Brad DeLong, sounding unusually market monetarist, calls a Nobel Prize-winning believer in liquidity traps a “dumbass”

And no, he wasn’t talking about Paul Krugman!  Here’s the Fama comment about QE that set him off:

They’re basically neutral events. I don’t think they do very much.

Fama argued the Fed simply swapped low interest federal debt (reserves) for low interest federal debt (T-securities)

DeLong insisted the market reaction showed that Fama was wrong in saying they don’t do very much:

The profound cluelessness as to what is going on in financial markets today is mind-numbing.

Something I’ve said about 862 times.

People, I’m not making this up.  You fell asleep last night in a world where market monetarism was a fringe theory and woke up in a world today where everything is topsy-turvy.  Arguments market monetarists have been making for years are suddenly conventional wisdom in the Keynesian community.

Quick!  Someone please dig up a quote where Krugman says QE is basically a neutral event, and that it doesn’t do very much.

HT:  TravisV

Update:  Marcus Nunes sent me the following Krugman quote:

“It is, or should be, immediately obvious from our analysis that in a direct sense the BOJ argument is quite correct. No matter how much the monetary base increases, as long as expectations are not affected it will simply be a swap of one zero-interest asset for another, with no real effects. A side implication of this analysis (see Krugman 1998) is that the central bank may literally be unable to affect broader monetary aggregates: since the volume of credit is a real variable, and like everything else will be unaffected by a swap that does not change expectations, aggregates that consist mainly of inside money that is the counterpart of credit may be as immune to monetary expansion as everything else.”


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62 Responses to “Brad DeLong, sounding unusually market monetarist, calls a Nobel Prize-winning believer in liquidity traps a “dumbass””

  1. Gravatar of Alexei Sadeski Alexei Sadeski
    30. October 2013 at 15:00

    DeLong doesn’t wish to draw Krugman’s ire.

  2. Gravatar of Geoff Geoff
    30. October 2013 at 15:17

    Market monetarism only, and I mean ONLY, has any shred of credibility in the pro-central banking world because it is calling for more inflation than exists.

    If we were living in the 1970s, and market monetarists did what they now claim they would have done, and called for tighter money, then you can be assured 100% that it would have remained in the fringes along with the Austrians.

    Like I said before, if NGDPLT is ever implemented, and the economy booms for a while, after which it goes through a prolonged, stagflation-type bust, where growth just seems to remain sluggish, then it is almost certain that should yet another braindead cockamamie inflation scheme be proposed, that conveniently called for even more inflation than 5% NGDPLT, then that new cockamamie cult would likely gain popularity as the monetarist world again becomes so desperate for a solution to the problems they themselves caused, that they will latch onto whoever is calling for more inflation.

    NGDPLT is really just a stage in a long term acceleration of inflation. Just like price level targeting proved to be “insufficient”, so will NGDPLT.

  3. Gravatar of dtoh dtoh
    30. October 2013 at 15:31

    Scott,
    Fama is partially right. QE works through expectations. The expectation is that higher assets prices will result in a marginal increase in the exchange of financial assets for goods and services by the non-banking sector.

    If QE simply results in an equivalent increase in ER, then there is nothing for expectations to be about.

    BTW – To make this whole discussion clearer, you ought to just talk about M0-ER rather than M0.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. October 2013 at 15:33

    Speaking of DeLong and topsy turvy, he resurrected one of his best posts ever;

    http://delong.typepad.com/sdj/2013/10/james-scott-and-friedrich-von-hayek-hoisted-from-the-archives-from-october-24-2007.html

    ———quote——–
    Just as seeing like a state means that you cannot see the local details of what is going on, so seeing like James Scott seems to me that you cannot see your intellectual predecessors.

    That the conclusion is so strong where the evidence is so weak may perhaps be, I think, evidence of profound subconscious anxiety: subconscious fear that recognizing that one’s book is in the tradition of the Austrian critique of the twentieth century state will commit one to becoming a right-wing inequality-loving Thatcher-worshiping libertarian (even though there are intermediate positions: you can endorse the Austrian critique of central planning without rejecting the mixed economy and the social insurance state).

