The problem he refers to is a classic deflationary scenario. Everybody saves money (to pay off debts, or etc). Money becomes scarcer, since nobody can borrow it (banks are deleveraging as well), and people aren't spending it.
The classic solution is to expand the money supply to get things moving again, which is the point of QE, etc. Creating inflation lessens the value of debt in real terms, too.
The implication is that QE has not been sufficient, if we were in a deflationary scenario. But we do seem to have avoided deflation for the most part.
There is a lot more to the economy that is out of the control of monetary policy. Companies and large organizations (Apple is a prime offender, hoarding $70B+) are sitting on a lot of cash. They are unwilling to invest it, spend it, or even to return it as dividends. Instead, they buy large amounts of treasury bonds* (which has pushed yields on them to unheard of lows).
The obvious solution to that, then, would be to use fiscal policy - to spend the money that is being dumped on the treasury at rates well below inflation. The treasury is paying negative interest, in real terms (and for a very brief period, in nominal terms!). If private entities won't spend it, the government should - provided they can step back, and reduce the debt when things get going well again.
Strangely enough, more deficit spending might be the solution to a problem caused by too much deficit spending to begin with.
One other caveat; there can be still more causes to unemployment that are not monetary in nature. Labor markets are notoriously inflexible.
*: I don't mean to imply that Apple literally holds treasury bonds (though they might). Apple might have its money in a bank, and the bank might deposit the money at the fed, or buy treasuries itself, but the net effect is the same; the money sits somewhere, unused, where the government could use it. In fact one suggested solution was to stop paying interest on federal reserve deposits, or even charge a negative interest rate on deposits above a certain threshold.
"The implication is that QE has not been sufficient, if we were in a deflationary scenario."
What would it take to prove to you that QE was a straight-up bad idea? Because you can always say it wasn't "big enough", that's a null defense. Adopting that as your first and best defense is cognitively dangerous, and sets off alarm bells in my head.
The goal of monetary policy is to manage inflation. Therefore, if there was hyperinflation, that would be a clear sign it was failing. It's hard to pick an exact number - but certainly inflation over 10% annualized would be a sign that it was not going well.
The CPI is the benchmark of the effectiveness of QE. I prefer the one without energy and food ("core"), myself, because the question I am concerned with is "What effect is the size of the money supply having on prices?" (Instead of, "how scarce has oil become?")
Bear in mind that high(er) inflation with very low nominal interest rates means you can have a 0 or negative real interest rate - which rather handily destroys debt, and encourages banks, companies, etc, to make riskier investments (because the money pile they sit on is steadily losing value).
Is combined fiscal + monetary policy working well? Of course not; there's a large output gap. The economy is not in good shape. I'm arguing that fiscal, not monetary, policy is to blame, along with the reluctance of large entities to deploy their money.
Nope. Not Einstein. It comes from the early 80s. There are two sources: a tennis murder mystery and the Narcotics Anonymous handbook. As you can see, we've been through this before :)
There are heaps more things Einstein never said, as well as Gandhi, Picasso, Leonardo, and other big names. Basically, the more you look into it, the more you find that if you have a favorite catchy quote by someone famous, they probably didn't say it.
(That meme is funny but long past its shelf life, so I'm going to reply seriously.)
But the internet makes it trivial to check these things, where it was decidedly nontrivial before. And the phenomenon of catchy quotes "hopping" to famous names is ancient, and probably why the great figures of history all seem so witty and smart.
When I was in high school someone quoted Churchill to me as having said (hilariously, I thought, and still do): "The pleasures of fornication are overrated and those of defecation underrated." But the internet tells me that Churchill probably never said this, nor the classic "up with which I shall not put" either (http://public.wsu.edu/~brians/errors/churchill.html). Sad, but better to know.
Yes, and compare the Swedish solution: Let the banks go bankrupt, then QE. Iceland also did this recently.
It ripped the band-aid off quickly. More pain short term but their economies emerged quickly from the downturn. Too bad our gov't is so captured by the financial interests that such a solution is deemed unviable.
As for QE: Note there was a devaluation imposed by the exchange rate, and the peg evaporated. So you are correct that Riksbank did not print, but the QE was achieved by the currency markets.
Nope, NYT is wrong on that one. I suspect they are referring to the implosion of the real estate sector which brought down a number of companies, but none of them where banks.
QE is a word with a specific meaning, it's not just a synonym for "stimulus". It refers to the buying of financial assets by the central to increase their value, and/or to increase the money supply. Ending a currency peg has nothing to do with that.
Note that the bailout operations that did take place did so after the end of the peg.
> The problem he refers to is a classic deflationary scenario. Everybody saves money (to pay off debts, or etc). Money becomes scarcer, since nobody can borrow it (banks are deleveraging as well), and people aren't spending it.
This is the propaganda reasoning and you bought it hook line and sinker. If everyone is saving then the banks have plenty of money to lend! That's what people do with their money, they put it in banks. The reason many banks aren't lending is that they made many bad loans and don't want to admit that they can't pay the savers back and they are now afraid to make new ones. Still, there is plenty of money to borrow from other banks. The Fed is giving money away at amazingly low interest rates.
Who gets this $ that's being printed non stop? Banks - who in turn don't lend shit? Why not give tax incentives for hiring people or something and help out small businesses.
Comments
The problem he refers to is a classic deflationary scenario. Everybody saves money (to pay off debts, or etc). Money becomes scarcer, since nobody can borrow it (banks are deleveraging as well), and people aren't spending it.
The classic solution is to expand the money supply to get things moving again, which is the point of QE, etc. Creating inflation lessens the value of debt in real terms, too.
