Liquidity trap? What Liquidity trap?

More evidence that the so-called liquidity trap is not a trap at all:

The yen hit a fresh 2-1/2 year low on Friday and was vulnerable to more losses on bets the Bank of Japan will ease monetary policy aggressively at a meeting early next week.

The dollar broke above reported options barriers at 90 yen to reach 90.21 yen on the EBS trading platform. It was last nearly flat at 89.81 yen.

The U.S. currency has gained around 14 percent against the yen since early November, but further gains were expected if Japan’s central bank takes measures beyond the market’s central expectations in an attempt to stave off deflation.

Sources familiar with the BOJ’s thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will consider making an open-ended commitment to buy assets until 2 percent inflation is in sight.

Yes, the BOJ may do less than expected (and I’m still skeptical):

Such an plan would exceed market expectations, which have centered on the BOJ setting a 2 percent inflation target at its two-day meeting that ends on Tuesday and possibly increasing its asset-buying program.

“A lot is priced in for next week’s BOJ meeting. If asset purchases by the BOJ were unlimited that could lead to significantly higher levels in dollar/yen and euro/yen levels,” said Peter Kinsella, currency strategist at Commerzbank. “Levels past 93 to 95 yen within the next two to three weeks is not unreasonable.”

But some analysts warned the BOJ could undershoot expectations and this could see the yen rebound.

But even the recent stock and forex market reactions to hints that the BOJ might move ahead are a pretty big problem for theories of monetary policy impotence at the zero bound.  (I’m looking at you MMTers, Wallace Neutrality fans, Krugman/Woodford expectations trappers, Cochrane FTPLers.)


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71 Responses to “Liquidity trap? What Liquidity trap?”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    18. January 2013 at 09:06

    “Theories of monetary policy impotence” relate to conventional open market operations. There’s nothing conventional about “an open-ended commitment to buy assets until 2 percent inflation is in sight.”

  2. Gravatar of Doug M Doug M
    18. January 2013 at 09:29

    The efforts of the Japanese to inflate, is reminding me of the episode in the 90s were the Japanese were intervening in the FOREX markets to keep the yen from weakening while the economy was more moribund then than it is today.

  3. Gravatar of Jack Cunningham Jack Cunningham
    18. January 2013 at 09:34

    I’m not really sure this is a problem for Krugman and Woodford. Krugman writes:

    Yet this need not mean that the central bank is without options. I think I was the first to make a point that Woodford and Gauti Eggertsson greatly expanded in 2003, namely, that the central bank can still gain traction if it can convince the public that it will pursue a more inflationary policy than previously expected after the economy recovers. As I wrote way back then, the central bank needs to credibly promise to be irresponsible.

    http://krugman.blogs.nytimes.com/2012/09/01/woodford-on-monetary-policy-sort-of-wonkish/

    The BOJ by pursuing policies which are ultimately inflationary and to commit itself to maintain a higher rate of inflation can boost the economy now. You may be confusing Krugman’s statements that in a liquidity trap there is very little that can be done by thinking that this amounts to almost nothing, which is not the case, monetary policy can still make a difference as Krugman writes in relation to the US ‘the Fed can still do some pretty exotic things.’

    You also have to bear in mind the Japanese prime minister has recently annouced a fiscal stimulus program and this may be influencing the stock market (I honestly don’t know).

  4. Gravatar of Saturos Saturos
    18. January 2013 at 09:58

    Scott, have you ever actively looked for more evidence in favor of liquidity traps? Just asking.

  5. Gravatar of Saturos Saturos
    18. January 2013 at 10:01

    Kevin, wasn’t it conventional wisdom pre-2008 that there were things central banks could do at the ZLB, “conventional” or not, to get the economy going again? All far less costly than fiscal stimulus? If you define “conventional policy” as lowering the FF rate, then ipso facto when that hits zero conventional monetary policy is impotent. But that doesn’t establish anything…

  6. Gravatar of Geoff Geoff
    18. January 2013 at 10:57

    “A lot is priced in for next week’s BOJ meeting.”

    This is an important point. Yes, “a lot” has been priced in, but of course not ALL has been priced in.

    If all were priced in, then actual BOJ inflation, once it occurs, would have zero effect, which would mean the BOJ doesn’t actually have to inflate in the future. Of course, that makes no sense, so the only way out of this is to realize that not all has been priced in now in the present, which means actual BOJ inflation will have its own price effects in the future, and that is the component of inflation – the ignorance aspect, the “imperfect” aspect – that is necessary for inflation to actually have any effect on the real economy.

  7. Gravatar of JVM JVM
    18. January 2013 at 10:59

    BTW Scott you should check out the correlation of AUD/JPY to the Nikkei, it is completely ridiculous:

    http://www.actionforex.com/analysis/daily-forex-technicals/the-correlations-corner:-audjpy-vs.-nikkei-225-20130116182023/

  8. Gravatar of johnleemk johnleemk
    18. January 2013 at 11:01

    Saturos:

    Took the words out of my mouth. Every reasonable notion of the ZLB assumes that conventional monetary policy is the only feasible, realistic option. The “we’ll buy more stuff until inflation hits 2%” option may be unconventional, but no ZLB believer I’ve ever seen would argue that it couldn’t be done easily — as Bernanke so recently proved.

  9. Gravatar of John Papola John Papola
    18. January 2013 at 11:19

    The Fed could do much less exotic things as well… like getting rid of their interest payments on reserves. Why is this still happening? One gets the impression that they LIKE being a central planner of credit allocation in the US. Hmmm… I wonder if there’s a theoretical framework for government agencies acting in their own power-hungry interests…

  10. Gravatar of TallDave TallDave
    18. January 2013 at 11:22

    Should be interesting to watch.

