Were Quantitative-Easing Alarmists "Knaves, Fools"? No, Says Cliff Asness.


City University of New York's Paul Krugman recently mocked folks who signed a 2010 letter warning about negative outcomes from the Federal Reserve's quantitative easing (QE). Specifically, the signatories had warned of rampant inflation, "currency debasement," massive distortion in financial markets, and continuing high levels of unemployment. The most-catastrophic versions of these things haven't happened and when asked by Bloomberg a couple of weeks ago to explain the failure of the predictions, many of the folks involved hemmed and hawed or simply said that they hadn't set a deadline for when QE would blow up the economy.

"Note the absence of a date," explained Niall Ferguson, one of the signers. "There is in fact still a risk of currency debasement and inflation." Others said that in fact everything they warned about was happening. Inflation isn't showing up in the official measure, they said; the stock market is bubbling; the economy is barely moving; and more. 

Krugman characterized the signers as the sort of "fools and knaves" who "argue in bad faith" and can't admit when they're wrong. He's got at least part of a point. Certainly, inflation hasn't spiked in the way that basic monetarist policy would have predicted.

But Krugman's cock-a-doodle-doing is similarly overplayed. As AQR Capital's Cliff Asness, who signed the letter, writes in an excellent piece at RealClearMarkets about the matter, QE has been revealed to be a dud in virtually just about every way possible—except for making the 1 percent even better off.

This is not the opening statement of a guy arguing in bad faith:

Those looking for a blanket admission of error will get part of what they want; a small part. Those hoping I hold the line denying any misstep will also be disappointed. I believe truth, as is often the case in similar situations, lies in the middle of these and I prefer truth, as I see it, to any reader walking away sated.

He stresses that in signing the letter, nobody made a prediction but called attention to a heightened risk. And when it comes to inflation, the idea of the Fed pumping huge amounts of money into the banking system via an unprecedented move clearly "represented at least a heightened risk" for inflation. "By writing the letter we clearly thought this risk was higher than others did, and wished to stress it, and it has not (as most commonly measured) as of now come to bear. Our, and my, (half) bad."

But if CPI inflation didn't come to pass, notes Asness, neither did much of anything else.

To the extent inflation worriers like us were wrong, so were those predicting great economic benefits. The Fed clearly wanted this money lent by banks and spent by companies on investment and by people on consumption. They didn't get that, and we didn't get the inflation we feared. This is not to say that low interest rates, real and nominal, and high prices for risky assets (and the supposed "wealth effect" that comes with them) were not Fed goals. They clearly were. But it seems these intermediate goals have not had their desired effect on the real economy.

The main reason that inflation hasn't spiked, Asness argues (and in this, he's in wide company) is because the Fed is paying banks "low but positive interest rates" on reserves, thus keeping the dough from circulating in the absence of strong demand. That means the Fed's magic money is neither "creating inflation as we feared, or helping the economy as they [QE proponents] hoped."

Which isn't to say there isn't inflation going on.

You'd be hard pressed to find many economists or Wall Street professionals who don't see current extremely high asset prices, and low forward looking returns to investors, as at least a partial consequence of the cocktail of QE, loose monetary policy, and financial repression….

While not as dangerous so far as we thought, it appears QE was only mostly useless. To the extent even that is only mostly true, where effects did show up, it actually caused rather a lot of inflation, but inflation that went straight into the pockets of those who needed it least and whom [Krugman] wouldn't swerve his car to avoid. That is, it inflated financial assets, benefited the rich, and enhanced inequality.

Asness also notes that the Fed is only now stopping QE and we've still got a very loose monetary policy, so it's not yet clear how this whole grand experiment is going to play out.

It's possible that as the "real economy" picks up, the Fed will in fact be able to soak up all the money it's pumped into the system at exactly the right rate so that it doesn't cause any stalls or undue inflation (whatever that might be). Given the general failure of the last several years (decades? centuries?) of macroeconomic planning to fine-tune the economy, I'm skeptical. For those who need convincing of economists' ability to tinker with the economy like a Formula One car engine, I highly recommend Robert Samuelson's The Great Inflation and Its Aftermath, which catalogues the folly and hubris of a previous generation of ultra-hubristic folks who really do deserve to be considered fools and knaves.

