Sunday, 23 June 2013

QE myths and the Expectations Fairy

There are perhaps more myths about QE than almost any other monetary policy instrument. Here are five of the most pernicious QE myths:

Myth 1: QE raises inflation. Despite the considerable evidence that it does nothing of the kind, people still persistently believe that it does - that "eventually" inflation will come. This is because of the widespread misrepresentation of QE as "printing money". Numerous people have painstakingly explained what QE is and how it works, but inflationistas aren't listening. To them, QE is printing money, and everyone knows that printing money causes inflation. (That isn't necessarily true either, but as I said, they aren't listening). An alternative view proposes that because QE props asset prices, eventually the increase in asset values would feed through into an increase in the money supply as asset holders take profits and spend the proceeds, increasing inflation. This is perhaps more reasonable, but again there is little evidence to support this.

Myth 2: QE stimulates the economy by forcing banks to lend. This is based on the idea that if you throw money at banks they will lend. But banks only lend if the risk versus return profile is in their favour. At the moment banks don't want to lend, because their balance sheets are a mess. QE increases reserves, but it does little to repair bank balance sheets. No amount of excess reserves will force damaged banks with weak balance sheets to lend.

Myth 3: QE stimulates the economy by persuading corporates to invest. This is similar to Myth 2. It is based on the idea that if you make borrowing ridiculously cheap for corporates (i.e. throw money at them) they will invest. But corporates only borrow to invest if the risk versus return profile is in their favour. At the moment they don't want to invest, because the economic outlook is very uncertain and profitable investment opportunities look few. They are very happy to borrow to refinance debt or to buy back equity - but that doesn't help employment or incomes. I should make it clear, too, that this only applies to larger corporates that have access to the capital markets. Small and medium-size businesses are much more dependent on bank lending, and they are living in a financial desert - see Myth 2.

Myth 4: QE encourages households to increase spending. This is by means of the "wealth effect", whereby people who have assets that are increasing in value feel wealthier so spend more. Why the esteemed economists in charge of central banks seem incapable of understanding that having illiquid assets (such as houses) that are increasing in value doesn't make people who are income-dependent spend more is beyond me. Furthermore, NO amount of propping up asset prices will compensate for downward pressure on wages due to poor economic performance, or for benefit cuts and tax rises from austere fiscal policy. Nor will it compensate for reduction in the real incomes of people living on income from savings - which is certainly an effect of low interest rates and possibly also of QE. When ordinary people find their incomes being squeezed they cut spending, even if their houses are increasing in value. When ordinary people find their savings for their old age being eroded by low interest rates they save more, not less. Why these esteemed economists, not to mention the politicians designing fiscal policy, don't understand this is a mystery. Maybe they are all so wealthy that income-dependence is a foreign concept to them.

Myth 5: QE debases the currency. Whether this is seen as a positive effect depends on your viewpoint: devaluing the currency is supposed to help exports, but hard-money enthusiasts are appalled at the very idea of debasing the currency - they regard it as theft (I saw an article recently that described QE as the modern equivalent of coin-clipping). Actually there is very little evidence that QE has significant effects on the value of the currency - indeed as it doesn't raise inflation it is highly unlikely that it debases the currency. Though as a recent article at VOX pointed out, when a large part of a country's GDP is made up of global industry, devaluing the currency has little effect on exports, because exports are dependent on imports. The idea that devaluing the currency always helps exports is another of those economic myths, it seems.

When the transmission mechanisms of bank lending and corporate investment are not working properly, QE does not reach the wider economy in any particularly helpful way, as I've explained elsewhere. But people - especially economists and politicians - believe that somehow it does, or it will, eventually. The Expectations Fairy will wave her magic wand and all these things will come to be.

When central banks do QE, inflation expectations rise: this is shown by higher bond yields at the start of QE programmes, usually coupled with a rise in the price of gold. As the programme continues and inflation fails to appear, expectations moderate, bond yields fall back and the price of gold collapses.  We have seen this effect most recently in Japan: high inflation expectations at the start of the Bank of Japan's current QE programme have now fallen back to where they were in early April, the currency has recovered its value and asset prices have fallen. Not one QE programme has ever generated significant inflation. Not one. In fact no central bank in history has ever succeeded in deliberately creating inflation. And yet every time there is QE, inflation expectations rise. It's magical thinking.

