December 8, 2010


Do the QE opponents have ANY good arguments? (Scott Sumner, 12/06/10, The Money Illusion)

2. History shows that when central banks print lots of money, high inflation results.

Actually no. History shows that when central banks print lots of money at the zero rate bound, one generally doesn’t get much inflation. Japan has been printing lots of money for years, and has also run big budget deficits—thus they’ve been monetizing the debt. And their price level is lower than in 1994. {...]

4. The gold market shows that high inflation is just around the corner.

Actually no, for reasons discussed in this earlier post. Every direct indicator we have of inflation expectations shows very low inflation in the years ahead. CPI futures markets, 5-year TIPS spreads, the consensus economic forecast, they all point to low inflation.

5. OK, in the past printing money didn’t produce high inflation at the zero rate bound, and we don’t have high inflation now, and both forecasters and markets tell us not to expect high inflation in the future. But I just can’t believe we can print that much money without eventually suffering from high inflation. Monetarist theory tells us . . .

Monetarist theory has nothing to do with the current policy environment. Monetarist theory is all about the impact of printing non-interest bearing money–aka “high-powered money.” The reason it’s called high-powered is because it lacks interest, and thus is a sort of “hot potato,” an asset that everyone tries to get rid of, and the in process drives up prices. Milton Friedman and Karl Brunner would be rolling over in their graves if they knew people were claiming monetarist theory meant than the issuance of reserves paying interest at rates higher than earned on T-bills was some sort of “high-powered money.” [...]

So there you are. The conservatives do not have a single good argument against QE2. Every argument is based on bad logic, bad economics, a lack of understanding of history, or a lack of understanding of our political system. There must be some reason why the conservative establishment hardly raised a peep when the Fed would cut rates when inflation was running 3% or 4% when Reagan was president, or when Bush was president, and yet are now up in arms over monetary stimulus when we have 1% inflation and 17 million people out of work. There must be some reason. But for the life of me, I can’t figure out what it is.

Posted by Orrin Judd at December 8, 2010 2:11 PM
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