    And when the chips are down, this recognition is something James Scott cannot do. At some level he wishes–no matter what his reason tells him–to take his stand on the side of the barricades with the revolutionaries and their tools to build utopia.
    ———–endquote————–

  5. Gravatar of Integral Integral
    30. October 2013 at 15:42

    I read Fama as being basically right here. The big show isn’t QE, it’s forward guidance. Markets are taking QE policy as an indicator of forward guidance, so that the effectiveness of QE is largely an epiphenomenon.

    E.g. from a recent FRBSF letter:

    “The Federal Reserve’s large-scale purchases of long-term Treasury securities most likely provided a moderate boost to economic growth and inflation. Importantly, the effects appear to depend greatly on the Fed’s guidance that short-term interest rates would remain low for an extended period. Indeed, estimates from a macroeconomic model suggest that such interest rate forward guidance probably has greater effects than signals about the amount of assets purchased.”

  6. Gravatar of Steve Steve
    30. October 2013 at 16:05

    Not exactly what you’re looking for, but this is in Krugman’s column today:

    “we are still in a liquidity trap…Think about the Fed’s taper talk…it did do harm: long-term rates popped up, and are a significant factor in slowing our economy.”

    http://krugman.blogs.nytimes.com/2013/10/30/rentiers-entitlement-and-monetary-policy/

  7. Gravatar of benjamin cole benjamin cole
    30. October 2013 at 16:33

    Again, if QE is a paper (digital) tiger, then let us pay off the national debt…besides the Fed balance sheet now near $4 trillion and excess reserves up $2.2 trillion…you, a trillion here or there leaking into real aggregate demand adds up…
    Market Monetarism…so close…and yet Richard Fisher back on the vote at the FOMC…and so far

  8. Gravatar of ssumner ssumner
    30. October 2013 at 16:38

    Patrick, Excellent post. Bob Murphy would love it. Greg Ransom would be thrilled by it.

    dtoh and Integral. Yes, it’s always true that current Fed actions are of trivial importance compared to expected future actions. So I agree, QE is mostly about signaling, as are other Fed policies.

    Thanks Steve.

  9. Gravatar of Lawrence D’Anna Lawrence D'Anna
    30. October 2013 at 16:45

    I think we need to distinguish between being stupid and being crazy. Clearly Fama isn’t stupid, so maybe Brad should have called him a “nutcase” instead of a “dumbass”.

  10. Gravatar of Niklas Blanchard Niklas Blanchard
    30. October 2013 at 17:43

    DeLong took Stephen Williamson to task about the same issue, and mentioned me.

    http://delong.typepad.com/sdj/2011/10/niklas-blanchards-head-explodes-as-he-watches.html

  11. Gravatar of Geoff Geoff
    30. October 2013 at 18:06

    Patrick:

    Your favorable assessment of that blog post shows you misunderstand Austrian theory.

    The Austrian critique of central planning is no less applicable to so-called “mixed” economies. The foundation of the critique is economic calculation, capital structure sustainability, and subjective preferences given free reign to price all factors, goods, and labor.

    In central planning, there is no price system for the means of production. That much is clear. But in a “mixed” economy, there appears to be a price system, but the price system is hampered, and not reflective of individual preferences and activity constrained to individual private property rights. The prices that exist are corrupted. Those who make decisions based on relative prices are doing so in an environment where relative demand and relative prices are affected not by market actors, but by coercive state actors.

    This in turn prevents calculation errors that otherwise would have been avoided or minimized. The result of these errors is what we call booms and busts, even though it is typically the case that busts are again hampered with such that it looks like the ultimate causation for busts is tighter money, when in reality the ultimate cause is prior looser than market money.

    DeLong, as well as all progressives, have a profound anxiety about the free market, and believe it to be the supreme evil. There is no other explanation for why he and others would without any moral remorse call for initiations of violence against innocent people.

  12. Gravatar of Geoff Geoff
    30. October 2013 at 18:08

    Niklas:

    If you’re a card carrier, chances are he’ll use you for his own ends.