Those who believe that QE achieves its effects through raising inflation point to index-linked bond spreads (which are a measure of inflation EXPECTATIONS) as evidence that QE works. But expectations and reality are not the same thing. Just because markets EXPECT inflation doesn't mean it is going to happen. Frankly, since the reason markets expect inflation is based on a misunderstanding of QE and its effects, it would be amazing if expectations did turn into reality.

Inflation expectations from active QE are illogical enough. But now we are seeing even greater illogicality. The Fed starts to talk about tapering off QE. And immediately we get markets pricing in interest rate rises - which would normally be associated with rising inflation. So it seems that talking about NOT doing QE can also raise inflation expectations. There seems to be some kind of belief that when the Fed stops doing QE all the excess reserves will leak out into the economy and cause inflation. Why, for goodness' sake? The banks are in no better shape than they were before (and reserves aren't "lent out" anyway). Yes, there could be a huge credit bubble - but as we saw in the mid-2000s, that can happen just as easily when there aren't excess reserves. And as corporates are not much more positive than they were before, and household incomes are no higher than they were before, and unemployment is still uncomfortably high, where on earth is this credit bubble and inflation going to come from? It's more magical thinking.

There is zero chance of domestically-generated inflation while wages are falling, contractionary fiscal policy is depressing real incomes, banks are not lending and corporates are failing to invest. Externally-driven inflation is possible, and we are of course seeing inflation in asset prices as a consequence of QE. But the core trend is disinflation in developed countries - I hesitate to say "deflation", since inflation is still above zero, but core inflation is on a downwards trend in nearly all developed countries. Some people think that the UK is an exception, but I disagree with this: UK CPI is currently distorted by rises in student fees and by above-inflation price rises in privatised utilities that could and should have been prevented by government. Strip out those, and the UK's core inflation rate is heading for the floor like everyone else's.

Belief in inflation caused by QE is therefore irrational. So is belief in inflation caused by NOT doing QE. In fact belief in ANY of the myths I describe above is irrational. But markets are responding to central bank signalling on the basis of those myths. More importantly, governments are constructing fiscal policy on the basis of those myths. And this is poisonous.

When banks aren't lending and corporates aren't borrowing to invest, QE does not affect the wider economy in any very helpful way: its effects if anything are contractionary, because of the hit to aggregate demand for some groups caused by the depression of interest rates on savings. But politicians construct fiscal policy in the belief that it does. Therefore - in their view - fiscal policy can be directly contractionary, because it will be offset by expansionary monetary policy. The UK's Chancellor has pursued an austere fiscal programme for the last three years, cutting both out-of-work and in-work benefits, raising taxes and - most unhelpful of all - cutting capital investment to the bone. He has done so (and continues to do so, despite concerns expressed by a number of institutions including the IMF) in the expectation that the Bank of England's loose monetary policy, including its large QE programme and other initiatives such as extended-term repo and Funding for Lending, will protect the economy from the contractionary effects of fiscal austerity. The Expectations Fairy will wave her magic wand and Gideon will get the economic recovery he desires despite his considerable efforts to prevent it......

Sadly the reality is different. QE and its relatives do not protect the wider economy from the effects of fiscal austerity. There has been a considerable hit to aggregate demand in the UK, firstly due to recession (which as the Institute for Fiscal Studies (IFS) notes has caused significant falls in nominal wages), and secondly due to ill-considered fiscal policy. I have to ask whether, in the absence of supposedly supportive monetary policy, the Chancellor might have adopted a more relaxed approach to fiscal consolidation.

The political situation in the US is different: there, fiscal tightening has occurred more because of political gridlock than deliberate policy. But the effects are much the same. And it is a real pity. The US was doing well: it was the one country that appeared to be getting the balance of monetary and fiscal policy about right - helped by a disintermediated banking system, which improves monetary policy transmission - and it was starting to recover. But then the payroll tax cuts were allowed to expire...and now there is the sequester....It remains to be seen whether the US's nascent recovery will survive this idiocy. Given the downwards path of US inflation and its stubbornly high unemployment, I am not hopeful.