    I’ve also thought of a hook to help get the left behind MM. Sorry if this is overly obvious and/or has been covered before:

    Interest income is taxed, whether it is real or nominal. So if “inflation” is 5% and real return on a given bond is 3%, the government gets to tax all 8% of the yield.

    But now imagine “inflation” is more like -2%. Now you run into ZLB weirdness and the same bond might go for ~1% — and the government only gets to tax that nominal 1%.

    This also applies, of course, to companies sitting on huge piles of cash — those rich bastards are getting untaxed real interest income! Occupy the Fed!

    Sorry, got a little carried away at the end there.

  11. Gravatar of Geoff Geoff
    18. January 2013 at 11:26

    John Papola:

    “Why is this still happening?”

    Because they don’t want the banks to lend it out, they just want the banks to stay solvent.

  12. Gravatar of TallDave TallDave
    18. January 2013 at 11:37

    Kevin,

    “Theories of monetary policy impotence” relate to conventional open market operations.

    No they don’t. Krugman’s been talking about Fed asset purchases for quite a while. His mantra is that we need fiscal stimulus because monetary is ineffective, asset purchases or no.

    e.g.

    Now, back in late 2008, contemplating the situation we were in, those of us who saw it in terms of basic IS-LM macro made a twofold prediction: as long as the economy stayed depressed, interest rates and inflation would both stay subdued despite both large deficits and a huge expansion of the Fed’s balance sheet.

    Current monetary policy is indeed ineffective in a liquidity trap; but there is still scope for central bank action in the form of credible commitments to keep monetary policy easy in the future, when the economy is no longer at the zero lower bound.

  13. Gravatar of marcus nunes marcus nunes
    18. January 2013 at 12:31

    The 2007 FOMC transcripts are out. “Throwing the economy towards the ZLB in a prelude to the Great Recession”:
    http://thefaintofheart.wordpress.com/2013/01/18/the-2007-fomc-transcripts-are-out/

  14. Gravatar of StatsGuy StatsGuy
    18. January 2013 at 13:26

    Marcus beat me to the FOMC transcripts from 2007…

    Bloomberg:

    http://www.bloomberg.com/news/2013-01-18/most-fed-officials-saw-economy-weathering-subprime-crisis.html

    Yellen, apparently, got it – Bernanke really didn’t seem to.

    From Aug 10:

    “However, risks to inflation remain, including the possible reversal of
    transitory factors, tight labor markets, the high price of commodities, and higher unit labor costs
    resulting from lower productivity growth. In all, the risks to inflation remain to the upside.”

    In the Aug 10 meeting, there were 12 discreet mentions of oil. 145 mentions of inflation. 0 mentions of deflation. 0 mentions of disinflation.

    Even in December 2007, there were 17 mentions of oil, 136 of inflation, 1 of deflation, 1 of disinflation.

    So, I guess we know where their heads were at.

    But yes, as Marcus says, 2008 transcripts will be a riot.

  15. Gravatar of Geoff Geoff
    18. January 2013 at 14:00

    Velocity continues to fall in the US.

    M2

    and

    M1

  16. Gravatar of Geoff Geoff
    18. January 2013 at 14:01

    Sorry, bad first link. Here’s M2.

    M2

  17. Gravatar of ssumner ssumner
    18. January 2013 at 14:24

    Everyone, I wish all commenters would get together in one room. All those who sneer that QE has failed showing open market purchases don’t work at the zero bound. And all those who say of course QE works at the zero bound, no one ever suggested otherwise. I want all of you to go to one room and get your story straight. Then come back here.

    Kevin, OMOs are as conventional as one can get. And if you are right, then why do so many Keynesians keep insisting that we have to do fiscal stimulus because the Fed is out of ammo. Are they out of ammo, or not?

    Jack, You said;

    “I’m not really sure this is a problem for Krugman and Woodford.”

    I never said it was. I said it was a problem for their “expectations trap” theory. And it is. Krugman’s been on both sides of this issue 100 times–one can find a Krugman quotation to support any point of view. In fairness to Krugman, the expectations trap theory is highly dependent on the specific policy environment. It doesn’t make unambiguous predictions. But monetary policy impotence is one important implication of the theory. Of all the theories I mentioned, the expectations trap has the least reason to be rejected.

    Saturos, I look every day. I look for central banks trying to inflate—and failing. And I’m not seeing them.

    I am seeing the BOJ raise interest rates in 2000 and 2006. I am seeing Ben Bernanke saying 3% inflation would be a horrible idea. But I’m not seeing central banks shooting for 3% inflation and failing. Do you see any such cases?

    I will say that Japan is unlikely to get 2% inflation, which will make people believe in the liquidity trap even more than they do today.

    JMV, I’m not surprised.

    Statsguy, I agree with Yglesias–Fed policy in 2007 was fine. It’s 2008 that will be interesting.

  18. Gravatar of Doug M Doug M
    18. January 2013 at 14:33

    “I want all of you to go to one room and get your story straight.”

    This is Macroeconomics you are talking about! As you said earlier this week:

    “macro is the only area of econ with an almost total lack of consensus on key questions. The bad news is that for most people this means economists cannot agree on anything useful at all.”

    Heck, trying to find a single economist who doesn’t express contradictory points of view from one week to the next is hard enough to find. Or as Harry S. said — Give me a one armed economist.