Asness's whole piece is well worth reading. Check it out here.

NEXT: American Forces Found 5,000 Chemical Weapons In Iraq—Just Not the Ones the Bush Administration Claimed Were There

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  1. NYC Reasonoid Meet-Up!

    Important Update – New Date

    When: Wednesday, 10/22/14, 6:00PM
    Where: Rattle N Hum
    14 E 33rd St

  2. We have a long way to go to get to Zimbabwe, but let’s refrain from taking those early steps.

    1. We also have a long way to go to get to Japan or Europe, but let’s refrain from taking those early steps and insisting on too hard money combined with high spending.

      1. Japan and Europe are not where they are because their money is too hard.

        1. Or because their spending is too low.

    2. The US will never be Zimbabwe, probably not even Argentina.

      But there is another country that we might emulate in this example.


      The experience extremely high inflation in the late 70s – early 80s including 5 years of triple digit inflation – topping out around 500% in 1984.

      Didn’t lead to a zombie apocalypse or destroy their country.

      But it was very bad.

  3. Many of those fools and knaves post here and listen to that idiot Peter Schiff – the Glenn Beck of investment advisors.

    QE is confined to discrete accounts at the Fed and can be dissolved as easily as it was created. Meanwhile we have 54 consecutive months of private sector job creation – the objective of QE.

    1. Ooooh, new talking points.

      Did you even read the article? Do you have the ability to read?

      1. No he doesn’t. And the great Progressive Hope Obama Administration has turned out to be nothing but one giant rip off for the 1% at everyone else’ expense. Government workers and the super rich are the only ones who have prospered under Obama. Everyone else is significantly worse of by any objective measure.

        I guess Goldman Sachs got their money’s worth.

        1. I agree with that, and yet without QE everyone else would be even more significantly worse off.

          The Fed controls the money supply. It can neutralize or substitute for any fiscal stimulus, making fiscal stimulus worse than useless, indeed just a rip off benefiting the connected at the expense of everyone else. But that’s because QE works.

          QE working is the reason that we know that fiscal stimulus like Obama favors is pointless and indeed worse than pointless. He doesn’t believe in QE.

          1. The entire theoretical basis for fiscal stimulus benefiting the broader economy instead of just those benefited by the immediate project (including the contractors, and so on) is that it affects the money supply in a way that the Fed can’t or won’t. That’s why Krugman et al. like to hammer hard at the idea that the Fed is powerless at the zero lower bound. If that’s wrong and QE works, then there is no case for fiscal stimulus.

            1. never was a stimulus. $2T in excess reserves never circulated, and banks are being paid to hold on to excess reserves. Let that money go, and watch inflation go nuts.

              1. Let that money go, and watch inflation go nuts.

                Oh well, the CPI needed to be re-defined again anyway. Isn’t the rate of inflation, using the old CPI calculation, something in the neighborhood of 5% (1990 calc) and 8-9% (1980 calc)?

          2. and yet without QE everyone else would be even more significantly worse off. [CITATION NEEDED]

      2. Not being sentient, shriek doesn’t read as you or I do. It parses pages and based on the words it sees its neural net spits out sequences of words that it calculates based on past experiences will spit out a response.

        It’s like an ant feeding an aphid in that respect. It really doesn’t comprehend what it is doing.

    2. QE … can be dissolved as easily as it was created.

      Gee, *that’s* reassuring.

    3. Meanwhile we have 54 consecutive months of private sector job creation – the objective of QE.

      So I guess Labor Force Participation Rate just isn’t a thing anymore?

      Better go revise your talking points.

      1. Oh, goddammit.

        1. The optics of that curve are not as friendly as the U-6 optics…and so is ignored.

      2. LFP is higher now than the booming 60s. Early retirees account for that small change.

        1. If by “early retirees” you mean “everybody who lost a job and got on disability 15 years before they could collect social security”, uh, sure!

    4. Fed-owned assets as a percentage of GDP were around 7% in 2007, they’re now around 26%. From what, $500bb to $4.5 trillion? And interest rates have been at practically 0% for the longest time in history. If and when QE

      1. … qe ends, what will the fed do to stimulate the economy, which it has never been NOT doing since 2007?