The most idiotic policies of all have to be in Europe. Though they aren't doing QE. They are relying on everyone else's QE to stimulate the Eurozone economy, while screwing down aggregate demand all over the place. I'm not about to advocate QE in the Eurozone - the banking system is severely damaged, so I strongly suspect it would be either ineffective or actually contractionary. But fiscal austerity is doing immense and possibly permanent damage to some Eurozone countries. A better way of revitalising the Eurozone periphery really has to be found.

And then there is Abenomics.....I don't pretend to understand Japan, but it seems to me that to have any chance of success, monetary and fiscal policy must complement each other. All monetary stimulus is likely to do in a moribund and savings-dominant economy is blow up asset bubbles, which then of course burst spectacularly..... Not that I am necessarily suggesting fiscal stimulus either. The Japanese problems run deeper. Structural fiscal and social reforms are needed - but whether there is the political will to make such changes remains to be seen.

Central bank heads around the world have expressed concern about over-reliance on monetary policy alone to fix economic ills. Mervyn King commented that "there's a limit to what monetary policy can hope to achieve", a view echoed by Shirakawa, the former head of the Bank of Japan, in a speech in 2012. Bernanke, in his testimony to Congress's Joint Economic Committee in October 2011, observed that "Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy." And the ECB's Draghi, in an interview with the Financial Times in December 2011, bluntly remarked that "Monetary policy cannot do everything".

But Shirakawa has already been replaced with Kuroda, who has embarked on a massive QE programme: the Bank of England's Mervyn King is about to be replaced by Mark Carney, who is known to favour forward guidance (which amounts to greater reliance on the Expectations Fairy): and Bernanke's term as Fed chief will be up soon, though his replacement has yet to be named. And meanwhile governments in the US, UK and Europe continue their catastrophic fiscal consolidations while praying every day to the Expectations Fairy, who seems to have replaced the Confidence Fairy as the principal policy goddess.

Paul Johnson, Director of the IFS, complained in a recent presentation that the problem with recovery from the 2008 recession is that, unlike the deep recessions of the 1930s and 1980s, there is no clear vision. I disagree with this: I think there is a vision, but it is based upon mistaken economic ideas and is therefore doomed to fail. The 1930s recovery was led by massive housebuilding programmes, and the 1980s recovery by radical supply-side reforms. In contrast, the main feature of the years since 2008, after a brief period of fiscal stimulus early on, is fiscal consolidation coupled with what the UK's Chancellor terms "monetary activism". The last five years have seen what the FT describes as the "largest economic experiment in history". And the results are stagnant economies, falling real incomes, increasing insecurity and uncertainty for the majority of people (especially the young), and a catastrophic drop in both private and public sector investment in many developed countries. The "vision" is an illusion. That is why there is no lasting recovery.

The Expectations Fairy is no more real than the Confidence Fairy, the Inflation Monster or the Bond Vigilantes. It is time for all of them to be consigned to the realm of mythology, and for monetary and fiscal policy to be grounded firmly in reality and redirected towards achieving the best quality of life for ordinary people.


Related links:

Inflation, deflation and QE - Coppola Comment
There's a problem with the transmission - Coppola Comment
Why do large movements in exchange rates have small effects on international prices? - Amiti, Itskhoki & Konings (Vox)
The inflation predictions weren't just wrong, many of them are hurting people - PragCap
Stock markets and money creation - Euronomist Blog
Unwinding Quantitative Easing - Grenville (Vox)
Is the developed world going down Japan's Long and Winding Road? - Shirakawa
Bernanke kills Fed credibility and the Confidence Fairy in one shot - Naked Capitalism
Slaying the inflation monster - Coppola Comment
What can wages and unemployment tell us about the UK's productivity puzzle? - IFS
Britain has never been through a recession like this before - Paul Johnson, IFS





40 comments:

  1. Agree with most of the above, great analysis. Thanks.

    Surely it must be possible to try different forms of QE rather than just bank reserves? Paul Krugman's :
    So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.

    I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead?

    http://www.nytimes.com/2013/06/14/opinion/krugman-sympathy-for-the-luddites.html?_r=1&

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    1. I actually suggested basic income in my post "The Changing Nature of Work" from August 2012:

      http://coppolacomment.blogspot.co.uk/2012/08/the-changing-nature-of-work.html

      But I'm planning to write a more detailed post on the case for basic income at Pieria in the next week.