  19. Gravatar of Geoff Geoff
    18. January 2013 at 14:44

    Dr. Sumner:

    “Saturos, I look every day. I look for central banks trying to inflate—and failing. And I’m not seeing them.”

    http://www.federalreserve.gov/releases/h6/Current/

    Scroll down to where it says:

    Percent change at seasonally adjusted annual rates M1 M2
    ————————————————————
    3 Months from Sep. 2012 TO Dec. 2012 11.2 9.6
    6 Months from June 2012 TO Dec. 2012 15.4 9.8
    12 Months from Dec. 2011 TO Dec. 2012 13.0 7.9

    Since the Fed controls M1, the annualized rates of 11.2%, 15.4%, and 13.0% are the rates at which the Fed itself is adding to the money supply.

    I don’t understand what you mean when you say you can’t find any central banks that are failing to inflate. The Fed is a central bank, and the Fed is inflating.

    Going by NGDP:

    http://research.stlouisfed.org/fredgraph.png?g=eG7

    The Fed’s inflation is generating a rate of aggregate annual spending growth of around 4 – 4.5%.

  20. Gravatar of Geoff Geoff
    18. January 2013 at 14:46

    Doug M:

    Yeah, that was a “heads I win, tails you lose” kind of a comment, wasn’t it?

    Dr. Sumner argues that macroeconomics has no consensus, which I think is right, and yet he wants us all to go into a room and agree on macro before talking to him.

    Maybe he has high hopes for us? Thanks Dr. Sumner! I hope we do you proud.

  21. Gravatar of Kevin Donoghue Kevin Donoghue
    18. January 2013 at 14:59

    Scott/Saturos,

    On getting the story straight, here’s Krugman, back in January 2009:

    “I keep seeing economics articles and blog posts that insist that we’re NOT in a liquidity trap (and, of
    course, that yours truly is all wrong) because the situation doesn’t meet the author’s definition of such
    a trap. E.g., the interest rates at which businesses can borrow aren’t zero; or there are still things the
    Fed could do, like buying long-term bonds or corporate debt, or something.

    “Well, my definition of a liquidity trap is, purely and simply, a situation in which conventional
    monetary policy — open-market purchases of short-term government debt — has lost effectiveness.
    Period. End of story.

    “Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana,
    instead. But changing the name does not change the essential fact — namely, conventional monetary
    policy has lost effectiveness.

    “Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re
    controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing
    among potentially risky investments. And there’s a much stronger case for fiscal policy than in normal
    times, because we don’t know how well these unconventional measures will work.”

    Isn’t that straight enough?

  22. Gravatar of Doug M Doug M
    18. January 2013 at 16:00

    Geoff,

    I read a whole lot of sarcasm in our dear professor’s comments.

    And of course it is troll protocol to make bold assertions as agreed fact. and rather that persuasive argument, just repeat your point again and say it louder.

    Which makes me note, I haven’t seen Major Freedom in a while, I hope he is okay.

  23. Gravatar of Bob Murphy Bob Murphy
    18. January 2013 at 17:27

    Scott, I don’t hope to convince you on this point, but for any innocent reader: I want to say for the record that Paul Krugman–my nemesis–has, since the late 1990s, consistently said that what Japan needs to do, to escape from the zero-bound liquidity trap, is to convince the public it will engage in future inflation.

    Thus, I find it weird that when Japanese policymakers appear to be implementing Krugman’s solution, and it seems to be working just as he predicted, that Scott Sumner thinks this somehow embarrasses the Keynesians.

  24. Gravatar of Max Max
    18. January 2013 at 17:46

    Will believers in the quantity theory of money explain why “massive” OMOs are needed to get a tiny reaction? Why doesn’t a doubling of money supply cause a doubling of prices?

    I think Scott would say something like, because people don’t expect the doubling to be permanent. But that’s not a very meaningful statement, because the monetary base is always entirely temporary. In other words, OMOs are fully reversible. Whether they actually will be reversed is determined by the central bank’s target.

    So, just as Krugman/Woodford/etc say, it’s all about the target. OMOs only matter to the extent that they paint the central bank into a corner – effectively force it to change its target.

  25. Gravatar of ssumner ssumner
    18. January 2013 at 18:23

    Doug, That was a joke. It gets frsutrating to get bombarded by people acting like I am some sort of freak for arguing that monetary stimulus can work at the zero bound, then when it does all the usual suspects disappear, or pretend they never made that argument. Again, if the BOJ policy is workable, there’s obviously no argument for fiscal stimulus in Japan. So why do so many economists favor fiscal stimulus?

    First they say you’re crazy. . .
    Then they say you’re wrong . . .
    Then they say they knew it all along.

    Kevin, You don’t seem to understand that the BOJ is going to be buying japanese government bonds paying near zero interest rates. That’s what monetary policy does. If Krugman doesn’t know that (and I presume he does) that’s his problem. In any case, your comment here has no bearing on this post. I did not criticize Krugman, I criticized the expectations trap model. That models says OMOs will not work because they’ll be perceived as being temporary, regardless of whether you buy short or long term bonds.

    I would add that it’s easy to find Krugman quotes to support any point of view, as he didn’t always qualify his remarks. He often said the Fed was out of ammo so fiscal stimulus was needed. And BTW, monetary stimulus is not risky. I think even he now recognizes that fact.