    5. And Peter Schiff, while using alarmist language was essentially right about the fed continuing QE. Everyone said that that fed was going to stop QE twice before, Schiff said they wouldn’t because they were backed into a corner, and all the CNBC talking heads declared “in a surprise move!!!” that the FED has continued QE.

      1. Schiff has my respect for wading into the OWS crowd with his “I am the 1%, Let’s Talk” sign, and trying to engage them in meaningful debate.

        1. What’s interesting about Schiff is that he has more in common with *some* of the OWS crowd than not.

          Schiff believes that the current economic policies are hurting the 99% by making college more expensive, forcing the labor participation rate down, keeping the economy anemic and debasing the currency.

          Unfortunately, the OWS crowd is too confused about its own arguments.

          Russel Brand was gladhanding on Wall Street yesterday whining that Capitalism doesn’t work. The problem is Capitalism is working fine, it’s Keynesianism that’s failing, and Capitalism keeps smacking it in the forehead with a 2×4.

          That WHAT the market collapse of 2007 was, it was Capitalism correcting for bad economic policy.

    6. QE is confined to discrete accounts at the Fed and can be dissolved as easily as it was created.

      No it can’t because doing so would fuck the equity markets and the federal budget.

      We’re in for the long haul at this point.

    7. Canada: no QE and superior job growth.

  4. Pretty much the entire developed world from Europe to the US to Japan currently has a stagnant or worse economy with enormous long term unemployment and horrible labor participation rates and terrible prospects for the young. QE was sold as a way to make economies healthy and to get them to recover for various credit shocks and recessions. It has by any objective measure utterly failed at doing that.

    All QE’s defenders have is the unfalsifiable counter factual of “it could have been worse” and the burning straw man of “it hasn’t (yet) caused German style hyper inflation”. We will never know if it would have been worse but considering how things are it is doubtful it could have been. And if the best thing you can say for your policy is “we didn’t produce hyper inflation”, you have lost the debate.

    1. No, by any objective measure it has succeeded. The US is doing better than Europe, despite doing more fiscal austerity than Europe. Why? Because the ECB keeps insisting on raising rates while the Fed has done QE.

      We *do* know it would have been worse; it would have been Europe. Being “better than the ECB” is a low bar, but we’ve cleared it.

      1. So by an objective measure boils to down to we are doing better than Europe? That’s one measure it’s hardly objective and again so what?

        1. The objective measure is the measure of the circulation of the money supply, M * V, which can be measured by, among other things, nominal GDP.

          1. These measures may be objective. But they are also meaningless.

        2. Saying we are doing better than Europe is like being in an Ebola ward but you’re lucky enough to have pancreatic cancer instead.

          1. Precisely – as I noted last week at the news that a hospital was relieved that a patient didn’t have ebola, but malarie:

            “You know it’s bad when you’re saying, ‘thank God, it’s only malaria!'”

            Yeah – “we’re better than Europe!”


          2. Japan engaged in the most aggressive version of QE. How’s that working out? Never mind.

            1. Hey, we’re doing better than Japan too!

            2. the most aggressive version of QE

              It’s called “bukkake“.

            3. Let’s enjoy the tremendous irony of the markets (DOW, S&P, NDK, Russell and all EU indexes) experiencing what will probably be a 10% “correction” AND commodities are in free fall while global growth is slowing across the board at the precise moment the FED ends QE (this month).

              Asset price inflation. I hope you all enjoyed it while it lasted.

              1. Don’t worry, it’ll be back as the FED responds to the new emergency with more asset purchases.

      2. First, while important monetary policy is not the only thing that affects the economy. Europe, sans Germany, has a much bigger sovereign debt problem than the US does. Europe also has much worse regulation on business than the US. So the US gets a head start. Just because it isn’t doing as poorly as Europe doesn’t mean QE worked.

        Moreover, “doing better” according to whom? I bet the savers in Europe don’t think the US is doing better. The US has many of the same problems Europe has, just to a lesser degree, with the added bonus of fucking people who save.