Not at all a new thought, in this situation or others. See wiki on debt deflation: http://en.wikipedia.org/wiki/Debt_deflation
> The classic solution is to expand the money supply to get things moving again, which is the point of QE, etc.
Let's see, we've been through 2 rounds of QE. Maybe number 3 will be the charm.
What was that saying about trying the same thing and expecting a different outcome?
The implication is that QE has not been sufficient, if we were in a deflationary scenario. But we do seem to have avoided deflation for the most part.
There is a lot more to the economy that is out of the control of monetary policy. Companies and large organizations (Apple is a prime offender, hoarding $70B+) are sitting on a lot of cash. They are unwilling to invest it, spend it, or even to return it as dividends. Instead, they buy large amounts of treasury bonds* (which has pushed yields on them to unheard of lows).
The obvious solution to that, then, would be to use fiscal policy - to spend the money that is being dumped on the treasury at rates well below inflation. The treasury is paying negative interest, in real terms (and for a very brief period, in nominal terms!). If private entities won't spend it, the government should - provided they can step back, and reduce the debt when things get going well again.
Strangely enough, more deficit spending might be the solution to a problem caused by too much deficit spending to begin with.
One other caveat; there can be still more causes to unemployment that are not monetary in nature. Labor markets are notoriously inflexible.
*: I don't mean to imply that Apple literally holds treasury bonds (though they might). Apple might have its money in a bank, and the bank might deposit the money at the fed, or buy treasuries itself, but the net effect is the same; the money sits somewhere, unused, where the government could use it. In fact one suggested solution was to stop paying interest on federal reserve deposits, or even charge a negative interest rate on deposits above a certain threshold.
"The implication is that QE has not been sufficient, if we were in a deflationary scenario."
What would it take to prove to you that QE was a straight-up bad idea? Because you can always say it wasn't "big enough", that's a null defense. Adopting that as your first and best defense is cognitively dangerous, and sets off alarm bells in my head.
The goal of monetary policy is to manage inflation. Therefore, if there was hyperinflation, that would be a clear sign it was failing. It's hard to pick an exact number - but certainly inflation over 10% annualized would be a sign that it was not going well.
The CPI is the benchmark of the effectiveness of QE. I prefer the one without energy and food ("core"), myself, because the question I am concerned with is "What effect is the size of the money supply having on prices?" (Instead of, "how scarce has oil become?")
Bear in mind that high(er) inflation with very low nominal interest rates means you can have a 0 or negative real interest rate - which rather handily destroys debt, and encourages banks, companies, etc, to make riskier investments (because the money pile they sit on is steadily losing value).
Is combined fiscal + monetary policy working well? Of course not; there's a large output gap. The economy is not in good shape. I'm arguing that fiscal, not monetary, policy is to blame, along with the reluctance of large entities to deploy their money.
Insanity: doing the same thing over and over again and expecting different results. -- Albert Einstein
Nope. Not Einstein. It comes from the early 80s. There are two sources: a tennis murder mystery and the Narcotics Anonymous handbook. As you can see, we've been through this before :)
There are heaps more things Einstein never said, as well as Gandhi, Picasso, Leonardo, and other big names. Basically, the more you look into it, the more you find that if you have a favorite catchy quote by someone famous, they probably didn't say it.
One can never trust the veracity of an attribution on the Internet. -- Abe Lincoln
(That meme is funny but long past its shelf life, so I'm going to reply seriously.)
But the internet makes it trivial to check these things, where it was decidedly nontrivial before. And the phenomenon of catchy quotes "hopping" to famous names is ancient, and probably why the great figures of history all seem so witty and smart.
When I was in high school someone quoted Churchill to me as having said (hilariously, I thought, and still do): "The pleasures of fornication are overrated and those of defecation underrated." But the internet tells me that Churchill probably never said this, nor the classic "up with which I shall not put" either (http://public.wsu.edu/~brians/errors/churchill.html). Sad, but better to know.
Problem is QE has gone to ensure banks don't go bankrupt but has not increased lending.
Yes, and compare the Swedish solution: Let the banks go bankrupt, then QE. Iceland also did this recently.
It ripped the band-aid off quickly. More pain short term but their economies emerged quickly from the downturn. Too bad our gov't is so captured by the financial interests that such a solution is deemed unviable.
Sweden only let one of its smaller banks go bankrupt, in the early 90s, and has never done any QE.
> Sweden only let one of its smaller banks go bankrupt
See, eg. http://www.nytimes.com/2008/09/23/business/worldbusiness/23k... , note the term "series of bank failures."
As for QE: Note there was a devaluation imposed by the exchange rate, and the peg evaporated. So you are correct that Riksbank did not print, but the QE was achieved by the currency markets.
Nope, NYT is wrong on that one. I suspect they are referring to the implosion of the real estate sector which brought down a number of companies, but none of them where banks.
QE is a word with a specific meaning, it's not just a synonym for "stimulus". It refers to the buying of financial assets by the central to increase their value, and/or to increase the money supply. Ending a currency peg has nothing to do with that.
Note that the bailout operations that did take place did so after the end of the peg.
> The problem he refers to is a classic deflationary scenario. Everybody saves money (to pay off debts, or etc). Money becomes scarcer, since nobody can borrow it (banks are deleveraging as well), and people aren't spending it.
This is the propaganda reasoning and you bought it hook line and sinker. If everyone is saving then the banks have plenty of money to lend! That's what people do with their money, they put it in banks. The reason many banks aren't lending is that they made many bad loans and don't want to admit that they can't pay the savers back and they are now afraid to make new ones. Still, there is plenty of money to borrow from other banks. The Fed is giving money away at amazingly low interest rates.
Who gets this $ that's being printed non stop? Banks - who in turn don't lend shit? Why not give tax incentives for hiring people or something and help out small businesses.