Is the Keynesian spell breaking?

In July, there was a media frenzy suggesting that the economy would tank if Congress did not pass another huge stimulus bill. According to the Financial Times, the spell finally seems to be breaking:

Hopes of Congress and the White House reaching a deal on further economic stimulus have faded, as an unexpectedly steep drop in the jobless rate has stifled appetite among Republicans and the White House for a compromise on new coronavirus relief.

Haggling over fresh federal support for the US economy will resume when lawmakers return to Washington after their summer break this week, as the impact of $3tn in relief funds approved at the start of the pandemic fades.

Economists and analysts expected an agreement to be struck by the end of the month to plough about $1.5tn in new government money into the economy, which could be pivotal to sustaining the US rebound. But prospects for a deal have diminished.

The strength of equity markets throughout August, as well as Friday’s data showing joblessness dropping to 8.4 per cent, below the unemployment peak during the Great Recession, has removed some of the pressure on Republicans on Capitol Hill, and Trump administration officials, to strike a deal. 

That’s not to say I entirely support the GOP position. There may be elements of a stimulus package that can be justified on humanitarian grounds, or to help with the Covid emergency. But we certainly don’t need fiscal stimulus to boost demand.

Bloomberg provides further evidence that the main problem is on the supply side:

As the economy picks up, America’s warehouse and factory owners increasingly find they can’t fill jobs without boosting meager wages.

E-commerce is driving a surge of orders, with U.S. manufacturing expanding in August at its fastest pace since late 2018. That has employers racing to bulk up staff to keep production rolling and satisfy demand. . . .

“It just doesn’t make sense,” said Richard Wahlquist, chief executive of the trade group American Staffing Association. “It’s an employment market like no one in our industry has ever seen.” . . .

It suggests the ample supply of available labor hasn’t necessarily cured the nation’s skills gap, where workers don’t have the qualifications employers need, and the pandemic probably will speed up the use of robotics that’s already under way, Moutray said.

Online retailer CJ Pony Parts in Harrisburg, Pennsylvania, tries to fulfill orders from Ford Mustang and Jeep fanatics the same day it receives them. A shortage of workers, though, is keeping it from hitting its goal by 40% some days, said President Mike Large.

The “it just doesn’t make sense” comment reflects the fact that we are experiencing a supply shock that is unique in US history. We need to quickly move millions of workers from service jobs eliminated by social distancing to other sectors like goods delivery, construction, and manufacturing. That re-allocation takes time and requires job training. Thus employers bid up wages even though overall unemployment is still high. (Generous unemployment compensation may also be a drag on re-employment, although some studies suggest otherwise.)

Keynesian stimulus is not designed to address this situation. Textbook models of stimulus are aimed at addressing falling wages due to deficient AD, not rising wages due to supply bottlenecks.

Keynesians have the wrong diagnosis and are recommending the wrong medicine. This is what Arnold Kling calls a “recalculation recession”. The solution is not stimulus, it’s masks plus test/trace/isolate. In the long run it’s a vaccine and or drug treatments.

PS. Tyler Cowen just linked to a new paper by Raj Chetty, John N. Friedman, Nathaniel Hendren, Michael Stepner, and the Opportunity Insights Team. This is from the abstract:

Stimulus payments to low-income households increased consumer spending sharply, but little of this increased spending flowed to businesses most affected by the COVID-19 shock, dampening its impacts on employment. Paycheck Protection Program loans increased employment at small businesses by only 2%, implying a cost of $300,000 per job saved. These results suggest that traditional macroeconomic tools – stimulating aggregate demand or providing liquidity to businesses – have diminished capacity to restore employment when consumer spending is constrained by health concerns. During a pandemic, it may be more fruitful to mitigate economic hardship through social insurance.



46 Responses to “Is the Keynesian spell breaking?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    6. September 2020 at 10:53

    Not Keynes, but Takahashi Korikiyo?

    The Federal Reserve balance sheet has exploded while the federal government has been running deficits.

    Michael Woodford says the combination of deficit spending and building central bank balance sheets constitutes helicopter drops.

    Interesting times.