        1. Nope, if the US didn’t do QE it would fuck savers over more. Savers depend on the real growth rate increasing. Everything else is noise.

          Less QE would mean even lower interest rates paid on investments, both nominal and real.

          1. What is your definition of real growth? How have savers not been fucked over hard for the last 8 years?

          2. That is rediculous Ken. Savers depend on interest rates. And interest rates are a product of the real price of money and the expected inflation rate. It is true that savers benefit from a growing economy because that raises the expected return on investment or the real price of money. That however doesn’t occur if the Fed is artificially holding interest rates to zero via QE. QE ensures that savers never benefit from a growing economy. This is why the 1% do so well. They are not savers but have the liquidity to invest rather than save.

            Further, you have bought into the insane idea that it is somehow a good idea to try and stop the business cycle. You think QE succeeded because it kept the recession from being worse. Yes, it did keep the recession from being worse. But it did so at the price of the economy never adjusting to the recession and having a normal recovery.

            All QE did was delay the eventual reckoning that needs to occur. The results of QE are always the same; a slight softening of a recession at the price of prolonged stagnation.

            1. You think QE succeeded because it kept the recession from being worse.

              As I said in 2008, we NEEDED (and still need?) a good 2 year depression.

              Let it crash and burn and build back stronger than ever.

              1. Yep and instead we traded a multi decade lesser depression for a short sharp one.

                All to save the masters of the universe from the consequences of their actions.

              2. We saw in the 1990s in Japan what the results of QE are. And they are not good. There is something organic about an economy. No economy can forever grow because no economy exists in a vacuum. Outside circumstances change and economies have to be able to adjust and account for these chances. The way economies do that is through recessions. It sounds nice to say we should prevent or mitigated all recessions just like is sounds nice to say we should stop all hurricanes from hitting land if we somehow could. When you think about the long term and second order effects of those short term disasters, you realize preventing them might not be the best idea.

            2. Savers depend on interest rates.

              Remember the time when banks required savers?

              Now the banks just need the Fed. If they want to lend funds, the Fed lends them the funds at an unbelievably low rate. And if the loan goes bad, the Fed will buy it off them at a higher value than the loan is worth in the open market.

              But it’s all good because it gets counted in GDP.

      3. despite doing more fiscal austerity than Europe.

        [citation needed]

        This also ignores some of the structural and political differences between the United States and the EU. The currency union’s implications for any given fiscal and/or monetary policy in the EU changes the dynamics of the member states in different ways than monetary and fiscal policy in the US.

      4. How do you know it’s not the opposite, that the relative fiscal austerity has worked as best it could in spite of QE?

      5. “doing more fiscal austerity”

        error, does not compute. Knowledge on topic is in doubt.

        1. It’s not in doubt. He’s FOS.

      6. Lies. The ECB has printed tons and tons of money. Europe’s inferior performance has nothing to do with the ECB and everything to do with restrictive labor regulations and excessive welfarism.

    2. This is an important point. since when can a policy be defended solely by claiming the worst possible scenario of its detractors didn’t come true. Specific claims were made on behalf of QE and those claims have not been fulfilled at all.

      Imagine if Donald Rumsfeld wrote an article stating: Ron Paul’s claims about potential American casualties and civilian deaths were vastly over stated Mission Acconplished. Would that be compelling to anyone?

      1. QE has come much closer to fulfilling its specific claims than the specific claims made against it.

        We had tight money in 2008 during the recession, and we continue to have somewhat tight money. The growth in MV has been lower than the pre-2008 trend.

        It’s certainly true that proper QE would restore the trend line, and that hasn’t happened. But it’s certainly been better than doing nothing or even raising rates like the ECB.

        1. You dont think a cleansing depression would have been the best result?

          Fuck restoring the trend line, we needed a reboot.

        2. But it’s certainly been better than doing nothing or even raising rates like the ECB. [CITATION NEEDED]

        3. The growth in MV has been lower than the pre-2008 trend.

          That’s because you’re not counting the parts of the money supply that actually grew. M3 is not the only measure of “money”.

        4. But it’s certainly been better than doing nothing or even raising rates like the ECB.

          This pathetic fallacy has been repeated 9 million times in the last 6 years. And it’s never been true. It’s unfalsifiable, and you know it is, so you make no attempt to support it.

