The Swiss devaluation

Lars Christensen recently sent me the following report from the Swiss National Bank:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

I don’t have a link, but this Bloomberg news report summarizes the move.  A few comments:

1.  Swiss stocks rose over 4% on the news, but the gains have been pared back as all markets are falling on recession fears.  I’d guess the move was partly expected, and hence the actual impact on the market was much more than 4%.  The exchange rate immediately fell by over 7%, to a level close to the target.  This suggests that the policy is credible.

2.  Unless I’m mistaken, this is close to what Lars Svensson recommended.  I’m relying on memory–perhaps a commenter can dig up an old Svensson paper on “foolproof escapes” from a liquidity trap.  The key idea is to create expectations of currency depreciation.  The final paragraph of the Swiss statement seems to have that aim, although a more specific target path might have been more credible.  The idea is to make investors think that the Swiss franc (base money) is not a good investment.

3.  I believe the Swiss central bank did the right thing.  Whether it’s done enough is hard to say.  Open economies like Switzerland (and Sweden) can only do so much in the face of falling demand for their highly specialized exports.  If the world continues to slide toward recession, I’d expect both countries to see some decline in output, even with optimal monetary policy.  But at a minimum the Swiss can and should prevent deflation trigger by falling demand.

4.  The market reaction to the Swiss move is one piece of evidence in support of my recent post arguing that Switzerland was not out of ammunition.  One more piece of evidence that money matters–especially when monetary shocks are destabilizing the world economy.  But the Swiss still need to carry through with the commitment.  And as the statement indicates, even further moves may be necessary.

PS.  I wish Lars could convince the Danes to devalue.  If enough countries act, maybe the ECB would take a hint.


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47 Responses to “The Swiss devaluation”

  1. Gravatar of Morgan Warstler Morgan Warstler
    6. September 2011 at 05:59

    Straight up Mundell.

    Have a free trade agreement? Want stable prices? Want capital to flow freely?

    Peg your currency.

  2. Gravatar of StatsGuy StatsGuy
    6. September 2011 at 06:06

    The argument that Central Banks are out of ammunition is hogwash. Those arguing WANT them to be out of ammunition, and WANT people to think so – so they speculate against the CBs and call the CBs bluff (or prove that it is a bluff).

    The issue is simply whether the central bank is willing to accept the consequences. In this case, the swiss franc was becoming the reserve currency of europe – the currency was becoming more important as a financial instrument than as a vehicle of commerce (observe the Yen). It would have destroyed the Swiss economy.

    The consequences of the devaluation is a commitment to purchase (and potentially “lose money” on) Euro denominated assets (such as bonds). In some ways this frees the hand of the ECB (the threat of currency flight from the Euro is lessened). Seems like the ECB can’t do anything unless there is a gun to its head loaded with bullets called “bank failures”.

    Then, suddenly, the ECB discovers that it’s own gun is not out of bullets.

  3. Gravatar of Gregor Bush Gregor Bush
    6. September 2011 at 06:17

    Scott,

    Well timed. I was just about to ask you for a comment on this.

    It’s interesting that many economists in recent weeks said that the SNB had limited capacity to weaken the Franc, which of course was ridiculous. And these are the same economists who have the view that the Fed (and BoJ) are limited in their ability to raise the price level (strengthen AD).

    Today’s lesson is that when it comes to nominal variables, central banks are all-powerful.

  4. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 07:22

    Scott, this is very much like Lars E. O. Svensson recommend (http://people.su.se/~leosven/papers/Tokyo509.pdf). Obviously a lot of this have to be seen in the light of the European debt crisis and there are a lot issues involved here concerning a flight to safty in in Swiss franc. Therefore, this action has also had broader European market impact.

    The point is here however that this demonstrate that a central bank can ALWAYS ease monetary policy via the FX markets.

    In my view the reason why the initial market impact have been “scaled back” a bit is due to the fact that euro fear still are alive and well (unfortunately).

    In many ways the European back and forth on policy action, Swiss Franc and dollar hoarding remind me of 1931 and how German/Austrian fears led to gold hoarding. This time around European debt fears have spurred Swiss Franc hoarding. Unlike in the 1931 – where the Fed did not act – the Swiss central bank today acted.

    But Scott, maybe there is a story you should tell here: What is the impact of dollar and franc hoarding on US and Swiss monetary policy? Is this 1931? I think we need to get a international perspective on the Hetzelian-Sumnerian explanation of the Great Recession.