  2. Gravatar of Gene Frenkle Gene Frenkle
    6. September 2020 at 10:59

    Just like I didn’t think perpetuating the 2001-2008 was a good idea…I don’t think perpetuating the economy of the last decade is a good idea even if it could be perpetuated which apparently it can’t. So that is why now is the perfect time to pay reparations to descendants of American slaves along with creating a program to get that group into housing with affordable mortgages in affordable cities. Furthermore reparations should include free tuition at community college for 2 years and full tuition and room and board at a state university for 2 years because the tuition inflation of the last 20 years is unacceptable and younger Americans should be discouraged from taking out student loans. So I would like to live in a nice neighborhood in Portland but in the age of Amazon and Netflix and Zoom and DoorDash is it really worth it to pay $1 million more in housing along with higher property taxes and insurance to live in a certain hip cities?? St Louis has the infrastructure for hundreds of thousands of more residents and it has affordable housing prices.

  3. Gravatar of Derrick Miedaner Derrick Miedaner
    6. September 2020 at 12:56

    Scott – one of your main criticisms of fiscal and monetary policy after the 2008-2009 crash was that our response was too tight. Why is this different? If I remember correctly, you were calling for us in March/April of this year to heed the learned lessons from 2008 and to not make the same mistakes this time around. Again, what has changed? We are definitely not out of the woods yet, and a second wave of the virus could compound already weak service industry sectors.

    Yes, it could be the case that we need to facilitate the transition of millions of workers for service sectors to transportation, construction and manufacturing, but who is going to do it?

    If employers aren’t going to be competitive with wages they are going to have to lure workers with paid training programs which facilitate employment sector transition. Tight monetary and/or fiscal policy will not encourage this.

  4. Gravatar of Thomas Hutcheson Thomas Hutcheson
    6. September 2020 at 12:57

    It is a mistake to look at the Congressional relief packages as “stimulus.” Congress should
    1) help spread the costs of recession – caused mainly by the Fed’s failure to keep aggregate demand (and expectations thereof) growing at 4-5% pa — more equitably, relieving the burden from unemployed workers, landlords renting to unemployed workers, and states and local governments that have lost tax revenue and
    2) underwrite some of the costs of the pandemic such as making schools safer for in-person classes, a massive program of frequent, rapid repetitive testing, tax incentives for infection dampening investments like better ventilation, etc.

    “Stimulus” is the Fed’s job. It needs to enable above-target increase in inflation to offset the supply shock from the pandemic. So far it’s performance, though better than 2008-2016, is inadequate. TIPS inflation expectations are still below pre-financial crisis levels and barely back to pre-pandemic levels.

  5. Gravatar of ssumner ssumner
    6. September 2020 at 13:15

    Derrick, I’d like to see monetary policy become expansionary enough to prevent disinflation. I am also comfortable with a monetary policy that leads to expected NGDP at the end of 2021 being about 8% above the level of the end of 2019. Thus I favor additional monetary stimulus.

    But even with the optimal monetary problem, we’ll have lots of unemployment in the short run due to the re-allocation problem.

    I cannot emphasize enough that we did NOT have a significant re-allocation problem in 2009–we just needed to get workers back to work in basically the same industries.

    This is very different from any previous American recession. The “recession” lasted all of 2 months, and unemployment has fallen from 14.7% to 8.4% in 4 months. Those are insane numbers, suggesting this is not a normal business cycle.

  6. Gravatar of Gene Frenkle Gene Frenkle
    6. September 2020 at 13:28

    sumner, the closest comparison I can think of is the harsh winter of Q1 2014.

  7. Gravatar of Matthias Görgens Matthias Görgens
    6. September 2020 at 16:43

    Gene, you are suggesting throwing more government money at things like college that are already expensive mostly because of past government subsidies.

    It is very hard to fight a fire by pouring oil.

  8. Gravatar of P Burgos P Burgos
    6. September 2020 at 17:26

    “may be more fruitful to mitigate economic hardship through social insurance.“

    I thought that “automatic stabilizers” were supposed to be the big idea to come out of Keynesianism. I get that there is an analytic distinction to be made between Congress just shoveling money out the door and sending money to people who cannot pay their bills, but shouldn’t both prop up AD? Alternately, isn’t the point of propping up AD during a recession in order to prevent poverty and material hardship? It seems to me that if a recession didn’t push people into poverty, why even care about it?

  9. Gravatar of Gene Frenkle Gene Frenkle
    6. September 2020 at 17:35

    Matthias, I am proposing we fund the UNCF so that every descendant of slaves gets 2 years of community college and then two years of state university with room and board. Private colleges could get that money only by covering the difference. African Americans make up 13% of the population so I am not concerned with that exacerbating tuition inflation.