  13. Gravatar of Dan W. Dan W.
    30. October 2013 at 18:15

    In Fama’s defense there was a time when people believed the stock market was not the economy. If Fama was to clarify that he meant that tapering would be a non-economic event would he be wrong? How would we know?

    Now the religion of the stock market is so embedded in the psyche of policy makers that it is simply assumed the stock market IS the Economy and any hitch in the financial markets is a repudiation of whatever policy was under consideration.

    Personally, I don’t see things ending well as long as this idolization of the financial markets persists.

  14. Gravatar of John John
    30. October 2013 at 19:43

    “initiations of violence against innocent people”

    I think you might be mentally ill, Geoff. Seek help.

  15. Gravatar of lxdr1f7 lxdr1f7
    30. October 2013 at 20:39

    Dont market monetarists say the trnasmision mechanism doesnt matter?

    If the fed used the people as counterparties a different velocity would be realised because people have a higher average MPC than current banks and asset holders.

  16. Gravatar of Saturos Saturos
    30. October 2013 at 21:14

    That Krugman quote doesn’t sound too bad though. Anyway, Yichuan Wang has a great new post on this on Noah Smith’s blog (which is temporarily a group blog): http://noahpinionblog.blogspot.com.au/2013/10/of-course-monetary-policy-is-asset-swap.html
    Some full-blown market-monetarism there, unusual for Noah’s blog.

  17. Gravatar of Saturos Saturos
    30. October 2013 at 21:16

    One meta-thing I’ve learned from this blog is to never underestimate the power of repetition and persistence.

  18. Gravatar of dtoh dtoh
    31. October 2013 at 02:16

    Just to clarify, expectations are about a marginal increase in the exchange of financial assets for goods and services (effectively increasing AD). The expectation that the monetary “injection” is permanent will have no effect if it is expected that the money will remain as ER. The only thing that matters for expectations is M0 – ER.

    Needless to say the level of ER is entirely at the discretion of the Fed.

  19. Gravatar of Benjamin Cole Benjamin Cole
    31. October 2013 at 03:19

    Saturos:

    For better or worse, any plausible sentiment, repeated often and loud enough, gains the status of respectability and even truth….

  20. Gravatar of Saturos Saturos
    31. October 2013 at 03:31

    Cash for Clunkers: an evaluation http://www.brookings.edu/research/interactives/2013/cash-for-clunkers-gayer

  21. Gravatar of nickik nickik
    31. October 2013 at 04:21

    DeLong might say acept the austrian critique but he really does not. If you press him how high would goverment to GDP be? I guess with all the function he wishes goverment to have plus all ‘fixing’ of inequality.

    I guess it would be somewhere around 70-80%. How much price system and markt feedback is left.

    To be sure a goverment can spend money in ways that are more or less destructive to the price mechanism.

  22. Gravatar of ssumner ssumner
    31. October 2013 at 04:27

    Saturos, In fairness to Fama he was not talking about swapping cash for bonds, he agrees that is expansionary. He was talking about swapping interest bearing reserves that pay a higher rate than T-bills for bonds. That’s a very different proposition.

    dtoh, Any permanent injection of money is not expected to stay in ER, unless accompanied by some other policy, such as higher IOR.

  23. Gravatar of dtoh dtoh
    31. October 2013 at 04:45

    Scott,
    I know you agree the Fed has complete control over the level of ER so I’m curious why you think the Fed raised ER (a contractionary policy) when we had a demand shortfall and will then reduce ER (expansionary) when we’re back up at full potential output.

  24. Gravatar of Roger Sparks Roger Sparks
    31. October 2013 at 04:52

    Fama certainly touched a nerve with his comments!

    Fama’s paraphrased argument is “Fama argued the Fed simply swapped low interest federal debt (reserves) for low interest federal debt (T-securities)”.

    Is the economics community making a serious error when we equate reserves with debt? Is cash really debt? I think not.

    Just for fun, consider QE if cash is not debt. Consider cash as a gift-certificate.

    If cash is not debt, then the Fed (who has no money) is simply issuing gift-certificates in exchange for Treasuries and MBS. The decision makers who are selling Treasuries and MBS are exchanging interest bearing assets for gift-certificates. Seems like a dumb thing to do, unless, the buyer is over-paying in the eyes of the seller.