    Bob, It would be weird if I had done what you claim I had done. But I didn’t. I pointed out that the BOJ policy, and the market reaction, refutes the “expectations trap” model. If you don’t think it refutes that model, I’d be very interested in knowing why. The claim that Krugman recommended they promise to be irresponsible is true, but has absolutely no bearing on my post. I wasn’t discussing whether Krugman had good ideas for getting out of a liquidity trap. Indeed if his policy had worked, it would have refuted his expectations trap model, wouldn’t it?

    Max, It’s actually both. It’s mostly about the target, but it’s also about the OMOs. The key is doing them together.

    BTW, No serious believer in the QTM has ever believed that temporary currency injections will lead to proportionate price level increases.

  26. Gravatar of Doug M Doug M
    18. January 2013 at 18:37

    Max,

    “Will believers in the quantity theory of money explain why “massive” OMOs are needed to get a tiny reaction? Why doesn’t a doubling of money supply cause a doubling of prices?”

    I beleive that the correct measure of the money supply is M3 (which puts me at odds with the Fed. As I gather, our Professor doesn’t like any of the aggregates, and looks at raw currency)

    M3 growth is flat over the last 4 years. Mb is not turning into M3.

  27. Gravatar of Max Max
    18. January 2013 at 18:59

    “BTW, No serious believer in the QTM has ever believed that temporary currency injections will lead to proportionate price level increases.”

    Currency injections are always temporary in the sense of being reversible. They are never temporary in the sense of being expected to reverse regardless of the central bank’s target.

    If we used gold as money, then an increase in the quantity of money would be permanent. Once gold is dug up, it stays dug up. That is not the case with bank money (whether central bank money or commercial bank money). It doesn’t make much sense to talk about permanence in the context of bank money.

  28. Gravatar of Keshav Srinivasan Keshav Srinivasan
    18. January 2013 at 21:25

    Scott, I don’t think that Keynesians like Krugman believe that all monetary policy is powerless at the zero lower bound. Rather, I think the view *conventional* monetary policy, like open market operations involving short-term Treasury securities, as powerless. They often say monetary policy is powerless, but I think they’re just forgetting the proviso “conventional”.

    Now it is true that Keynesians are often skeptical of unconventional monetary policy, which is why they try pursuing fiscal policy, but they don’t view it as fundamentally useless.

  29. Gravatar of Bob Murphy Bob Murphy
    18. January 2013 at 21:27

    Scott,

    Uno momento, por favor. The following is the title of your blog post, and its first line:

    LIQUIDITY TRAP? WHAT LIQUIDITY TRAP?
    More evidence that the so-called liquidity trap is not a trap at all:

    And then, when I said this was an unfair criticism of Krugman’s views on the liquidity trap, you clarified:

    Bob, It would be weird if I had done what you claim I had done. But I didn’t. I pointed out that the BOJ policy, and the market reaction, refutes the “expectations trap” model. If you don’t think it refutes that model, I’d be very interested in knowing why. The claim that Krugman recommended they promise to be irresponsible is true, but has absolutely no bearing on my post. I wasn’t discussing whether Krugman had good ideas for getting out of a liquidity trap.

  30. Gravatar of Bob Murphy Bob Murphy
    18. January 2013 at 21:31

    Scott wrote:

    Indeed if his policy had worked, it would have refuted his expectations trap model, wouldn’t it?

    OK, I think I’m finally starting to understand why we keep having this disagreement.

    No, I don’t agree with the above. By “liquidity trap” Krugman means conventional monetary policy stops working; it’s pushing on a string, if you will. And the way you get out of it (barring fiscal stimulus) is unconventional monetary policy, which raises future inflation expectations.

    If you are conceding this framework–which I think you are–then I truly think it is very confusing for you to keep saying, “The Keynesians are wrong about the liquidity trap.” Krugman doesn’t mean “trap” as in “black hole.” I.e., he isn’t walking around saying, “There is nothing we can do to get out of this, so I’m going to make a bunch of recommendations that, if successful, would prove I am wrong.”

    That makes absolutely no sense, Scott. How can you say if Krugman’s recommendations worked, it would prove that the model he is using is wrong?

  31. Gravatar of Jack Cunningham Jack Cunningham
    19. January 2013 at 00:38

    Scott,
    Could you please give an outline of the “expectations trap” model, preferably with links to Woodford and Krugman, that shows what you have said about this model can be attributed to them

  32. Gravatar of Saturos Saturos
    19. January 2013 at 01:36

    Screw you wordpress. Another epic comment lost. I’m not typin’ that **** up again.

    Jack Cunningham, I think you want this: http://web.mit.edu/krugman/www/bpea_jp.pdf

  33. Gravatar of Kevin Donoghue Kevin Donoghue
    19. January 2013 at 02:31

    Scott, no need for me to reply. Bob Murphy said all that need be said.

  34. Gravatar of ssumner ssumner
    19. January 2013 at 07:18

    Max, The issue is not whether an increase is technically reversible, it’s whether it is expected to be reversed.

    Keshav, You said;

    “Scott, I don’t think that Keynesians like Krugman believe that all monetary policy is powerless at the zero lower bound.”

    I agree 100%.

    Bob, When I say “the Keynesians” I don’t mean Krugman, and least not on every single point. Most Keyneisan have never even heard of the expectations trap, and are far less sophisticated than Krugman and Woodford. Here’s Krugman from a recent post:

    “As far as I can tell, Posen is going with the notion that unconventional monetary policy, by working both on asset demand and on expectations, can do the job. Maybe, but most of us have taken the limited payoff to quantitative easing as a cautionary tale. There’s a lot to say for the notion of using temporary fiscal stimulus to push the output gap down, ideally even causing some economic overheating, to jump-start the transition to an inflationary regime.

