Well, no it's not.
Posted on 10/15/2010 6:57:02 PM PDT by blam
Krugman: We Need Up To $10 Trillion In QE
by: Cullen Roche
October 15, 2010
Paul Krugman thinks we need more QE. Not just a little bit more. About 8-10X more than current projections! Richard Koo’s head must be spinning. No, no, we haven’t failed, it’s just that we haven’t tried hard enough! Krugman’s idea is the equivalent of a shopkeeper who thinks he can scream about the loads of new apples he is putting on the shelves while creating a stir in the marketplace that will ultimately result in higher sales. It won’t work in the long-run.
Of course, this is all very ironic given Mr. Krugman’s most recent commentary regarding Mr. Bernanke’s lecturing of Japanese officials:
“American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing.”
Mr. Krugman used to lecture the Japanese quite a bit. In a 1999 piece Mr. Krugman discussed the ways in which QE could help the Japanese economy. He wrote:
“Quantitative easing: There has been extensive discussion of “quantitative easing” , which usually means urging the central bank simply to impose high rates of increase in the monetary base. Some variants argue that the central bank should also set targets for broader aggregates such as M2. The Bank of Japan has repeatedly argued against such easing, arguing that it will be ineffective – that the excess liquidity will simply be held by banks or possibly individuals, with no effect on spending – and has often seemed to convey the impression that this is an argument against any kind of monetary solution.”
The Bank of Japan not only thought QE would be ineffective - they actually admitted as much (see here). Mr. Krugman goes on to argue that QE is essentially a non-event:
“It is, or should be, immediately obvious from our analysis that in a direct sense the BOJ argument is quite correct. No matter how much the monetary base increases, as long as expectations are not affected it will simply be a swap of one zero-interest asset for another, with no real effects. A side implication of this analysis (see Krugman 1998) is that the central bank may literally be unable to affect broader monetary aggregates: since the volume of credit is a real variable, and like everything else will be unaffected by a swap that does not change expectations, aggregates that consist mainly of inside money that is the counterpart of credit may be as immune to monetary expansion as everything else.”
There’s an obvious caveat thrown about in here – expectations. Mr. Krugman seems to believe that we can talk inflation into the economy:
“But this argument against the effectiveness of quantitative easing is simply irrelevant to arguments that focus on the expectational effects of monetary policy. And quantitative easing could play an important role in changing expectations; a central bank that tries to promise future inflation will be more credible if it puts its (freshly printed) money where its mouth is.”
The bigger problem here is not quantity, however. Mr. Krugman appears to believe that the apple (and no, this apple salesman is not selling iPads unfortunately) salesman can rush into the marketplace and scream and wave his hands regarding the new stock of apples he has that is 10X larger than his old stock. “Step right up ladies and gents! Fresh new apples right off the truck! We’ve got 10X more than we had yesterday!”. The problem with this thesis is that, while it might cause a stir in the marketplace (it might even cause a near-term boost in sales – or commodity and equity prices if you will), ultimately, sales will be determined by the willingness of the consumers to purchase. Therein lies the weakness in QE. Because it does not alter net financial assets in the private sector there is no reason to believe that it will alter the real economy in the long-term.
Talking a big game about future inflation expectations is great and all, but talk is cheap. Ultimately, we need real positive change in the real economy – more jobs, higher wages, higher net worth. QE doesn’t provide that. You can alter public perception briefly by screaming in the streets, but ultimately, without some real world impact people just begin to ignore you. And this might just be the greatest problem with QE. Not only will it do little to nothing to solve the economic malaise, but it threatens the credibility of the Federal Reserve who has now gone “all in” on a policy tool that I believe Mr. Bernanke himself does not even fully understand. If it doesn’t work the Fed will be viewed as the emperor with no clothes and that will be one more notch on devil’s tool of discouragement. And ultimately, that will have the exact OPPOSITE effect that Mr. Krugman and Mr. Bernanke are hoping for.
Well, no it's not.
I think he should go back to forecasting for extraterrestrial trade since his advice is out of this world
http://www.scribd.com/doc/39291424/Krugman-on-Interstellar-Trade
Now, that's a bit unfair. Even squirrels don't run out in front of a speeding vehicle every time.
I “need” a million, does it matter?