    Try it! It is a fun exercise to consider that cash is a gift-certificate.

  25. Gravatar of Michael Michael
    31. October 2013 at 05:25

    Geoff wrote:

    “Market monetarism only, and I mean ONLY, has any shred of credibility in the pro-central banking world because it is calling for more inflation than exists.

    If we were living in the 1970s, and market monetarists did what they now claim they would have done, and called for tighter money, then you can be assured 100% that it would have remained in the fringes along with the Austrians.

    Like I said before, if NGDPLT is ever implemented, and the economy booms for a while, after which it goes through a prolonged, stagflation-type bust, where growth just seems to remain sluggish, then it is almost certain that should yet another braindead cockamamie inflation scheme be proposed, that conveniently called for even more inflation than 5% NGDPLT, then that new cockamamie cult would likely gain popularity as the monetarist world again becomes so desperate for a solution to the problems they themselves caused, that they will latch onto whoever is calling for more inflation.

    NGDPLT is really just a stage in a long term acceleration of inflation. Just like price level targeting proved to be “insufficient”, so will NGDPLT.”

    I think you are correct that those who simply want to inflate would, at the present time, be on board with market monetarism because market monetarism calls for monetary easing under present circumstances.

    But there is plenty of evidence since the 70s that central bankers don’t advocate higher inflation as a solution to all problems in the economy. Inflation in the US was high in the 70s but has been tailing off ever since.

    I’m sure that, if nothing else, you do believe that for as long as the dollar has any value over and above that of the paper it is printed on, the Fed has the power to debase it.

    Yet it has not happened.

  26. Gravatar of Michael Michael
    31. October 2013 at 05:36

    dtoh wrote:

    “I know you agree the Fed has complete control over the level of ER so I’m curious why you think the Fed raised ER (a contractionary policy) when we had a demand shortfall and will then reduce ER (expansionary) when we’re back up at full potential output.”

    I can’t speak for Scott, but here’s my guess:

    1. The Fed’s initial response to the crisis was not focused on nominal spending or inflation vs deflation. On those problems they were asleep at the switch. Their goal was to flood the banks with cash to prevent runs – but they were still concerned enough about *inflation risk* that they did not want to see banks lending more; IOR was intended as a dicincentive.

    2. The Fed will not eliminate IOR – they will raise it. When it is time to raise the Fed Funds rate, IOR will be raised to match it. This will happen long before they start reducing the size of their balance sheet.

  27. Gravatar of Marcelo Marcelo
    31. October 2013 at 07:06

    Scott,

    Don’t you and Krugman agree in the quote you posted? If the “expectations channel” just means “permanence of base increase”, are you guys on the same page? QE + no expectations of future policy probably has little to no effect on economy at the ZLB right?

    Thanks,
    Marcelo

  28. Gravatar of TravisV TravisV
    31. October 2013 at 07:48

    Pethokoukis:

    “Time for the American right to declare peace on the US welfare state”

    http://www.aei-ideas.org/2013/10/time-for-the-american-right-to-declare-peace-on-the-us-welfare-state

    (Warning: this post will frustrate Morgan Warstler)

  29. Gravatar of Philo Philo
    31. October 2013 at 07:59

    The Krugman quote doesn’t fill the bill. He protected himself by limiting his remark to operations that don’t change expectations. Obviously the Fed’s QE operations are affecting expectations.

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    31. October 2013 at 08:50

    Brad is on a roll;

    http://delong.typepad.com/delong_long_form/2013/12/review-of-alan-blinder-after-the-music-stopped-extended-version.html

    ———-quote———–
    I see an economy in which the share of American adults who were employed was 63% in the mid-2000s, fell to 58.5% in 2009, and is still 58.5% today. We would have expected the natural aging of America’s population to have carried the share of adults at work from 63% down to 62% over the past seven years or so–not to 58.5%. And we would have expected the collapse of people’s retirement savings either in housing or in stocks in 2008 to have led many Americans to postpone retirement. Given the collapse in the value of retirement savings and their impact on desired retirements, I see a healthy American economy today as one that would still have the same adult employment-to-population ratio of 63% as the economy of the mid-2000s.