    And beyond that, the credibility of a higher inflation target in the face of the deflationary bias of central bankers may well be best established by (a) reducing the central bank’s autonomy and (b) getting the central bank in the business of supporting — indeed, monetizing — government deficits, at least for a while.”

    So he’s still talking about expectations traps and he’s still applying expectation traps to Japan, contrary to what you and Kevin claim.

    I find your comment about the title of my post to be bizarre. The specific comment about the Krugman/Woodford expectations trap did not imply that there is no way out of a liquidity trap. Krugman thinks that some techniques might work. But he also thinks that those techniques might not work. The expectations trap model claims that those techniques might not work due to an expectations trap. I’m saying that’s wrong. So your comment is just nitpicking by bringing the title of the post into the discussion. It’s absurd to claim that every single comment in a long post must relate to the post title. Half of the titles of blog posts these days are jokes, for God sake.

    When I started blogging in early 2009 there were hardly any economists in the entire world calling for easier money and claiming it would be effective. And I’m constantly being told “we all knew that monetary stimulus was effective and needed all along.”

    Jack, Just Google “Krugman expectations trap.”

  35. Gravatar of Bob Murphy Bob Murphy
    19. January 2013 at 08:31

    Scott wrote:

    When I started blogging in early 2009 there were hardly any economists in the entire world calling for easier money and claiming it would be effective. And I’m constantly being told “we all knew that monetary stimulus was effective and needed all along.”

    Whoa hang on there, Scott. I have been your staunchest ally on *that* front, particularly vis-a-vis Brad “monetary policy has shot its bolt” DeLong.

    You’re also right that Krugman himself lately has been squeamish about embracing the current Japanese situation, so I understand why you think I’m being “bizarre” in saying it vindicates Krugman, when he himself doesn’t seem to think so.

    Probably the explanation to all of this, is that Krugman is (famously) all over the map in his views. I imagine if a Republican wins in 2016, and then scientists warn of an impending alien invasion, Krugman would criticize the massive military spending at the time, saying we need monetary policy not fiscal.

  36. Gravatar of Saturos Saturos
    19. January 2013 at 09:07

    Bob, I don’t think you were part of the select few who both wanted easier money and believed it would solve the problem.

    You’re probably right about Krugman though. Sometimes I wonder what would happen if the Republican party issued a joint proclamation that “Paul Krugman is the greatest economist of our time”. Do you think his head would explode on the spot?

  37. Gravatar of Bob Murphy Bob Murphy
    19. January 2013 at 09:35

    Saturos wrote:

    Bob, I don’t think you were part of the select few who both wanted easier money and believed it would solve the problem.

    Of course not! I’d sue you for defamation if you claimed otherwise. I am on record as saying Scott is insane. But, it annoys me that most other economists–who agreed with me that he was insane in late 2008–have now said he’s a genius, and don’t remember when we all agreed he was insane. Scott and I have been consistent throughout this crisis.

  38. Gravatar of dtoh dtoh
    19. January 2013 at 09:37

    Scott,

    It will be interesting to see what happens to Japanese inflation. I’m pretty sure the BOJ will set a higher inflation target today. (They’ll get neutered if the don’t.)

    However IMHO while inflation is correlated to the money supply, I think the mechanism is purely one of short term demand outstripping short term supply. There’s a lot of resistance now in Japan to higher prices and wages. Firms and individuals have gotten used to deflation.

    In order to actually get to 2%, Japan will need pretty high and RGDP growth and when this starts to happen, I’d guess we see the BOJ pull back pretty quickly on OMP/asset purchases.

    BTW – I would say that “a pretty big problem” for the monetary impotence theory is a gross understatement.

  39. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 09:55

    “Probably the explanation to all of this, is that Krugman is (famously) all over the map in his views. I imagine if a Republican wins in 2016, and then scientists warn of an impending alien invasion, Krugman would criticize the massive military spending at the time, saying we need monetary policy not fiscal.”

    Bob you do have an imagination. LOL. A Republican winning in 2016. Not at the rate they’re going at right now. Next they’ll be vowing to cancel Christmas if we don’t do the Ryan Medicare plan.

    While you never tire of the meme that Krugman is all over the map on everything, perhaps even worst than this is to simply be consistently wrong.

    Like Mitt Romney’s team honesty thinking they were going to win big on November 6. Or those who have been forecasting sky high interest rates for 4 years.

    Saturos why does Krugman knocking the Republicans bother an Aussie like you so much?

  40. Gravatar of Saturos Saturos
    19. January 2013 at 10:06

    Mike, because I know how smart the man is, and I know he’s better than that. It’s a blow to the spirit of rationality. Honestly any non-partisan who reads him can see that it’s a joke, read through the text and there’s really not even a pretense of being unbiased. Everything is the Republicans’ fault, it’s absolutely comical.

    More interesting is how the zany fanatical phase of Krugman’s career (unhired and unacknowledged chief economist of the Democratic party) seems to have coincided with his marriage to Robin Wells: http://www.newyorker.com/reporting/2010/03/01/100301fa_fact_macfarquhar?printable=true

  41. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:17

    Saturos, I just have a hard time seeing how criticizing the Republican party makes you irrational. I mean this is the party that still questions evolution in Congress. The party who threatens debt ceiling chicken to get what it wants-and failed to win through the democratic process.

    I kind of see the GOP as the spirit that keeps irrationality in the public discourse. So I don’t get it. Now “non-partisan” is a loaded term.