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    2. Great, great - 'basic income' - basic income to survive then if and when people want they can have a go at advancement and make better products for us all and receive more money in return. It should work.

      We almost do that now eh? (or did until recently)

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    3. Steve Keen, Lord Adair Turner, PositiveMoney, Stephane Laborde, https://www.facebook.com/QuantitativeEasingForThePeople
      #basicincome is on the way

      Delete
    4. Very nice article and I am Obat Bius very happy to meet with your blog, the articles are very interesting, thank you for share very amazing article and I wait for the next quality articles

      Delete
  2. We are so screwed by this lot. Honestly you should see the letter I received back from Gareth Johnson MP for Dartford the other day. He said this about debt servicing "the amount is 49.5 billion pounds (37% of the deficit)" yes he seriously measured debt servicing against the deficit!

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  3. B.B.'s QE is about avoiding a collapse in a first place.

    The state does not give the money directly to the people. Afik the state does buy real estates, farmland, ... the expenditure is covered by assets whose prices increased until today. I think the U.S. maybe try to finance the increased expenditures via future gains from reselling. I have no data - I would try to do it this way.

    In practice the state buys things no one needs at the moment. I think the QE is driving the redistribution of wealth into the well known direction. From this perspective it's not helpful. It can be a threat to the economy ... U.S. economy is a threat to itself as long as we look at the U.S. only - I personally tend to include Asian countries.

    I'm convinced that the root cause is that we produce enough so that there is no shortage. This does mean that prices should drop. We have everything. We talk about equilibrium prices but the price is only important because people think in terms of money (product kept short).

    The price does communicate the demand and a certain portion represents the shortage.*) If the prices are raised a false demand for quantity is communicated and the non-profitable investment is the result. Misallocation.

    Friedman in the 60s said - It's not the best way, but the cheapest information about the demand for quantities that does come for free.

    *) The other way would be to try to estimate the quantities. The result is well known. Centrally planned economy which did not work well.

    Influence of equilibrium quantity is underestimated. Where should a shortage come from? I don't see a point where a natural inflation in prices could come from. It does fairly make sense to communicate an increase of quantity required if demand is satisfied.

    The wealth distribution processes still work according to a 50s or 60s philosophy. The whole area, social insurance, pension in Mid-Europe, ... Those processes are not adjusted to falling prices. That's the problem in Mid-Europe.

    In practice you can print whatever amount you like. One should not print money in the hands those who are not willing to spend. If the FED likes they can print money and buy real easte on other planets, very very long term perspective.

    Austrian entrepreneurs (from Austria) have their business. But from what they (middle class) does grow 'more' rich is dealing assets or speculation with 'finance' products. The illusion of the employees is a result from the gold standard. When you have a growing economy, growing quantities and a limited money base you can come to the conclusion that work creates money. For several reason politicians in Mid-Europe leave people in the dark. The world changed decades ago. It's the investment that allows to benefit from increased quantities supplied. Which is misinterpreted as wealth, imo. People are doing hard to move the mindset towards paying for non-materials. In software business people need to see a certain kind of package. It took years to make them accept a download only. A picture of box was used to build trust and the download would be the cheaper and quicker alternative access the product purchased.

    Most of the points you mentioned I agree on. Even not Peter Schiff:) is saying that Q.E. causes inflation in prices - that says something. He complains about the absence of prosperity.

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  4. It's worth noting that QE can potentially have a perverse wealth effect.

    Rising markets increase the value of pension fund assets. However, DB schemes value their obligations by reference to gilt yields, so their liabilities are likely to increase by even more. The same principle is likely to depress pension projections for holders of DC and private pensions. One shouldn't overstate the response to this, but it's hardly likely to make people feel more inclined to increase current spending wealthy and there is some anecdotal evidence of a small negative impact on corporate investment (http://www.bankofengland.co.uk/publications/Documents/agentssummary/agsum13jun.pdf).

    The likely fall in quoted annuity rates is related to the potential contractionary fiscal impact of QE due to the reduced flow of interest income from the public sector to the private sector, which ties in to the observations you make about savings income of households.

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  5. Coppola says:

    it seems that talking about NOT doing QE also raises inflation expectations.

    Wrong! Inflation expectations, as measured by the TIPS/Note spread have collapsed in the past month.

    The market was pricing in a 2.5% inflation rate - that has fallen to 2.02% as of this morning.