    From that perspective, we are not halfway back to health. We had a gap of 4.5% points between actual employment and full employment at the end of 2009. We have a gap of 4.5% points between actual employment and full employment today. We are flatlining. It is true that in late 2009 there were still real and rational fears that things might become worse very quickly, and that that possibility is no longer on the menu. But in my view our “recovery” has taken the form not of things getting better but of having successfully guarded against the possibility that things would get even worse. And that is a very feeble recovery indeed. And, in Europe, things are getting worse right now.

    Most economists would say that there is a silver lining, in that this is not a Great Depression. I have been calling the current episode the “Lesser Depression”. I now think that most economists are–and that I was–wrong in claiming this silver lining.
    ———–endquote————

    Though he doesn’t come to the obvious conclusion; Obama totally screwed up, and shouldn’t have been re-elected.

  31. Gravatar of Tom Brown Tom Brown
    31. October 2013 at 09:08

    Scott, in your Krugman quote (here’s a bit of it):

    “No matter how much the monetary base increases, as long as expectations are not affected it will simply be a swap of one zero-interest asset for another, with no real effects.”

    Since he’s qualifying this with “as long as expectations are not affected” is this really so wrong? I recall you writing something (which I thought was) similar here:

    “Rates are zero but expected to be positive in the future. Now a permanent increase in the base has an inflationary effect, for the same reason we discussed in the case of the gold reserve that would take two years to dig down to. A temporary increase in the base? Little or no effect, but then that’s true even if rates are positive.”

    http://www.themoneyillusion.com/?p=23314

    Both statements are qualified on expectations.

  32. Gravatar of Tom Brown Tom Brown
    31. October 2013 at 09:10

    Woops! I got the wrong one above from you Scott, I meant this quote:

    “Nominal rates are zero and expected to stay zero forever. Now open market operations are meaningless. Bonds are essentially cash, and pay no interest. It’s like swapping a $20 bill for two $10 bills. Fiscal policy is powerful but currently inefficient, as the national debt is too small.”

  33. Gravatar of JohnB JohnB
    31. October 2013 at 09:20

    Travis V,

    Pethotoukis’ basic argument for welfare in that argument was “middle-income buying power is essentially back at its 2007 peak [despite market incomes being 10% lower] “” which was an all-time high. “In short, while the middle class””and especially the poor””saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households,” Winship concludes.

    This argument completely misses the fact that income gained from the market is completely superior economically from income from the government. They are totally different things.

    1. The basis of GDP calculation assumes that you can count net value created based on the validity of market prices. If a guy takes 15K of materials and labor and makes a car that sells for 25K, you can reasonably say that he created 10K of value. This 10K is counted as GDP. On the other hand, government spending in GDP is simply counted based on spending rather than the prices paid for a service. As such there is no way to tell how much value the spending created or destroyed and there are serious issues in counting government spending as GDP that its creators like Kuznets really grappled with but have been lost over time.

    2. Market income is based on the value created by your services; your productivity. Income from the government is simply taken from one group and given to the other. Besides not creating value, there are a whole range of transfer costs and incentive problems created which ultimately destroy value.

    I thoroughly disagree with Pethotoukis’ point. Anyone friendly to the market economy should continue to fight against the welfare state. It creates an underclass of permanent dependents and makes society poorer as a whole through its disincentives to work and raise children in a family. It fails at its mission of creating greater equality; there is little evidence of economic equality being related to anything other than ethnic homogeneity. In short, a large welfare state leaves society with a smaller economic pie overall that is still cut just as unevenly as before. Everyone gets a smaller slice.

    BTW, I have posted as John before and I’m not the same John that told Geoff in this discussion that he has a mental illness.

  34. Gravatar of JohnB JohnB
    31. October 2013 at 09:58

    Scott,

    I wanted to call your attention to what I think is the best quote about economics I’ve ever heard. It comes from Bryan Caplan in a debate on immigration. He is talking about how to judge the overall effects of a policy, in this case allowing workers to move freely. “How on earth can we ever judge the overall effects? There is a very simple answer. Keep both eyes firmly on production. When global production doubles, you’re standard of living is very likely to rise.”