    Being non-partisan makes you neither right nor even informated, much less rational. Most people who do know what’s going on have a bias of some kind.

    I mean the joke of “undecideds” in the US is that they’re low information voters.

    But a lot of people around here say they want someone “non-biased” when they realy just mean someone who shares their-conservative- biases.

    Many people who started out “non-partisan” ennd up admtting that in the US political process its the GOP who is the cause of the dysfunctional gridlock mess it has become.

    I do now however hold out hope that things are turning around: the GOP has failed twice in its hostage taking.

    Look, if you criticize Krugman for economic issues that’s one thing. But criticizing him because he crtiticizes the GOP I just don’t get.

  42. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:23

    Again, how do you define unbiased? To critizie the REpublican and Democratic parties the exact same amount? What if it turns out that one party is the one that’s wrong most of the time. or the problem most of the time?

    Think of it this way. If there are two kids and one bullies the other mecilessly but their parents no matter what just insists that they both must stop the abusivness is that really fair, “unbiased” parenting?

    Of course not. In truth they are favoring the bullying kid by pretending that he’s no more guilty than his hapless brother.

    By this defintiion David Brooks is the most brilliant man in American-after all, he’s the most “un-biased.”

  43. Gravatar of Saturos Saturos
    19. January 2013 at 10:27

    Mike, are you deliberately misreading me? Of course there’s nothing wrong with criticizing the Republican party, even for different reasons to mine. What’s wrong is to scapegoat the Republican party for absolutely everything, going to absurd lengths to defend untenable attacks, making out that the Republicans are the root of all evil in the country, getting tied up in many documented knots and contradictions in doing so, and just generally letting politics go to one’s head and ruin one’s power of critical evaluation of beliefs (let alone efficient prioritization of which beliefs to concern oneself with.) There are plenty of sensible progressives (Thoma, Thaler and Sunstein come to mind) who will concede that Krugman’s regular ranting against the Republicans is not a little bit ridiculous. Indeed, I’m sure that even the New York Times board is aware of it, and they practically have an agenda to keep the Republicans out of office (which is fine by me, it’s a free country).

  44. Gravatar of Saturos Saturos
    19. January 2013 at 10:33

    Mike, even if the Republicans really were wrong 99% of the time, that wouldn’t justify the attitude and ranting he displays in his writing. But Krugman far from establishes that in his columns, and even most progressives don’t seriously think that’s true.

    But that’s not all. Krugman these days writes as though it were an established mathematical lemma that everyone on the right is stupid (including the likes of Tyler Cowen, whom he lumps in there). And looking for the derivation of this claim in past writing, you find that Krugman has essentially adopted a technique of asserting that anyone who seriously disagrees with him is stupid. Even the recent market monetarist developments, which he now endorses, he claims to have been a vindication of
    the views he held all along, even though you can easily read the letter to Krugman at the beginning of this blog’s history and see how much of a U-turn he’s done since then.

    He has neither the tone nor the attitued of someone who is concerned with the disinterested pursuit of the truth, whatever it may come out to be, is what I’m saying. But perhaps he would defend himself by saying that “it’s all a matter of what’s useful”, or something (no coincidence that Rorty was a political man…).
    Honestly – just pretend

  45. Gravatar of Becky Hargrove Becky Hargrove
    19. January 2013 at 10:37

    Mike you said “…how do you define unbiased? To criticize the Republican and Democratic parties the exact same amount?”

    This is really important: by recognizing the degree to which they both hijack the story (of our survival possibilities) for their own means and ends. One of the main reasons I was drawn to economic studies in the first place was the hope of potential solutions that went beyond ideology. Oh yes I have been disappointed plenty of times for economics also gets distorted by political parties. Still it is the best place to start and dig beyond the distractions, for the meat of what can be understood and even augmented if need be. Both parties have trashed human survival possibilties so bad that I still cannot enter into many arguments as they are presently presented, because I see potential solutions that have little if anything to do with the arguments put forth. So I am still learning….

  46. Gravatar of Saturos Saturos
    19. January 2013 at 10:38

    Note that the joke at the end of this video is made by a staunch Democrat. It’s funny because it’s true (watch the whole thing): http://www.youtube.com/watch?v=TypWtZYLCF8

  47. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:38

    I don’t know about the root of all evil in the coutry but in politics they are the main problem. Why is that so hard to fathom?

    When the GOP was the party that was most for progress and good things. The Dems-who had run things for 60 years-were on the “wrong side of history” and in supporting the South in the Civil War ended up in the wildernes for the next 72 years-1860-1932.

    So at this time the Dems weren’t necessarily the root of all evil in the world but they were in politics the party with most of the evil or wrong ideas-slavery and then segration-and rightly were only a minority party outside the South and certain urban immigration centers in the North.

    Then there was the Depression and while this view is probably disagrees with many who read Money Illusion, most Americans saw the GOP’s policies as being the cause of the Depression. So the Dems then were the dominant party again.

    So one party or another can be the one that’s mainly not so much “evil” which is a word I stay away from, but mostly wrong. I would argue that the GOP has mostly been wrong since the New Deal-to this day they’ve never made their peace with it.

    Now the tactics they’ve adopted in recent years have been so exterme that they are the main cause of the problems in terms of basic dysfunction.

    See this is where my problem is with the word “non-partisan.” It presumes that only if you’re non-partisan are you honest and rational and that then-of course-you will see both parties as roughly 50-50 right and wrong on anything. This is in fact not the case.