    The market is acting "rationally". It is saying, "If QE ends, future inflation will be lower.

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  6. Interesting. Your views sound very similar to Stephen Williamson's, specifically Myths 1 & 5. Do you read his blog at all? He's a huge QE skeptic.

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  7. How is QE not "printing money?" In the Bank of England (BoE) page, which you link to, states that "the Bank of England electronically creates new money." So, while BoE is not literally "printing money," it is creating money and expanding the money supply, which is, I assume, what people mean, figuratively-speaking, when they use the phrase.

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    1. It is not "printing money" in the sense of a helicopter drop. It creates new bank reserves (M0). Unless these are intermediated into credit money (M3) through new lending, there is no increase in money in circulation. If banks are not lending and corporates are not borrowing to invest, QE does not expand the money supply in any way that directly affects the real economy. It creates excess liquidity in the financial system, that is all.

      I have explained this ad nauseam in other posts, as have many other people.

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    2. This rather depends on the source of the gilts. If the gilts are held by banks, then this would be correct. Reserves would simply replace gilts on the banks' balance sheet and that would be the end of the matter.

      However, in general they're acquired (indirectly) from institutional investors. Such investors can't hold reserve balances. Instead they get higher bank deposits, and the increased deposits match the increased reserves in the banks' books. Assuming we're talking about UK resident investors, those extra deposits represent additional M4 money.

      This has nothing to do with the money multiplier - the change in reserves and change in broad money is one for one.

      I agree though that there is unlikely to be any real impact from this.

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    3. True, there is an increase in M4 when the BoE buys from institutional investors. I was not talking specifically about the UK, though, and the approach of other central banks has been different.

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    4. the way i try to explain this, in very simple terms, is that the expansion of M0 is necessary to counter the banking sector deleveraging, otherwise you would get a contraction in broad money (M2, M3, M4), that would threaten DEflation.

      Basically, inflation has already happened (when banks were lending like there was no risk and M3 was growing) now central banks are forced to substitute base money for credit, unless they want to endure a deflationary depression.

      It all goes back to the question of "what is money?"

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    5. Base money does not substitute directly for credit money in the wider economy. It has to be intermediated via new lending. When banks aren't lending and corporates/households are paying down debt, new credit money is not created in sufficient quantities to offset deleveraging. No amount of M0 creation in the form of bank reserves can compensate for that, because as I explained in the post, throwing money at banks doesn't make them lend.

      If M0 were created in the form of notes & coins and distributed directly to households and corporates, THAT might compensate for falling broad money - although if households & corporates preferred to save the money or use it to pay off debt, even that kind of helicopter drop might not work too well. But when transmission mechanisms are broken, increasing M0 in the form of bank reserves cannot possibly compensate for falling broad money. Deflation can happen even when the monetary base is reaching for the moon. This was shown by Friedman in his work with Anna Schwarz on the Great Depression.

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    6. one caveat: all this is true if the reason banks would not lend is solvency or profitability. But in my experience sometimes banks do not lend simply because of lack of liquidity or fear of future lack of liquidity. Which is why things like LTRO or OMT promise can help avoid a crunch.
      BTW much easier to discuss here than in 140 characters :)
      Goodnight
      Marco (a.k.a. Alex in the Markets)

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    7. It's certainly true that under exceptional circumstances funding can become extremely tight and banks stop lending. That was true in 2007-8.

      In 2011-12 the ECB was not acting as lender of last resort for Eurozone periphery banks, which was causing a liquidity freeze. The LTROs, followed by the OMT promise, broke that deadlock and convinced banks and markets that the ECB would act as lender of last resort. That sort of liquidity freeze should not happen in sovereign countries that have their own central banks - although the Northern Rock bank run was (arguably) caused by the inability of the Bank of England to provide emergency liquidity without HMT prior approval, a problem that has now been fixed by creation of a discount window facility.

      Generally, though, in the last five years banks have not been lending because their balance sheets are in extremely poor shape and they have been under regulatory and political pressure to deleverage and reduce balance sheet risk. While that remains the case, lending is likely to remain depressed.

      I agree this is a lot easier than Twitter!