    Furthermore I believe private colleges and their billionaire benefactors should be focused on using endowment to cover tuition for students from middle class families…which Bloomberg and Bezos’ ex are currently donating specifically to fund tuition for those students. I would like to see private colleges contract and combine endowment with goal of private college doing away with tuition because tuition is a very stupid concept—how many 18 year olds do you know that have $200k in the bank?? Did they have a very successful lawnmower ing business?? Why would they be going to college and giving up their business?? Btw, student loans is the reason I would have supported Trump over Elizabeth Warren—she was an expert on debt that became famous in the 2000s as student loan debt was exploding. So she was a lawyer/professor complaining about doctors saving people’s lives while professors and administrators were getting rich by convincing 18 year old to take out student loans!?! Talk about self serving!!

  10. Gravatar of Benjamin Cole Benjamin Cole
    6. September 2020 at 18:39

    Gene Frenkle:

    Suppose I am descended from small (mostly white) farmers, laborers and craftsmen who were financially and often literally all but obliterated by the immigration of slaves to the US?

    No reparations for me?

    If I am somewhat like Elizabeth Warren, and have a portion of currently desirable ancestry, say 1/16th African, do I qualify for reparations?

    How about 1/8th? 1/4?

    If you want to help Americans, especially American in the bottom half of the economic pyramid, then–

    Keep labor markets tight, and property markets loose.

    That’s Job One.

  11. Gravatar of Gene Frenkle Gene Frenkle
    6. September 2020 at 19:24

    Ben Cole, Trump threw $10 billion at coal miners in West Virginia (I wonder what race they are?) and Obama threw about the same at the UAW…I didn’t belong to either of those groups so I didn’t get any of those sweet sweet dollar bills! Descendants of slaves are just as deserving as any other group that gets the government to give them money. But once again, reparations are merely pretext to get money into bank accounts of Americans that will spend those dollars which inevitably end up in the pockets of productive Americans. The reparations along with a $150k guaranteed mortgage also help people buy affordable homes and pay property taxes to cities like St Louis that need to increase their shrinking tax base!! Paying for college helps young people get college degrees which everyone believes is a very positive thing…the fact their parents can’t help them out isn’t their fault.

  12. Gravatar of Derrick Derrick
    6. September 2020 at 19:31

    Scott – Maybe I am misunderstanding the point of your post. There is clearly a consumption shock, as well as a production shock. I will use my home state of MN as proxy for this situation. Manufacturing is 0.0% month over month, and the service sector is 1.4% month over month. I would much rather service sector folks reach a much larger rebound since they were likely worse off in terms of wage growth prior to covid, so this would seem like good news?

    Particularly promising is that leisure and hospitality is showing 10% growth month over month. Professional and financial services however are 0% or effectively so. What does this mean?

    It seems as though restaurants and hotels which were in good fiscal position are weathering the storm. It also means that large corporations in finance and business are in a stasis period. What necessarily results is that smaller to medium sized businesses are folding, leading to a further accumulation of capital and talent, which exacerbates income inequality.

  13. Gravatar of Carl Carl
    6. September 2020 at 20:55

    Supply bottlenecks plus generous unemployment compensation sounds like a formula for inflation.

    @Gene Frenkle
    Enforcement of intergenerational guilt did wonders for social cohesion in places like the Balkans.

  14. Gravatar of Gene Frenkle Gene Frenkle
    6. September 2020 at 22:43

    Carl, so we’re screwed…because Trump bailed out the coal miners?? If we’re screwed why not just throw money at descendants of slaves??

  15. Gravatar of James Alexander James Alexander
    6. September 2020 at 22:54

    Labor shortages. Wage inflation. What a fantastic prospect! We may yet live to see a return to 1950s and 1960s growth rates and shared prosperity – with a rebalancing of income from capitalists to labor.

  16. Gravatar of Ralph Musgrave Ralph Musgrave
    6. September 2020 at 23:38

    Scott says “But we certainly don’t need fiscal stimulus to boost demand.”

    Well that’s true in that demand can always be boosted by cutting interest rates or by QE. But the reverse is also true: i.e. “we don’t need monetary policy to boost demand” because fiscal stimulus can always do the job.

    Ergo the CRUCIAL question is: which is better – fiscal or monetary stimulus?

    I suggest there isn’t much of a place for monetary policy for the following reasons. The claim by MMTers that the optimum rate of interest is a more or less permanent zero rate is right: reason is that paying interest on govt liabilities equals rewarding people simply for hoarding money. I.e. it’s an unjustified subsidy for the rich.

