?  Deflation is already occuring in staples such as food, Loblaw pricing power .  There is simply no way certain price levels can be supported without increased money in the hands of consumers.  Right now, there is a tug of war going on between the avalanche of liquidity Central Banks are providing and the inability of consumers to increase borrowing.  I believe that at some point, Central Banks will be impotent to stop the wave of deleveraging that must occur before the fiat system can reset.