    I haven’t had a problem with Krugman’s position on the GOP as in my opinon they are the main problem in politics in recent years.

  48. Gravatar of Saturos Saturos
    19. January 2013 at 10:39

    Becky, you’re a pessimist for human survival into the far future? Which of the global catastrophic risks do you think is greatest?

  49. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:43

    Saturos how many conservative writers act like eveyrone on the Left is stupid? Read the WSJ editoral page any day of the week. Have you seen Fox? How about Rush Limbaugh? There are 100 on the Right like this to a Krugman on the Left

    You have to understand that I remember the time in the 90s were the only non-network media you could get was Right wing talk radio-with no “balance” on the other side.

  50. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:46

    Becky I understand the attraction of ecnomics as a refuge from political ideology. However, while I find econoimc analysis very interesting and fertile, just the same, much of it is undercut by ideology as well.

    Politics and economics both have their blind spots. I’m actually pretty optimistic about things right now but that’s just me

  51. Gravatar of Saturos Saturos
    19. January 2013 at 10:47

    Mike, in the scheme of things political parties don’t matter so much. Try evaluating the behavior of individuals and institutions without knowing which party they are. You’ll find not much loss of explanatory power. Hoover and Roosevelt both contributed dramatically to making the Depression worse (both very economically interventionist, contrary to what you were taught in school). And a majority of economists would agree that even those New Deal policies which weren’t ended within 10 years for being just plain stupid, are grossly inefficient ways of achieving social goals. This doesn’t stop many economists from defending the New Deal, though in the cold light of day they don’t have much of a case. For instance, there’s no good reason why the government should be in charge of people’s retirement saving, unless there was a deliberate aim to rob future generations to benefit the present (which is what is happening). And if the aim was to transfer wealth to the Depression generation from all the others, this should have been done transparently. Perhaps one justification is that nobody trusted the private market for their retirement savings after 1929, but economists now know that’s unjustified, and at this blog we know that 1929 wasn’t even the market’s fault.

  52. Gravatar of Saturos Saturos
    19. January 2013 at 10:49

    Mike, no question that there’s plenty on the right that’s totally moronic. But I don’t concern myself with them. I’m just sad because Krugman’s a freaking Nobel laureate. He’s better than that, he really is.

  53. Gravatar of Saturos Saturos
    19. January 2013 at 10:52

    Mike, most academics have been on the left for most of the last century, most writers and intellectuals were too. You should see the right-wing talk radio as providing “balance”, by that logic. But now who’s the one counting mere numbers?

  54. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:54

    Well Saturos, at this point we are dealing with genuine idelogical disagreements. While you say parties don’t matter this is clearly in line with the GOP argument:

    “And a majority of economists would agree that even those New Deal policies which weren’t ended within 10 years for being just plain stupid, are grossly inefficient ways of achieving social goals. This doesn’t stop many economists from defending the New Deal, though in the cold light of day they don’t have much of a case. For instance, there’s no good reason why the government should be in charge of people’s retirement saving, unless there was a deliberate aim to rob future generations to benefit the present (which is what is happening). And if the aim was to transfer wealth to the Depression generation from all the others, this should have been done transparently. Perhaps one justification is that nobody trusted the private market for their retirement savings after 1929, but economists now know that’s unjustified, and at this blog we know that 1929 wasn’t even the market’s fault.”

    Mitt Romney agreed with that, Paul Ryan does, Boehner, Cantor, et al. Most Democrats at lesat claim to believe this.

    The reson for Social Security is to deal with an ongoing social problem. Previous to it, you had the phenomenon that people would work all their lives and yet be impoverished in retiremenet and if they were lucky they would move in with their parents.

    If they were less so, they’d go to a poor house. Indeed, how integral Social Security has been to the wealth and high welfare of the elderly in recent generations is underscored that even Ayn Rand-Ms. Atlast Shrugged-collected Medicare in her old age and she was relatively wealthy.

    So that’s a point of genuine disagreement.

  55. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:55

    Most Democrats claim not to believe it.

  56. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 10:56

    Move in with their children.

  57. Gravatar of Becky Hargrove Becky Hargrove
    19. January 2013 at 10:59

    Saturos,
    That we all, as individuals, forget how to negotiate directly with one another for both economic and social purposes. Models of economic efficiency have lulled us into one size fits all social economic interactions. We have already gone a long way down that road as it is, where we try to fool ourselves into thinking it’s not even necessary to be a part of vital mental processes of evolution, or that there is anything positive to be gained by doing so when in fact the most important reasons we have for being alive is to discover challenges of sharing knowledge and cooperation with one another. But everyone got locked into ideas of how institutions were supposed to do that for us, and as a result we fight over funding to perform certain kinds of (often stupid) economic functions which in fact are usually miles away from what the individual was trying to negotiate for in the first place. So you get people reacting in a million different ways to societally enforced solitude that never should have happened…it only happened because we imagined that economic activities which should often be snowflake activities were one economically efficient “same” activity stamp instead. (Okay end of rant)

  58. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 11:02

    On the postiive, Satuors, very intersting piece on Krugman in the New Yorker.

    I have wondered about his marriage. If anything I’ve sometimes wondered if the reason he has blogged compartiavely less since the Summner is because of his wife. I know it’s a generalziation but I always suspect that most women end up trying to urge their men to work less and “smell the roses” more.

  59. Gravatar of Mike Sax Mike Sax
    19. January 2013 at 11:05

    Just the same I do in many ways prefer blogs like Money Illusion to more political and liberal blogs like Daily Kos or even DemocraticUndgerground.