  5. Gravatar of Oscar Oscar
    6. September 2011 at 07:47

    If ECB should do something similar, should it peg the €/$ at 1,20 too?
    And what should the Fed then do?
    If all major western central banks (tries to) devalue their currencies – what is the net effect?

  6. Gravatar of Andrew Andrew
    6. September 2011 at 08:25

    Hi Scott,

    sort of related, but what do you think of Hans-Olaf Henkels idea that the strong countries (Germany, Austria, Netherlands and Finland) leave the Euro and go with a new currency?

    Seems workable in that the debt burden faced by those left behind would remain in Euro, which would then be devalued.

    A pretty inversion of the standard rhetoric that it is the weak countries that need to leave the Euro. Would probably help the Swiss Franc a lot too.

  7. Gravatar of marcus nunes marcus nunes
    6. September 2011 at 08:48

    And I thought you were still sipping italian wine! Get a CB to do level targeting and you “rush back”!
    David Glasner, David Beckworth and myself have all answered Lars call!
    http://thefaintofheart.wordpress.com/2011/09/06/the-%E2%80%9Cwilliam-tell-strategy%E2%80%9D-aim-and-shoot/

  8. Gravatar of Martin Martin
    6. September 2011 at 08:51

    Well to be fair: they did take note.
    http://www.ecb.europa.eu/press/pr/date/2011/html/pr110906.en.html

    “The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”

    The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its responsibility.”

  9. Gravatar of Doc Merlin Doc Merlin
    6. September 2011 at 09:19

    On this news gold shot back up over 1900.

    People who had been putting their money into CHF are now switching out into gold again.
    Gold is now being priced above platinum.

  10. Gravatar of Doc Merlin Doc Merlin
    6. September 2011 at 09:29

    The country that has weathered this crisis the best has been China, who’s currency has appreciated substantially against the USD.

    I don’t think these currency gimmicks are going to work in the benefit of any country that uses them. They will, instead, will make gold miners and farmers happy.

  11. Gravatar of JimP JimP
    6. September 2011 at 10:07

    Yglesias – Currency wars could save the world.

    http://thinkprogress.org/yglesias/2011/09/06/312284/currency-wars-could-save-the-world/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+matthewyglesias+%28Matthew+Yglesias%29

    Lets hope so.

  12. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 10:14

    Jim P…good point – Barry Eichengreen made a similar point a year ago: http://www.guardian.co.uk/commentisfree/2009/mar/17/g20-globalrecession

    I think it is important to stress that competitive devaluations are positive because it is basically a foolproof way to ensure global monetary easing. Some are saying this will not work because they focus on the competitive impact rather than – as they do – on the impact on the money supply.

  13. Gravatar of JimP JimP
    6. September 2011 at 10:15

    Here is a guy who would undo the 2013 Fed commitment – if he could.

    http://www.forexlive.com/blog/2011/09/06/feds-kocherlakotaunlikely-any-more-ease-justified-in-sept/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+forexlive-rss+%28Forex+News+by+ForexLive.com%29

  14. Gravatar of JimP JimP
    6. September 2011 at 10:18

    And here we have the standard devaluation position – just in case anyone forgot.

    http://www.forexlive.com/blog/2011/09/06/isn%E2%80%99t-this-how-all-wars-start/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+forexlive-rss+%28Forex+News+by+ForexLive.com%29

  15. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 10:25

    JimP, interestingly enough one should also note that today’s actions from the SNB is effectively easing monetary policy in Poland, Hungary and Romania, where many households and companies are funded in Swiss franc. This is another way the SNB easing is being exported. I am pretty sure that the central banks in Poland, Hungary and Romania are both happy and relieved to see the action from the SNB today.

  16. Gravatar of justanothereconomist justanothereconomist
    6. September 2011 at 10:38

    Here’s the Svensson paper:

    Svensson, Lars (2001), “The Zero Bound in an Open-Economy: A Foolproof Way of Escaping from
    a Liquidity Trap,” Monetary and Economic Studies 19(S-1), 277-312.

    http://ideas.repec.org/a/ime/imemes/v19y2001is1p277-312.html

  17. Gravatar of JimP JimP
    6. September 2011 at 10:41

    Lars

    If only the Fed would act!

    The whole thing just drives me crazy.

    As I said elsewhere – Obama should demand that the Fed act. Obama should take the political lead and political heat. He should protect the Fed. That should be the content of his jobs speech Thursday. Not some silly little stimulus spending, that he knows and we know and we know that he knows will never get passed by the congress, and would do very little good (if any) anyway.