    The quote comes in his opening statement at the 16 minute mark.

    http://intelligencesquaredus.org/debates/upcoming-debates/item/909-let-anyone-take-a-job-anywhere

    To me this encapsulates how to think about all economic issues. This is especially useful with so-called “demand side” issues. If a policy to counter this recession allows an increase in production it should be embraced but a bad policy would be something that does nothing to boost production such as regulations, increased transfer payments, or government spending that does not create value to consumers like military spending. These measures will not do anything to boost living standards.

    The arguments you make about NGDP targeting emphasize that with nominal wage rigidity, restoring NGDP to its pre-crisis path would lead to more workers being hired and more output. These “real effects” are the only reason to enact a demand side policy. Creating higher spending simply for the sake of higher spending does not do anything useful and actually creates drag on production. Policy needs to focus on allowing private businesses to produce more output.

  35. Gravatar of Philo Philo
    31. October 2013 at 10:59

    @ Patrick R. Sullivan

    You wrote: “Obama totally screwed up, and shouldn’t have been re-elected.” Well, he screwed up, but wouldn’t McCain or Romney have done just as badly, probably even worse?

  36. Gravatar of Scott Sumner Scott Sumner
    31. October 2013 at 12:39

    dtoh, I don’t think they have “complete control” over ERs. And why claim more ERs are contractionary?

    Marcelo, Krugman’s always a bit slippery on these issues, so it’s hard to say whether we agree. The interesting question is not whether I agree with Krugman, but rather whether Krugman agrees with Fama, and if both are viewed by DeLong as dumbasses.

    Philo and Tom, I see to recall Fama said the same, or something similar.

    Thanks JohnB.

  37. Gravatar of Mike Rulle Mike Rulle
    31. October 2013 at 14:58

    The Fed balance sheet has grown by about $2.0 trillion since 2008, as have excess reserves on deposit at the Fed.

    QE has the superficial appearance of just being recycled back for the purpose of……what? Monetizing debt? Or, can the money from QE become real investment even if ER grows dollar for dollar? I suppose yes. If company X sold treasuries to build 10 new stores, that could happen with ER growing dollar for dollar. But why would QE encourage them to do so? They could have sold their treasuries to the market. Implicitly, also, they would not be borrowing money—or ER would go down.

    What “objective” purpose is being accomplished by QE? I can understand that other financial assets could rise in price, but not marginal real investment occurring. In fact, the LBO market is booming, the stock market is booming, the bond market has stayed boomed. This just looks like financial gobbledy gook, accomplishing nothing real. I do not understand what QE has accomplished. Further, we have an enormous amount of high powered money just sitting there which, in theory at least, could explode like an inflationary powder keg.

    What “signals” or “expectations” are being delivered? Please explain.

  38. Gravatar of Martin Martin
    31. October 2013 at 15:18

    Scott,

    “Krugman’s always a bit slippery on these issues, so it’s hard to say whether we agree. The interesting question is not whether I agree with Krugman, but rather whether Krugman agrees with Fama, and if both are viewed by DeLong as dumbasses.”

    It’s just going to boil down to interpretation and the interpretation depends on whether you want to be charitable or not or in what esteem you hold someone. DeLong will claim that Krugman keeps expectations of NGDP/inflation constant and claim that the question asked of Fama clearly was not one of constant expectations on NGDP/inflation.

    Personally, I think it’s pretty clear in Fama’s remarks that he does keep expectations constant.

  39. Gravatar of dtoh dtoh
    31. October 2013 at 15:49

    Scott, you said;

    “I don’t think they have “complete control” over ERs. And why claim more ERs are contractionary?”

    Scott of course they do. By adjusting IOR, they can achieve any level of ER they desire.

    If you raise ER, it generally results in a reduction of other assets (e.g. credit extended to the non-banking sector) held by banks. Assuming that private demand for credit has not increased, this raises real interest rates (i.e. lowers the real price of financial assets), which in turn causes a marginal reduction in the exchange of financial assets for goods/services by the non-banking sector. I.e. reduces AD, ergo contractionary.