    I don’t neceessarily seek out agreement.

  60. Gravatar of Saturos Saturos
    19. January 2013 at 11:10

    Ok Mike, we’re getting off topic now, but I’ll pursue this. In the past most people were simply poor, by current standards. Social Security isn’t what fixed that. But how did you think it even helped? How does it make you better off to have your own money taken away from you to pay for Social Security, and then you receive benefits in retirement? How can the government possibly offer you a return on the money it takes from you that’s better than the market? Oh, right, by running a Ponzi scheme, which comes crashing down on future generations who foot the bill. What do you think that debt crisis is? Jerks did the same thing with Medicare. If the goal was to help a generation born in times when workers were relatively poor, to increase their lifetime income at the expense of their grandchildren’s lifetime income (let’s forget about the voluntary option of leaving smaller bequests) that should have been done more openly and efficiently (cheaply).

    Plus do you know what that program does to the national savings rate, and hence the long run productivity of labor? Hint: it’s not pretty.

    As I see it the left’s main positions which can’t be refuted on “objective empirical grounds” are some combination of the following: redistribution, paternalism, and prioritizing the group over the individual (public goods are great simply because we do them “together” – that is the government forces everyone to contribute). I’m not saying I can prove that right is better than left (it isn’t) but that if everyone rationally examined the consequences of policies before picking sides (perhaps a “veil of ignorance” to prevent them from knowing which side an idea belonged to before rationally evaluating it) then the left would have to seriously change which policies it dug itself into defending (though there’d still be severe differences with the right, of course).

    So Mike in other words I can respect you for being a progressive, but not necessarily for being a Democrat. That’s just dumb football-team mentality, “I will believe it because that’s what the good-guys believe”. That’s a slippery slope to Krugmanism. And yes my argument applies to Republicans too. If we pretend that the War on Drugs, for instance, was a mainly Republican idea… no wait, better example. I think the War on Terror fails on pure consequentialist grounds too. Even if for instance you value American national safety above all else, it’s still probably a bad idea.

  61. Gravatar of Saturos Saturos
    19. January 2013 at 11:12

    But my main point is, even by dogmatically partisan Democrat standards Krugman can be awful. Unless you’re really dogmatic… surely that’s not you, Mike?

  62. Gravatar of Saturos Saturos
    19. January 2013 at 11:13

    Uh Becky, could you be a little more… concrete?

  63. Gravatar of Saturos Saturos
    19. January 2013 at 11:16

    “redistribution, paternalism, and prioritizing the group over the individual”

    Oh sorry, I forgot to say pacificism and personal (non-economic) freedoms (because I agree with those).

  64. Gravatar of Saturos Saturos
    19. January 2013 at 11:17

    Though obviously the Democratic party is hardly pacifist, just look at Obama’s record… but that’s another kettle of fish.

    Ben Cole should be happy, I got very political tonight. Doesn’t become me.

  65. Gravatar of Saturos Saturos
    19. January 2013 at 11:18

    And yes, the left can be paternalistic and in favor of personal freedom at the same time. Not everyone is that consistent, especially not when it comes to politics.

  66. Gravatar of Saturos Saturos
    19. January 2013 at 11:19

    I’ve been trading in stereotypes here, though, of course, even partisans are actually much more complex than that…

  67. Gravatar of Becky Hargrove Becky Hargrove
    19. January 2013 at 11:28

    Saturos,
    My head is a bit foggy with these things right now! Let’s see if I can condense into a couple of points: I’m afraid people are convincing themselves that individual skills use does not matter, that institutions should dictate skills use, and that in the process of relying on institutions to be told what to do the institutions finally convince us to demolish one another.

  68. Gravatar of Saturos Saturos
    19. January 2013 at 11:39

    Becky, still not entirely sure what you mean, but would you perhaps have some sympathy then with this Robert Heinlein quote?

    A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.

  69. Gravatar of Becky Hargrove Becky Hargrove
    19. January 2013 at 11:52

    Absolutely! However with a caveat: both specialization and division of labor are just as important now but we have not yet thought of them in terms of our own personal time division and choice making, let alone maneuvers in services and related (aggregate) community time decisions. Availability of knowledge and technology could allow us now to internalize what once had to be externalized for spread through civilizations.

  70. Gravatar of Max Max
    19. January 2013 at 20:01

    “The issue is not whether an increase is technically reversible, it’s whether it is expected to be reversed.”

    If it’s reversible, then there is no reason for massive OMOs to automatically alter expectations in such a way that the liquidity trap is exited. Reversible OMOs don’t commit the central bank to anything. At best, they signal that the bank is in a dovish mood, which is helpful but not necessarily sufficient.

    I can only conclude that you have a kind of “leaky faucet” theory of monetary policy – if the quantity of money is large enough, some of it will “leak” into the economy through some hidden defect in the monetary “pipes”.

  71. Gravatar of ssumner ssumner
    20. January 2013 at 07:37

    Bob, Good observation–we’ll move this discussion to a newer post now.

    dtoh, Keep me posted on what they do.

    Max, Let’s start with the fact that the Fed isn’t even trying QE–they are injecting interest bearing reserves, not cash. The reserves pay a higher rtte than T-bills. There is no debt monetization. So anything going on today provides no support for the liqudity trap view. Even worse, despite the Fed doing things the wrong way, the injections do raise TIPS spreads, so the markets think they work. Thus the markets believe they are at least partly permanent. If that’s what the markets believe, it really doesn’t matter what professional economists like Krugman believe.

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