The release of the recent Fed notes indicates the Fed agrees with Krugman, QE2 is underway. We conservatives ought to consider the why of it. It is clear that our central bankers fear a disintegration, a deflationary spiral, which can lead to the unraveling of our political as well as our economic institutions. In fact, the Fed is explicitly adopted a policy to encourage inflation, so much do they fear deflation. Far-fetched? As we speak, people are rioting in the streets of Iceland because of the effects of deflation.
Brazil and Japan explicitly have expressed opposition to our beggar our currency policy and China and South Korea and others certainly will not passively tolerate such a policy from us. In any event, the Fed is accepting the inevitable debasement of our currency, with all of the hardships that will impose, as the lesser of two evils.
The greatest immediate threat to this house of cards is the foreclosure debacle. Not only are our banks on the receiving end of a tsunami of defaults, the entire legal system foreclosure has broken down, with the result that mortgagee's cannot prove who is the lien holder of record and, since these mortgages have been sliced and diced and parceled out to innumerable investors who in turn have leveraged them fantastically with derivatives, the implications for the entire financial system, here and abroad, are devastating. Meanwhile, it will not take a genius to figure that it is pointless for him to continue to pay a mortgage for his house which is underwater when his neighbor squats in his house without paying his mortgage. The system simply disintegrates.
It is important to understand that the rioting in Iceland (rioting in Iceland!) has been precipitated by an end to mortgage payment moratorium.
There are many conservative economists who believe that QE2 is the last chance, as forlorn hope as it is. If we do not default intentionally by inflation we will default haplessly by deflation. Some argue that it is swifter and cleaner and more honest to default now and others fear the social implications.
What we are really talking about is how to commit economic euthanasia.
Paul Krugman has become the class clown of economists.
I asked the squirrel eating seed on my deck this morning how much money we need and he said “Oh...we need up to 154 quinzillion billion in QE”. I trust him more than this fool, krugman.
I had a big crop of pecans last year but the squirrels are getting the few I’m having this year.
If ever there were an argument against QE, it is that this lunatic is for it. I wish he would recommend specific investments—we could make a lot of money shorting them.
The government getting out of the way of the American people would be so much cheaper and effective.
“In fact, the Fed is explicitly adopted a policy to encourage inflation, so much do they fear deflation. Far-fetched? As we speak, people are rioting in the streets of Iceland because of the effects of deflation. “
Thanks for the nice words - you should see the words that I get when I go after Republican governors (including my own) for selling off our highways. However, I do differ slightly on Iceland. I think Iceland’s problem is that their currency is worthless, since they cannot and don’t have a prayer of paying their national debt (even worse than us, as crazy as it sounds).
But their problem is different, in that even their mortgage loans are Euros, and with their currency diving, the cost of paying those loans goes through the roof - so the end of the 6-month break absolutely kills those people. Additionally, with a worthless currency, the cost of everything imported also goes through the roof - classic inflation - but coupled with a debt that they cannot print away - so they’re really hosed. In fact, if it wasn’t for IMF life support, they’d be starving by now (or dead of starvation). Their only currency now is barter, and they just don’t produce enough for that to be productive.
My understanding of deflation is that you get it after a lending bubble, when a society actually tries to pay back its debts, and thus stops buying goods (relatively speaking) - and that also protects their currency. Iceland’s debt (10 times GNP) cannot be repaid by its people, so they don’t even have that option.
At least that’s my take.
You need to do both. The problem is that the money supply is not sufficient (look at the velocity charts from the St. Louis Fed). If you cut taxes without increasing the supply you will increase demand and throw us further into deflation which will be far, far worse than inflation.
I’ll respectfully disagree. In the real world, supply follows demand. There may be a short period of time where supply falls short of satisfying demand and prices rise as a result. As those higher prices stimulate profit motive supply will rise to satisfy demand unless it has been artifically restricted (by government or unions). If you want to increase the velocity of money just cut taxes and regulation, sit back and watch. Works. Every. Time.
A viable alternative would be to allow energy companies to access the coal, oil and natural gas that we have without todays onerous restrictions. To slash wasteful government spending and to lower tax rates across the board, which will increase the income to the federal government exponentially.
It sounds like you are describing “conservative economists” that believe in Keynesian economics. They are as common as unicorns. Supply side economics is the only solution.
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