      2. So I suppose Krugman absolutely believes that Ehrlich, Michael Mann, etc are all Knaves and Fools, none of their worst case warnings have come to pass. Per Krugman, we should now be free to ignore all the ‘short-term doomsday’ climate scientists, right??

        1. “by 2005 the internet will prove to have as little effect on the economy as the fax machine” – P. Krugman.

    3. Here’s the thing you don’t get, John. There was no economy before the government became powerful enough to enact centrally planned solutions to recessions. This is because the economy can’t recover without help from the central planners. So after the very first economic downturn in human history, the economy never recovered. How could it without central planners?

      You didn’t build that!

      1. Here’s what you don’t get. I want to abolish the Fed as well. But you aren’t arguing for that, nor is Nick.

        You’re all arguing for one very precise kind of central planning versus another. Yours happens to be wrong IMO, but it’s absolutely no less of central planning.

        1. I didn’t make an argument, dumbass.

          1. Just idle speculation with no point to it? Seems like a waste of time.

            The Fed is central planning. But aside from abolishing the Fed, the article is still talking about still having central planning, just even worse central planning.

            If I don’t like the public schools and believe in vouchers, that doesn’t mean I don’t want the public schools that exist to teach evolution.

            1. Some say they want separation of church and state. I would like to see separation of economy and state. Beyond enforcing criminal law, property rights, contracts, and providing courts for settling disputes, I see no role for the government in the economy.

        2. You’re all arguing for one very precise kind of central planning versus another. Yours happens to be wrong IMO, but it’s absolutely no less of central planning.


  5. For you Dollar Doomers – crude oil is now $81. It peaked at $147 the year QE began.



    1. That doesn’t have much to do with Inflation either, nor does it necessarily mean good or bad.

      The real question is whether the decrease in price is a positive supply shock or a negative demand shock. The former is a wholly good thing; the latter is bad.

      1. The former is a wholly good thing

        Depends on WHY there is a positive supply shock. OPEC crumbling is a good thing in my mind, although I tend to doubt it will be replaced by a free market.

        Also, oil cannot be looked at in an energy vacuum. Nat Gas and Coal are in upward pricing trends.

        Right now the energy supply seems to be at the hands of foreign policy planners rather than central economic planners.

    2. And gold hasn’t dropped to $600 an ounce as predicted by the fiat fetishists!

      1. $700 gold is coming – as I predicted when gold was $1700. Just wait until the Fed funds rate is raised.

        1. And $100 bitcoins too!

        2. Just wait until the Fed funds rate is raised.

          I’d say you were delusional if I didn’t know you’re just stupid.

          The Fed can never raise rates.

          1. You don’t know what the Fed funds rate is then.

            1. Poor Shreek. Wants so desperately to be privy to secret information that no one else can understand, but can’t figure out how to change his own Depends.

        3. $700 gold is coming – as I predicted when gold was $1700. Just wait until the Fed funds rate is raised.

          Yes, and I can remember when gold was only $70. $700 gold is still ten times that. Why do you suppose that is?

        4. Sad4u: the price of gold is steadily increasing-even as the stock market thunders in.

    3. Or maybe the Saudis have decided to let prices fall for the short term, in order to make US/CAN oil exploration (shale,sands,Deep Gulf) more cost prohibitive?

      1. And to put the squeeze on ISIS and Russia.

        1. Yeppers, those too.

          1. I heard a BBC report that basically came right out and said just that (all three reasons).

            The GCC members of OPEC are acting more or less as one on this, over the objections of the non-GCC members of OPEC.

            1. Namely, Venezuela.

              1. Venezuela is BONED. If all those oil countries start trying to edge each other out, they are all BONED. It will be an interesting time.

  6. This article is as ridiculous as claiming that just because inflation has been high in the past, the Fed should never cut rates in a recession.

    The entire existence of the Fed is government planning of the banking system. You people aren’t arguing for any less central planning, you’re just arguing over the exact parameters and preferred central planning formulae.