    He should demand that the Fed act. Target NGDP. That will create more jobs quicker than any federal jobs program ever could.

  18. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 10:52

    Jim P, one can easy get crazy in this world. It seems so obvious what policies should be implemented, but central bankers are afraid of they own shadow.

    The frustrating thing I guess is how hard it is to get people (investors, policy makers, commentators) to understand “money”: No, low interest rates is not easy monetary policy and no, there is no liquidity trap. You know the drill…

  19. Gravatar of JimP JimP
    6. September 2011 at 11:02

    If Obama just makes that standard stimulus and spending speech he should just not bother to even show up.

    Everyone will know he does not expect any of it to get through Congress. He knows that we know that he is going through the motions – to get ready for the election. I very much doubt we can wait that long, or that he will win the election anyway.

    He should go for broke – with NGDP targeting. It is the only chance he has.

    http://www.businessinsider.com/gop-lining-up-to-oppose-obamas-jobs-plan–even-before-its-announced-2011-9

  20. Gravatar of JimP JimP
    6. September 2011 at 11:09

    Mosler think this is big – but it is not big enough.

    Because government spending is never big enough – no matter how big it is.

    http://www.creditwritedowns.com/2011/09/mosler-on-tax-cuts-jobs-local-government-transfer.html

  21. Gravatar of K K
    6. September 2011 at 11:24

    Lars Christensen: “The point is here however that this demonstrate that a central bank can ALWAYS ease monetary policy via the FX markets.”

    Well, not always. Only if other CBs cooperate by not trying to do the same thing. If we all do it, then we just get one big global QE. And, as much as the Fed wants us to believe otherwise – the jury is still out on that.

  22. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 11:38

    K, you are wrong. It is not about competitiveness. Devaluation is a method to increase the money supply (relative to money demand).

    Lets say Fed tomorrow announced that a target on EUR/USD at 1.80 and the ECB the following day announced a target on EUR/USD at 1.00. Then both central banks would compete to hit their targets by printing money. They would not hit their targets, but both central banks would see an explosion in the money supply. That would be inflationary. Very simple…I am not recommending that, but it is an illustration that competitive devaluations can be an positive sum game in a deflationary world.

    See Barry Eichengreen’s excellent comment on this:

    http://www.guardian.co.uk/commentisfree/2009/mar/17/g20-globalrecession

  23. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 11:47

    K, I am sorry re-reading what you wrote. You perfectly understood, but just think that global QE does work. Well, I think it would work, but obviously this would be “accidental monetary policy” that just might work.

  24. Gravatar of K K
    6. September 2011 at 13:13

    “You perfectly understood, but just think that global QE doesn’t work.”

    I wouldn’t say I think it doesn’t work.  I just think the jury is still out. Certainly I question the assertion that it has now been proven to “ALWAYS” work. But I think QE based on attempted competitive devaluation has a better shot than a domestic only QE because the competitive element is more likely to make it permanent, or at least that significant inflation might be tolerated and old fashioned rate hikes employed before reversing it. (I think that QE that is reasonably expected to be reversed before exit from the ZIRB is worthless from a ratex/EMH perspective).

  25. Gravatar of Lars Christensen Lars Christensen
    6. September 2011 at 13:28

    K, this is boring – we totally agree;-)

  26. Gravatar of david stinson david stinson
    6. September 2011 at 13:45

    Hi Scott. How was Vicenza?

    Is it fair to argue that the devaluation as a means to re-establish monetary equilibrium (or address monetary disequilibrium) is really only necessary when one’s choice of targets for conventional monetary policy are poorly chosen (e.g., interest rates & the “zero bound”) and one refuses to change them to something more reflective of actual monetary (dis)equilibrium? As a result, the central bank has mistaken what is really tight money for what it believes is accommodative money and thus concludes that the country is in a liquidity trap? Or something?

    If so, could targeting an exchange rate peg not seriously lead one astray particularly if a) exchange rates are not the best indicators of monetary disequilibrium, b) other countries are trying to devalue as well, and c) it is desirable to demonstrate the credibility of central bank commitments (in this case, to the peg)?

    If not, what makes an exchange rate a more desirable target for monetary policy than, for instance, a NGDP target?

  27. Gravatar of Scott Sumner Scott Sumner
    6. September 2011 at 14:50

    Morgan, No, not fixed rates–1.20 is the upper limit. The SNB is hinting at a lower rate later on.

