. . . I couldn’t resist. This is from Krugman’s March 1 post:
OK, I see that Scott Sumner has written an open letter to me. But I’m puzzled. He writes:
“I think you have acknowledged that there is some level of quantitative easing that would boost demand. If I am not mistaken you are concerned that if such a policy boosted inflation expectations sharply, the Fed would have to quickly sell off these assets, suffering massive capital losses.”
Um, you are mistaken. I’ve never said such a thing. Did you mean to address this letter to someone else?
And here is something from his blog 19 days later:
My back of the envelope calculation looks like this: if the Fed buys $1 trillion of 10-year bonds at 2.5%, and has to sell those bonds in an environment where the market demands a yield to maturity of more than 5%, it will take around a $200 billion loss.
I’m not complaining; I think quantitative easing (it’s really qualitative easing, but I give up on trying to fix the terminology) is the right way to go. But we should go into it with our eyes open.
Any Krugman defenders wish to comment?