    My first preference is free banking and abolishing the Fed, but my second preference is that the Fed act responsibly and keep the money supply growing at a stable rate rather than either letting it fall off a cliff as it was doing, or letting it expand so rapidly as it did in the 60s and 70s.

    I don’t see any reason to approve of your less accurate Five Year Plan.

    1. Nor do i see any reason to approve of yours. Merely declaring that your preferred course of action is ‘responsible’ is not the same thing as proving it.

      1. Man, I like your handle almost as well as my own. 🙂

    2. my second preference is that the Fed act responsibly and keep the money supply growing at a stable rate

      But the Fed hasn’t really achieved that goal, nor is that (directly, anyway) a part of its self-contradictory mandates of price stability and full employment.

    3. This article is as ridiculous as claiming that just because inflation has been high in the past, the Fed should never cut rates in a recession.

      Next time, try not reading your own BS into the article.

      QE failed, end of story.

  7. related:

    Are Paul Krugman and other progressives assuming the debt doesn’t matter ? and will never matter?

    I would guess that Krugman, and many others on the left, would like to increase spending on all kinds of things: infrastructure, expanded healthcare subsidies, and universal pre-k among other “clear and present dangers.” So that’s where they want the public’s focus to stay. And when the time comes to address the growing debt, grab a VAT off the shelf. Or maybe that day will never come. Left-liberal economist Brad DeLong has speculated on a scenario where rates stay low forever:

    ? we may well find ourselves in a situation in which the U.S; government can simply borrow and borrow and never have to pay it back because the economy grows faster than interest accrues. In which case the U.S. government looks much more like the Renaissance Medici Bank?an organization you are happy to pay to keep your money safe, rather than a debtor from whom you demand a healthy return. The treasury becomes a profit center for the government rather than a cost.

    I wonder how much the Medici Bank scenario is fueling the left’s blas? attitude about the debt.

    1. Tony doesn’t think that the debt will ever come due, so that might be a clue.

      1. It comes due – one generation at a time, each being enslaved to paying off the debt of a previous one which it had no say in creating. But the Tonys of the world don’t really have anything against slavery as long as they get to be the masters or as long as everyone is enslaved.

  8. Social conservatives like Thatcher and Reagan correctly observed that the permissive society was eroding values and virtues that made restrained government and stable economies possible to jeers of libertarians. We are now at the point were a lot of cosmotarians are quite apparenrly commited to denying economic recklessness lest the Republicans and SOCONS get into power and “take ar Merican freedums” from us. What inflation, Obamacare puft small potatoes? But we can’t let Huckabee win guys Elmer Gantry Pat Roberson um.. Jerry Falwell is dead but he’s still a threat too.

    1. Carter appointed Volcker tamed inflation – not Reagan.

      1. Proof that tarran is right!

    2. I can’t even parse what the point of this slobbering diatribe is supposed to be. Thatcher and Reagan…SoCons…Obamacare…therefore vote for Huckabee?

  9. Krugman characterized the signers as the sort of “fools and knaves” who “argue in bad faith” and can’t admit when they’re wrong.

    Takes one to know one, I guess?

  10. The best measure of inflation is change in M2. Who the fuck thinks that isnt happening?

    1. threadwinner

  11. So we got, what 15 days for the fed to stop QE? Dow’s down again today (thus far). And that’s after all that ‘GOOD NEWS!!11!!’ that was release in the Fed meeting minutes.

  12. The overriding point here is that no one can say “the market shall collapse on such-and-such” a day because of Fed policy.

    The market is much like a living breathing thing and it can adjust and correct for problems, but at some point it can’t sustain itself if there are systemic problems and it will eventually let the air out.

    The FED has been dumping cheap money into the market, and I believe that what anemic recovery we’ve had has been utterly fake, or better stated, largely propped up by QE infinity. Coupled with the fact that Interest rates–the Feds major market-cooling/market-heating tool– have been at effectively 0% for the longest time in American history, the economy is essentially backed into a corner.

    The good news of course is that crude is down as well which, helps the economy. Unfortunately, the FED has taken on entirely inconsistent positions and keeps trying to insist that prices dropping is a BAD thing… oh, except for crude!!!

    I can’t WAIT to see what happens when the fed stops QE in the next… 15 days.