      Delete
  8. Bunk. QE provided the liquidity for TBTF banks and their protege hedge funds to place large bets in commodities, thus raising food and energy prices well beyond the demand created by an anemic global economy. Unless one is an anorexic hitchhiker, this is what faces most of us.

    http://www.scribd.com/doc/36691558/Synthetic-Inflation

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    1. Bit unfortunate that your link doesn't include the relevant bit.

      How do you explain this? http://finviz.com/futures_charts.ashx

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    2. Solely looking at the present trend ignores the billions from commodities raked in over the past five years. Certainly there is a downward trend now that Bernanke is threatening QE liquidity, since QE was the fuel for the commodity fire. But there's little doubt that when comparing prices to stock-to-use ratios, there was no real shortages in most commodities from 2008 to 2012, and no real demand other than those from rampant speculation.

      This helped, in part, clean out what little money circulation remained in the middle to lower income levels, thus muting any rebound in substantive economic activity.

      I agree the paper needs an update to reflect current activity in light of a QE pull back, but this doesn't change the inflation realities that occurred over the past five years. And with a sliding-scale CPI, we have no good thermometer for inflation anyway.

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  9. "Inflation expectations from active QE are illogical enough. But now we are seeing even greater illogicality. The Fed starts to talk about tapering off QE. And TIPS yields rise - considerably. So it seems that talking about NOT doing QE also raises inflation expectations."
    Huh? Maybe you need to revise your understanding of TIPS?
    Inflation expectations have been going down not up...

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    1. See the chart that I linked to. You are saying that the St. Louis Fed is wrong?

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    2. http://research.stlouisfed.org/fred2/series/DFII10/
      This link?
      I am saying that you don't understand what you are talking about :)
      These is the yield of the TIPS...

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    3. Now you do know the difference between the yield of the TIPS and the implied inflation expectations, don't you ?

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    4. Apologies, wrong chart. And you are right - TIPS/TSY spread has indeed reduced. So inflation expectations are lower. I stand corrected.

      However, I still (anecdotally) hear people claiming that inflation will rise massively once the Fed stops QE.

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  10. So if QE doesnt do anything why do it? Or let me ask the inverse question. If QE does something what does it do and how does it work?

    Harry

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    1. QE props up asset prices. That is useful in a crisis - as indeed it was in 2009 when asset prices were in freefall due to systemic financial system meltdown. QE prevented catastrophic deleveraging and probably prevented a 1930s-style depression at that point. My argument is not that QE is useless, but that we are now expecting far more from it than it can realistically deliver.

      Delete
    2. According to this article Q.E. has been beneficial to the Japanese economy?

      "Myths about quantitative easing
      Some of the money for these government expenditures has come directly from "money printing" by the central bank, also known as "quantitative easing". For over a decade, the Bank of Japan has been engaged in this practice; yet the hyperinflation that deficit hawks said it would trigger has not occurred. To the contrary, as noted by Wolf Richter in a May 9, 2012 article:
      [T]he Japanese [are] in fact among the few people in the world enjoying actual price stability, with interchanging periods of minor inflation and minor deflation - as opposed to the 27% inflation per decade that the Fed has conjured up and continues to call, moronically, "price stability." [9]
      How is that possible? It all depends on where the money generated by quantitative easing ends up. In Japan, the money borrowed by the government has found its way back into the pockets of the Japanese people in the form of social security and interest on their savings. Money in consumer bank accounts stimulates demand, stimulating the production of goods and services, increasing supply; and when supply and demand rise together, prices remain stable."

      http://www.atimes.com/atimes/Japan/NI11Dh01.html

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  11. Above someone asked what the options are if QE does not actually create demand in the economy.
    And why do it.
    On the latter, remember, the Fed is the BANKER's bank. It acts to provide what 'liquidity' it can for that sector, and confidently awaits the 'trickle' down to the Restofus.

    As for the options, Turner's Overt Permanent Money Finance (OPMF) looks like the best solution to me. As Turner says, quoting Friedman, such puts the real money supply increases directly into the nation's income stream.
    Isn't that what's needed?

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  12. False equivalence alert.

    Expectations regarding inflation are something that can be (and are) managed by the Fed, because market participants are sifting every pronouncement for clues as to future policy. Expectations matter.

    "Confidence" (to invest) is unlikely to be generated by any politician or policy. There is no reputable study anywhere that shows a causative link between paying down government debt and measurable investment action brought on by "confidence".

