Harvard economist Al Roth claims there’s natural human revulsion against all sorts of things. We all know about the sight of blood or sewerage sewage. But there’s also a revulsion against certain concepts, such as the sale of human body parts. I’d like to add unconventional monetary stimulus to that list.
Start with the fact that getting progressives interested in the notion has been like pulling teeth—even though it fits in well with their pro-stimulus agenda. But it’s even worse with conservatives. I used to read the newspapers from the 1930s, and I kept scratching my head over what I read. The conservative business press hated unconventional monetary stimulus, even more than they hated socialism. Indeed their hatred was so intense that at times it became absolutely irrational. This may sound preposterous, but you’ll have to take my word. They actually claimed two flaws in monetary stimulus; it wouldn’t work (the so-called pushing on a string argument) and it would lead to hyperinflation, such as what Germany had recently experienced. Yes, I know that both arguments can’t be true, but that didn’t stop them from making them.
At the time I assumed we were much superior. We had models like AD/AD AS/AD that clarified things; that eliminated this sort of sloppy thinking. But consider the following from Mikihiro Matsuoka at Deutsche Securities:
The Bank of Japan (BoJ) may conduct additional easing operations after the scheduled 27 October monetary policy meeting on the back of persistent JPY strength and uncertainty over the Euro sovereign crisis, according to an article in today’s Nikkei. The article suggested that easing options might include an expansion of the ongoing asset purchase program, with more emphasis on the purchase of long-dated government debt. In our view, it is certainly better to have something, rather than nothing. That said, if the BoJ response were to simply expand the asset purchase program, say by another JPY 5trn, we would be disappointed because it represents nothing more than their typical backward-looking, reactive response without any strategic commitment over the long-run.
The BoJ is highly unlikely to change its behavior as long as Mr Shirakawa, whose term end term ends on 8 April 2013, is in charge. He has continued to reinforce the Bank’s view that QE failed to stimulate the economy from 2001-06. But is this really true? This view does not explain why the Japanese economy enjoyed the longest economic expansion (2001-08), supported by stable and weak exchange rates, even as fiscal policy continued to tighten during those seven years. The BoJ has also made a habit of reiterating the warning that if the central bank embarks on unprecedented actions such as financing government debt, it would lead to accelerating inflation. Wait. How can this ‘ineffective’ monetary policy stimulate economic activity and lead to accelerating inflation? Obviously, these two arguments (ineffective QE and inflation fear) contradict. Until the BoJ recants their statement of ineffective QE, we cannot expect monetary policy to be used as an instrument to rescue for the Japanese economy.
OK, but we all know the Japanese have strange views of monetary policy (as Ben Bernanke informed us.) Thank God we don’t see that at the Fed. To be sure, there are some Fed officials who share the BOJ’s excessive fear of inflation:
Federal Reserve Bank of Dallas President Richard Fisher said the central bank faces a “significant” risk of providing record stimulus for too long and should weigh curtailing its $600 billion bond-purchase plan. . . .
“Continued accommodation presents significant risks,” Fisher said. “In my view, no amount of further accommodation by the Fed would be wise,” whether it is adding more purchases or “tapering” the plan to purchase Treasuries beyond June.
“Indeed, it may well be that we should consider curtailing what remains” of the bond-purchase program, he said. . . .
“We’re there” in terms of the need to end accommodation now, Fisher said, when asked whether he would prefer to wait until June. He added that inflation is “not out of hand yet.”
But at least Fisher’s not also claiming that monetary stimulus would be merely pushing on a string. Oh wait:
Until our fiscal authorities get their act together, further monetary accommodation — be it in the form of quantitative easing or performing ‘jujitsu’ on the yield curve through efforts such as Operation Twist — will represent nothing more than pushing on a string.
Oh dear, it seems to be spreading.
Seriously, here’s what I think is going on. If interest rates were 8% right now, TIPS spreads were 1.5%, unemployment was 9.1%, and this blog recommended cutting the fed funds target to 7.5%, then NO ONE WOULD OBJECT. Not Richard Fisher. Not Bob Murphy. Not Stephen Williamson. Not John Taylor. Not Allan Meltzer. Not Rick Perry. No one.
So why do people object to my proposal for monetary stimulus? Because it’s a proposal for unconventional monetary stimulus. For “printing money” at a time when most people (including most people who agree with me) think money is already incredibly easy. Rate cuts are acceptable, there’s no natural human revulsion against cutting rates from 8% to 7.5%.
Now it just so happens that right now money is tighter than when interest rates were 8% in the 1970s, but you me and about 23 other people are the only humans on the planet who realize that. Hence it seems like I’m proposing Zimbabwe, whereas I’m actually proposing a monetary policy far tighter than the one implemented by Paul Volcker. And that’s one of many reasons why we are where we are.
Still buried with work, but enough of a break where I’ll try to start on the comments.