    1. I can’t WAIT to see what happens when the fed stops QE in the next… 15 days.

      Prediction: Sometime between now and the election, the Fed will announce another round of QE – to calm recent market volatility. This will of course have nothing to do with the fact that an election is coming up.

      1. I don’t think it has much to do with the election. I think that they’ll realize at the 11th hour that they simply CAN’T stop QE.

        1. QE is ending. $85 billion/month down to $20 billion and zero by EOY.

          1. You sure you won’t be in for another surprise?

        2. When your using something to control peoples behavior you can’t stop and expect them to continue said behavior. This is somehow,a mystery to the FED.

    2. QE essentially enables malinvestment. According to John Thacker, there is no such thing as malinvestment because it counts in GDP.

  13. I know that picture is purposely used because it is unflattering to Krugman. But he really is a twitchy little oddball. Whenever I see him on a talk show, he reminds me of Nathan Thurm.

  14. Debt servicing alone is pushing a quarter Trillion a year, nearly half the defense budget. This is with extremely low rates that won’t last forever. That’s almost $18T in debt, or more than $153k per taxpayer.

    This should always be part of any discussion about the wonders of government debt-financed “stimulus”.

  15. What is the plan for reversing QE? They have two choices, after all:

    (1) Not reverse QE, but just leave that gargantuan expansion of the money supply in place. Its not causing price inflation because its not moving, but when it starts moving, massive price inflation is mathematically inevitable.

    (2) Reverse QE. The usual way to reduce the money supply is to jack interest rates. That will wreck bond portfolios, for sure, because math. It usually kills any growth as well, as it slows down lending. In this scenario, where the banks aren’t lending much anyway, hard to say.

    QE has had two components: (1) monetizing the federal debt, and (2) swapping toxic bank assets (mainly CMOs) for federal paper/cash. If they stop monetizing the debt, rates spike. When they stop swapping toxic assets (and eventually they will run out), not sure, although you have to wonder what all those toxic assets are doing on the Fed’s books.

    Either way, interest rate spikes and the destruction of bond portfolios are in our future. The impact on the economy and banks is hard for me to see, but I have hard time believing it will be good.

    1. Here are their idiotic arguments:

      1) QE does not cause inflation.
      2) Look at the booming stock market!
      3) Look at the booming housing recovery!

      These people want to pretend that rising asset prices do not count as price inflation.

    2. Its not causing price inflation because its not moving, but when it starts moving, massive price inflation is mathematically inevitable.

      This is what I was getting at upthread. QE hasn’t hit the official money supply yet. Letting it hit the official money supply or soaking it up both have potentially unpleasant consequences that can’t just be handwaved away.

    3. The trick is making sure the “bad stuff” happens when the other party is in power, so that they get blamed for it.

  16. For you Dollar Doomers – crude oil is now $81. It peaked at $147 the year QE began.

    I have no economics or finance background, so PB, I’m just asking: Are falling prices a good thing or a bad thing?

      1. Me?

        1. PB’s answer: Vote Obama!

        2. Are you a buyer? Or are you a seller?

  17. Relevant, from today’s Journal:

    For quantitative easing to work, it must boost the broader money supply. The Fed’s monetary base (currency in circulation and reserve balances) has grown 28.8% per year since QE started. If banks had multiplied this high-powered liquidity, the broader M2 measure of money (all deposits at banks, including money market accounts and cash) would have grown at the same rate. But M2, the measure Milton Friedman told us to watch, has grown just 6.7% per year. If banks had lent most of this new money, M2 and inflation would have accelerated sharply. But excess (unused) reserves are now at $2.7 trillion. This is why inflation has not accelerated.

    Keynesians call this a “liquidity trap”?a condition in which consumers will not spend and businesses will not invest. In reality it’s the “big government trap”?a condition where the government siphons off the benefits of private growth and investment before they reach the economy as a whole.

    The U.S. is growing faster than Europe not because of QE, but because, believe it or not, our government is relatively smaller. Federal, state and local expenditures in the U.S. were 36.5% of GDP in 2013. This is too high, but because it is less than Europe, the U.S. has a larger and more vibrant private sector.

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