    Statsguy, Agreed, and I’d add they don’t need to lose money. Cut the rate to 1.19 next year, and 1.18 the year after, then 1.17 the year after, and so on. All those rates are still a very strong SF, strong enough to prevent excessive inflation. But they don’t lose money on asset purchases if the SF gradually falls.

    Gregor, Agreed.

    Lars. Good points. I definitely feel there are similarities to 1931, as you indicated. The SF is obviously like gold, but the dollar also has that problem–a refuge from euro problems. That puts deflationary pressure on the US economy. Obviously we can print dollars, whereas in 1931 central banks could not print gold. But will we?

    Oscar, All central banks can simultaneously devalue–against goods and services. You are right that they can’t all devalue against each other. All the Swiss are actually doing he is preventing excessive appreciation. The US and eurozone need to depreciate against goods and services. They are the main problem with the world economy today.

    Andrew, Might be a good idea, but right now seems very unlikely. Much more likely is that a few really weak countries leave–and the middle countries (France, etc) hang in there. But who knows how things might play out if the crisis got worse. I’m not making predictions because right now there are too many variables that could swing the result one way or another–if I had to guess I’d guess much more than those four stay in the euro, with few leaving. Indeed it’s still possible that none leave, and Greece opts for outright default rather than currency devaluation. I imagine European commentators have a better sense of this issue–but as an outsider it seems like the Europeans are pretty committed to the euro project, and won’t give it up easily.

    Marcus, Thanks–I’ve never felt so out of the loop in my life. I haven’t even been able to keep up with other blogs, or much news, so I’m way behind you guys.

    Martin, Yes, it was duly noted, but were any lessons learned?

    Doc Merlin, Good observation about gold as a substitute for SF. But I don’t agree about it not working. It can work for Switzerland–at least relative to the alternative of a SF at parity with the euro.

    JimP and Lars, Eichengreen and I both argued the competitive devaluations of the 1930s were helpful. Interestingly, Bernanke agreed.

    JimP, When your link says only precious metals producers would benefit from a currency war, he forgets one other group–the unemployed.

    Lars, Good point about the Eastern Europeans.

    Justanothereconomist, Thanks for finding that paper. I’ll add a link.

    K, But where’s the country that tried to debase its currency, but failed?

    David, We stayed two nights in Vicenza, but I recommend staying in Padua instead–it has a more vibrant restaurant scene. Take a train over and you can see Vicenza’s highlights in a single day (a couple villas, including the sublime Villa Rotunda, the Olympic theatre, etc.) You can also take a train to Venice–and save money.

    But I did like Vicenza.

    I’d still prefer a NGDP target, even at the zero bound, but they might be less effective for small countries than large countries. In any case, an NGDP target is probably too risky for the Swiss, and the exchange rate is better than interest rates. A price level target is another possibility for Switzerland. Because the Swiss do a lot of trade, a price level target would implicitly require aggressive moves against huge swings in the exchange rate.

  28. Gravatar of Will the Swiss event start a series of competitive devaluations? » TVHE Will the Swiss event start a series of competitive devaluations? » TVHE
    6. September 2011 at 15:02

    […] Sumner hints at this, and its an issue we’ve discussed here before.  Although it is true that “not all […]

  29. Gravatar of Richard W Richard W
    6. September 2011 at 15:30

    I don’t see the gold substitute for CHF at all. Gold was trading at 1920 just under two hours before the announcement. Fell from 1908 to 1874 in the 30 mins before the announcement. Climbed back to 1904 after the announcement and then trended down all day and is back to where it was trading prior to the SNB intervention.

  30. Gravatar of K K
    6. September 2011 at 18:25

    Scott:”K, But where’s the country that tried to debase its currency, but failed?”

    You mean inflate? I assume that in a currency war we can’t all devalue. I’m not disagreeing that some can escape from a liquidity trap via competitive devaluation. I’m just saying that if we all end up in a liquidity trap (or even if the nominal natural rate of the world falls below zero) then a huge currency war will just amount to huge QE. And it may not work. I think sometimes the only available escape is a helicopter drop.