  40. Gravatar of ssumner ssumner
    31. October 2013 at 18:05

    Mike, I think most sensible people would prefer other policies, such as NGDPLT. But if it’s all they have on offer, it’s still clearly better than nothing. QE does boost AD a little bit.

    Martin, Fama specifically said IOR was the problem, so he clearly thinks a permanent QE would be inflationary. Let’s be realistic, DeLong doesn’t care what Fama thinks, DeLong is simply I guy who loves to take cheap shots.

    dtoh, If QE is contractionary, then why do the markets respond positively to QE? After all, QE raises ERs.

  41. Gravatar of dtoh dtoh
    31. October 2013 at 18:40

    Scott,
    Because…

    1. Not all of QE is always fully absorbed by QE. Some of it results in a marginal increase in non-banking (e.g. not ER) assets held by the banking sector.

    2. QE can cause a change in expectations of future NGDP. This will result in a shift of the preference curve between assets and goods/services so that at constant (or even lower) real asset prices, you get a marginal increase in the exchange of assets for goods and services. This can be true even if the market expects all current OMP to be permanently absorbed by ER, because the market may expect that current OMP signals future OMP that will not absorbed by ER.

  42. Gravatar of dtoh dtoh
    31. October 2013 at 18:46

    Scott,
    To put it another way, doing OMP while holding ER constant (by lowering IOR) will be more expansionary than doing OMP while allowing ER to rise.

  43. Gravatar of DOB DOB
    31. October 2013 at 21:38

    Fama’s absolutely right. They’re neutral events.

    Any attributable market reaction comes from the fact that QE signals dovish intent on the Fed’s part (and therefore that it will keep nominal rates lower for longer).

    They could send the same signals via open mouth operations and it would work just as well (if they’re credible).

  44. Gravatar of DOB DOB
    31. October 2013 at 21:41

    Actually, I just read the full comments by Fama in the linked post and I must take back any endorsement I might have made of his statements :)

    I do stand by these three words though: “They’re neutral events.”

  45. Gravatar of Tesc Tesc
    1. November 2013 at 03:17

    In conclusion, MM won. Congrats guys.

  46. Gravatar of StatsGuy StatsGuy
    1. November 2013 at 07:45

    “Something I’ve said about 862 times.”

    I think you’re lowballing that estimate, scott!

  47. Gravatar of Geoff Geoff
    2. November 2013 at 18:09

    John:

    “”initiations of violence against innocent people”

    I think you might be mentally ill, Geoff. Seek help.”

    No, you’re just in denial, or ignorant.

    Anytime someone calls for government activity apart from use of defensive force, is advocating for violence against innocent people.

  48. Gravatar of Mike Mike
    2. November 2013 at 19:15

    “Anytime someone calls for government activity apart from use of defensive force, is advocating for violence against innocent people.”

    So if the gov builds a bridge or a hospital this is an act of violence?

  49. Gravatar of Geoff Geoff
    2. November 2013 at 19:51

    “So if the gov builds a bridge or a hospital this is an act of violence?”

    You have to take into account all the activity relating to building a bridge, including the financing of it.

    The financing of building a bridge, if the government pays someone to do it, does rest on violence.

  50. Gravatar of Mike Mike
    2. November 2013 at 23:54

    How is government taxation violence to people that are happy to pay taxes?

    Why are you using the internet if it was developed by the US gov?

  51. Gravatar of ssumner ssumner
    3. November 2013 at 06:15

    dtoh, OK, But I thought you were saying more ERs are not expansionary. Now you say they are if they lead to expectations of higher future growth in the base.

    My general point is that it’s dangerous to make generalizations in this area. To talk about the effect of X on Y requires all sorts of subtle assumptions about other things going on. It’s never simple.

  52. Gravatar of dtoh dtoh
    3. November 2013 at 09:19

    Scott,
    Yes it is simple. If you think of a simple preference curve between financial assets and goods/services with asset price changes causing movement along the curve and changes in NGDP expectations causing a shift in the curve, then it’s easy too understand everything that’s going on. You should try it for a week, you will be amazed at how simple it is explain things and how easy it is to rebut criticisms of MM. Other than discarding HPE, it’s 100% consistent with all your views.