    These things are just not the same. They may both be irrelevant (and fairies) but certainly not for the same reasons.

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    1. I have nowhere suggested that expectations and confidence fairies are equivalent, except in their irrelevance.

      The 5 myths demonstrate that inflation expectations and reality are a long way apart. And as far as the lives of ordinary people are concerned - which is the most important thing - reality matters far more.

      Delete
  13. " . . . and the 1980s recovery by radical supply-side reforms."

    Supply-side 'reforms' may have contributed, but?

    "In a retrospective debate on the merits of the 1981 Budget, published by the Institute of Economic Affairs as the report Were 364 Economists All Wrong? (2006), none of the contributors believes it was the Budget cuts themselves that produced recovery. Rather, it was the monetary loosening which accompanied them: interest rates were cut by 2 per cent and restrictions eased on banking lending. Tim Congdon, the most skilful defender of Howe's Budget strategy, argues: "The [presumably adverse] macroeconomic effects of the £4bn tax increase in the 1981 Budget were smothered by the much larger and more powerful effects of changes in monetary policy."
    http://www.newstatesman.com/economy/2010/10/government-spending-fiscal

    Or,

    "As Smallwood points out, the Treasury and Bank drew the wrong conclusion from the apparent success of the combination of fiscal contraction and monetary expansion in the 1980s and 1990s. "In both cases, the contractionary impact of tax rises and spending cuts was counterbalanced by substantial falls in interest rates, and of the sterling exchange rate at a time when our export markets were growing," he writes. Exports and investment took up the slack left by budgetary cuts.
    21 Feb 2013
    Special Report - How to restore grow...
    The policy consequences of revived Keynesianism The combination of fiscal contraction and expansionary monetary policy which worked so successfully in turning round the economy in the 1980s and 1990..."
    http://www.lombardstreetresearch.com/

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  14. whoever & whatever says , The Fate will decide everything.. Is anyone here to oppose this....

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  15. OK, what effect (if any) is QE having right now? Not a rhetorical question.

    And can anyone point me (a non-economist) to a helpful definition of inflation? I'm puzzled by an apparently inflationary environment (UK) in which wages aren't going up. I thought inflation was (at least in part) about t'workers demanding more money.

    Sorry to use your blog for my general education.

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  16. QE was originally sold as a mechanism to lower interest rates when monetary policy reached the lower bound.

    Since the Fed meeting last week, with talk of tapering and ending, rates have been rising rapidly, and significantly on a percentage basis over a short time period.

    I thought rates were low because we have a poor economy. Little has changed economically in the past week, and additionally, inflation is trending down in the US.

    Despite the many myths outlined above, can we state as fact: QE is an effective monetary tool to lower rates?

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  17. One of the problems at looking at CPI in the US is that it has continually been changed to push the CPI rate of change down. When I look at my family's purchasing power - it has been going down continuously - from food, health care, fuel, school tuition, clothing, restaurant food, laundry services, lawyers and accountants fees, etc prices have been going up. Only economists and government bureaucrats want me to believe that my actual experience is invalid as they publish these unbelievable CPI and PCE deflator data.

    I for one would relish some deflation where my money buys more goods and services. We have seen that for decades in the technology industry, yet they seem to thrive. I think deflation is just another item of fear mongering by the politicians and apparatchiks just like Saddam's mushroom clouds.

    QE and fiscal "stimulus" through deficit financing it should be obvious to the most casual observer just does not work for the purported objective. The Fed has tripled it's balance sheet, and the federal government has run up six trillion dollars in debt since 2008, yet we have the weakest post-war recovery with real median wages declining and the labor participation rate plummeting. This is all a perfect example of insanity! But the sophists continue to fill the airwaves with their snake oil quackery.

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  18. For the latest insights(?) from the Bank of England on QE, see:

    http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech671.pdf

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  19. It is such an important topic and ignored by so many, even professionals. I thank you to help making people more aware of possible issues.

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  20. OK, what effect (if any) is QE having right now? Not a rhetorical question.

    And can anyone point me (a non-economist) to a helpful definition of inflation? I'm puzzled by an apparently inflationary environment (UK) in which wages aren't going up. I thought inflation was (at least in part) about t'workers demanding more money.

    Sorry to use your blog for my general education.

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