  31. Gravatar of Jim Glass Jim Glass
    6. September 2011 at 19:10

    Felix Salmon gives some charts relating to this 20-sigma event:

    http://blogs.reuters.com/felix-salmon/2011/09/06/charts-of-the-day-swiss-franc-edition/

  32. Gravatar of Full Employment Hawk Full Employment Hawk
    6. September 2011 at 21:38

    “He should go for broke – with NGDP targeting. It is the only chance he has”

    Monetary policy is made by the Fed, not the President. The Fed is supposed to be independent and any attempt by Obama to tell the Fed to do this will create a very negative reaction. The most he can do is urge the Fed to comply with its Congressional mandate to achieve maximum employment.

    What he needs to do is to recess appoint two new members to the FOMC who favor NGDP targeting. He first needs to nominate them and then when the Repubicans obstruct them recess appoint them.

    Two candidates, if they are willing to accept, that would make a good bipartisan combination are:

    Democrat Brad DeLong
    Libetarian Scott Sumner

    DeSumner could get the unemployment rate down significantly before the election, which is why the Repubicans will do all they can to prevent this.

  33. Gravatar of Full Employment Hawk Full Employment Hawk
    6. September 2011 at 21:45

    “If ECB should do something similar, should it peg the €/$ at 1,20 too? And what should the Fed then do?”

    Threaten to retaliate by pegging the €/$ at 1,50 (1.50 for Americans). The United States is running a deficit in the trade balance while Germany is running a huge surplus. The United States cannot and should not be the world’s buyer of last resort.

  34. Gravatar of James in london James in london
    6. September 2011 at 22:06

    FEH

    This is what is called a reductio ad absurdum. And shows the bankruptcy of macroeconomic politicking.

  35. Gravatar of Martin Martin
    7. September 2011 at 02:17

    Scott:

    “Martin, Yes, it was duly noted, but were any lessons learned?”

    I doubt it. a quick back of the envelop calculation will tell you that the ECB is on target when it comes to the price-level and inflation – as measured at the moment – is also ‘too high’ from a year to year perspective. Anything else is outside their mandate.

    Trichet was actually arguing that the ECB was the least activist central bank in terms of OMO and that their OMO’s were solely to restore the monetary transmission mechanism.

    This is what a die-hard technocratic central bank looks like. They’re on target, within their mandate, with minimal effort. What else would they possibly want to do?

    Not to mention that the ECB is a young central bank and is more concerned about its future credibility than the present crisis.

  36. Gravatar of JP Koning JP Koning
    7. September 2011 at 04:14

    “Swiss stocks rose over 4% on the news, but the gains have been pared back as all markets are falling on recession fears. I’d guess the move was partly expected, and hence the actual impact on the market was much more than 4%. The exchange rate immediately fell by over 7%, to a level close to the target. This suggests that the policy is credible.”

    Swiss stocks rose 5.8% nominally (the Swiss-20 rose 150 points within three hours of the announcement) but with the 8% decline in the denominator, the CHF, they effectively fell 2.2% on a real basis. Hardly the sort of reaction that might suggest the policy was credible or helpful.

  37. Gravatar of Scott Sumner Scott Sumner
    7. September 2011 at 04:20

    Richard, I can’t say for sure, but in theory it is the response right after the announcement that is relevant.

    K, I don’t agree about helicopter drops. The US has basically done that, and it hasn’t worked. (We “monetized” the stimulus spending.) But an explicit nominal target will work. Zero interest rates don’t prevent countries from inflating–there is no example of that problem occurring.

    Jim Glass, Interesting, but by now we know that returns aren’t normally distributed, hence “20 sigma” is pretty meaningless.

    Martin, Good point, but of course this shows the folly of targeting inflation.

  38. Gravatar of Scott Sumner Scott Sumner
    7. September 2011 at 04:22

    JP Koning, Your numbers are wrong–the real and nominal increases were almost identical–the Swiss price level did not change yesterday.

  39. Gravatar of MikeDC MikeDC
    7. September 2011 at 04:41

    “Open economies like Switzerland (and Sweden) can only do so much in the face of falling demand for their highly specialized exports. If the world continues to slide toward recession, I’d expect both countries to see some decline in output, even with optimal monetary policy.”

    How does the SNB recognize when it’s reached the limits of what it can do and what would the consequences of exceeding them be?

  40. Gravatar of JP Koning JP Koning
    7. September 2011 at 05:17

    Scott Sumner, your numbers are wrong. They were not almost identical, as I pointed out.

  41. Gravatar of K K
    7. September 2011 at 06:30

    Scott: “K, I don’t agree about helicopter drops. The US has basically done that, and it hasn’t worked. (We “monetized” the stimulus spending.) ”

    Whether it worked is, of course, debatable. I agree that the stimulus plus QE is a helicopter drop. But I don’t think it failed. Without it we might now be in a full on debt-deflation spiral. Like the prominent Keynesians, I think it just wasn’t big enough.