  53. Gravatar of ssumner ssumner
    4. November 2013 at 09:52

    dtoh, I’m not denying asset prices are a mechanism, but I also think the HPE is as well, and also that the HPE explains the change in asset prices.

  54. Gravatar of Ron M Ron M
    4. November 2013 at 09:52

    dtoh and Scott,

    Here is a picture of the base minus excess reserves along with the base and currency.
    http://research.stlouisfed.org/fred2/graph/?g=o26

  55. Gravatar of dtoh dtoh
    4. November 2013 at 15:12

    Scott, you said;

    “I’m not denying asset prices are a mechanism, but I also think the HPE is as well, and also that the HPE explains the change in asset prices.”

    I would say this,

    1. As Seuss said in Green Eggs and Ham, “Try it. You may like it.” Seriously, you will be able to easily explain everything and rebut any argument by relying solely on asset prices and expectations. It is a much better model than HPE because it is simpler, more logical and comports better with the actual economic behavior of firms and individuals. As I say, try it for a week or two. You’ll be amazed at its accuracy and simplicity.

    2. I don’t disagree that there is an equilibrium between money supply and NGDP. If this equilibrium is what you’re describing as the HPE, that’s fine, but I think it misleading to describe an equilibrium as a “mechanism”.

    3. To the extent that an HPE does exist as a mechanism, it does so only within the Fed, i.e. the Fed will essentially pay any price (i.e. conduct an auction) in order to get rid of (issue) the money. Individuals and firms are only acquiring money in order to effect an exchange of financial assets for goods/services. The decision to spend or acquire money is unrelated to the quantity of money…. it depends solely on a) expectations and b) the price of financial assets relative to goods/services.

  56. Gravatar of dtoh dtoh
    4. November 2013 at 15:18

    Ron M,
    Thanks. Something I’ve been too lazy to do, Exactly as an expectation/asset price model would predict.

  57. Gravatar of dtoh dtoh
    4. November 2013 at 15:27

    Scott,
    The reason I keep harping on this stuff is because the biggest constraint to more rapid acceptance of the MM is the lack of a convincing explanation for the mechanism. Simplify your explanation to expectations and asset prices. It will make MM much easier to sell.

  58. Gravatar of ssumner ssumner
    5. November 2013 at 06:13

    dtoh. What do you see as the “mechanism” connecting a bigger apple crop and falling apple prices? Is it asset markets?

  59. Gravatar of dtoh dtoh
    5. November 2013 at 06:57

    Scott,
    I think that’s the problem. In the case of a bigger apple crop, there is definitely an HPE. Supply endogenously increases over the demand existing at a particular equilibrium. One gets into problems though if you extrapolate the apple analogy to the money supply and assume that the issuance of money takes place via an exogenous isolated increase. That’s not what happens though. There is no helicopter drop. Money creation (at least under our current monetary regime) takes place through an exchange.

    This is easy to see if you think about the subway token analogy.

    Similarly, to use the apple example, it would be analogous to raising the price of farmland (acres per apple) while holding the price (in apple terms) of all other commodities (oranges, potatoes, etc.) constant. It would induce an increased exchange of farmland for commodities, which is very different than what happens if you just get a bigger apple crop.

  60. Gravatar of dtoh dtoh
    5. November 2013 at 07:03

    Errata – 3rd sentence should read….. “Supply exogeneously increases…” (Faulty spell checker.)

  61. Gravatar of ssumner ssumner
    6. November 2013 at 07:05

    dtoh, I claim the effects would be almost identical if done via a helicopter drop.

  62. Gravatar of Sumner Declares Delong for Market Monetaristism | Last Men and OverMen Sumner Declares Delong for Market Monetaristism | Last Men and OverMen
    18. February 2017 at 08:40

    […] QE is basically a neutral event, and that it doesn’t do very much.”      http://www.themoneyillusion.com/?p=24505      Actually, the Fama-Santelli exchange was great. Whether or not Fama is […]

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