    “But an explicit nominal target will work. Zero interest rates don’t prevent countries from inflating-there is no example of that problem occurring.”

    But all the examples you are thinking of (and there are indeed lots) were cases of loose monetary policy *plus* deficits, i.e. helicopter drops.  I’m not aware that anyone has ever attempted reflation from the zero bound without deficits and succeeded. I’m not saying it’s impossible; I just think there are good reasons *in the current monetary system* why it may fail, and I don’t think you have the relevant evidence. Helicopter drops, on the other hand, are well known to succeed.

  42. Gravatar of W. Peden W. Peden
    7. September 2011 at 12:44

    K,

    Deficits or big counter-cyclical deficits?

  43. Gravatar of K K
    7. September 2011 at 21:41

    W. Peden:  Just the latter. The point is to get the nominal natural rate above zero by a comfortable margin.  From then on Wicksell is your friend, and the short rate can do the heavy lifting. And please note that I’m not categorically ruling out QE.  I’m somewhat skeptical of it, and very skeptical of expectations management *without* a credible sledgehammer type tool to back it up. (And the current situation where Bernanke keeps telling us that he is actually armed and dangerous but refuses to show what he’s got in his back pocket is enough to make you want to cry.) Helicopter drops are a sledgehammer (but he doesn’t have that tool).

    And I want to comment again on Scott’s point that countries have created inflation even though rates were at zero. Yes, of course.  If the nominal natural rate is above zero then putting the short rate at zero will cause inflation. I know Krugman has said that the definition of a liquidity trap is when the short rate is at zero. But that surely is not what he really means. What he means is that rates are at zero but NGDP is still declining, i.e. the nominal natural rate is below zero.

    Here’s the really sad part: QE might not work (and there are good ratex/emh arguments that it shouldn’t, i.e. the potato is *not hot at all* when rates are at zero and we all know they intend to fully undo it before they ever hike again), in which case threats of more QE wont work either. Heli drops definitely work and there is little doubt that $1T or $2T would do the trick once and for all and it would all be water under the bridge once NGDP is back to 5%. But more importantly, if the Fed had the power of a heli drop, then they’d only have to threaten it and they’d probably get the job done. Alas, they don’t, and anyways they  seem hellbent on staying well behind the curve.

    There is a way that I think QE could be credible: if the fed bought assets that were subsequently destroyed (eg defaulted or cancelled) then they could very credibly claim that they wouldn’t undo that easing because they wouldn’t be able to. They would have lost their independence for the purposes of tightening. That ought to be inflationary. 

  44. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 00:36

    “There is a way that I think QE could be credible: if the fed bought assets that were subsequently destroyed (eg defaulted or cancelled) then they could very credibly claim that they wouldn’t undo that easing because they wouldn’t be able to.”

    Trye.

    I argued early on the Fed should threaten Treasury to force the worst MBS to be unwound and the houses sold at $1 auctions.

    The fed speaks much too much about its balance sheet and is PROUD to say they make money to be credible.

  45. Gravatar of The Journal Gets It Right — for a Change « Uneasy Money The Journal Gets It Right — for a Change « Uneasy Money
    8. September 2011 at 19:15

    […] many bloggers (Marcus Nunes, David Beckworth, Scott Sumner, and  Scott Sumner, among others) have pointed out, the Swiss National Bank, in pledging not to […]

  46. Gravatar of Scott Sumner Scott Sumner
    9. September 2011 at 17:40

    MikeDC, It’s not a question of knowing when it’s reached a limit, it’s a question of picking a target. I’m saying that even with stable NGDP, real GDP would fall due to the fall in world trade.

    JP, You deflated by the exchange rate, when you need to deflate by the price level.

    K, I don’t agree. They didn’t succeed in Japan. The 1933-34 inflation in the US was almost purely monetary–fiscal policy played almost no role.

  47. Gravatar of La politique économique de l’UDC « Cettou-Farronato Blog La politique économique de l’UDC « Cettou-Farronato Blog
    14. October 2011 at 09:58

    […] fixation du Franc à l’Euro) reconnu par des commentateurs du monde entier (ici ou encore ici sur le taux de change, ici pour le sauvetage de l’UBS), l’UDC via Christophe Blocher […]

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