    Next, if negative rates are not a good idea, then there’s little scope for interest rate adjustments. Ergo fiscal stimulus is best. (BTW, by fiscal stimulus, I mean creating new base money and spending it, rather than having govt BORROW money and spend it.)

    And finally, re Scott’s claim that “Keynesian stimulus is not designed to address this situation” (i.e. an “inadequate aggregate supply” situation), my answer is that neither is monetary stimulus a solution in the latter situation.

  17. Gravatar of Benjamin Cole Benjamin Cole
    7. September 2020 at 02:09

    Sumner asked me about headlines of Fox, but perhaps the same applies to CNN.

    This one is a doozy;

    “Trump attacks the sixth-richest woman in the world for her ties to The Atlantic

    By Alexis Benveniste, CNN Business

    Updated 1939 GMT (0339 HKT) September 6, 2020”

    The story is worth reading in some regards, perhaps for its total lack of self-awareness. The former Ms. Jobs has more money than Croesus, evidently based on Disney and Apple stock holdings (tight with China), and is pouring money ($500k) into the Biden campaign. She favors “immigration reform.” BTW, Ms. Jobs “resides” in Palo Alto. (Tonier people tend to “reside” in one city and perhaps “summer” or “winter” in another.)

    People like me just live somewhere.

    And yes, The Atlantic has become unreadable for its self-rightous preachiness and PC-MAX.

    Trump has become a bad caricature of himself, and he was a boorish TV talk-show host to begin with.

    But the Biden backers? Monied, heavy exposure to China, want lots of cheap labor to clean house, and think Palo Alto is normal?

    PS: I am voting for Pat Paulsen.

  18. Gravatar of ssumner ssumner
    7. September 2020 at 05:15

    Derrick, I am assuming that many of the service sector jobs cannot return immediately, due to social distancing. That’s not a problem in farming, manufacturing, construction, transport, etc.

    There are two solutions. Wait for a vaccine (probably this winter). Or shift workers from services to the sectors that can grow. That’s a slow process.

    In my view we need enough AD during this transition so that wage and price inflation does not slow.

    Just to be clear, I’m not moving away from NGDP targeting. I’ve always favored targeting future expected NGDP, and still do. The difference in this case is that I’ve generally assumed that stabilizing future expected NGDP will also tend to stabilize current NGDP. That does not seem to be true of the Covid-19 recession.

    James, That would be good, but I’m skeptical it will happen.

    Ralph, The MMTers are hopelessly confused. The only way to get zero interest rates in the long run is with a highly contractionary monetary policy, as in Japan, which has seen almost no growth in AD in 25 years. You don’t get zero interest rates by waving a magic wand.

  19. Gravatar of Todd Ramsey Todd Ramsey
    7. September 2020 at 06:52

    “Generous unemployment compensation may also be a drag on re-employment”


    Through the April – July period, employers were advertising job openings on broadcast media, which previously has only happened in boom times. Jobs in supermarkets and Amazon warehouses, which can be started with a minimum of training.

  20. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 09:03

    Gene Frenkle re: “reparations”

    Yeah, BLM should pay for all the physical destruction and looting they’ve done.

  21. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 09:20

    “It’s an employment market like no one in our industry has ever seen.”

    Hardly. A speedier matching of jobs and skills is a long-standing problem.

    But to assume that the Federal Reserve can solve our unemployment problem is to assume the problem is so simple that its solution requires only that the manager of the Open Market Account buy a sufficient quantity of U.S. obligations for the accounts of the 12 Federal Reserve banks. This is utter naiveté…

    It is impossible for monetary policy to stabilize prices without inducing intolerable levels of unemployment, given the pervasive extent of monopolistic pricing practices of our product markets, and, to a limited extent, of our labor markets.

    It axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility.

    What could be done to reduce or eliminate barriers to competition, to create a market structure in which there was both downward and upward price flexibility? Here are a few suggestions:

    We should conduct antitrust actions on the basis for the most economical size of plant. That is, limit corporations to a size that would achieve minimum unit costs at optimum rates of output. Outlaw the conglomerate and holding companies beyond the first degree, and severely restrict vertical as well as horizontal corporate aggregations.

    That is to say, prohibit corporations from conducting unrelated activities under a single corporate roof. From expanding in order to broaden their share of the market or from controlling their suppliers through ownership or legal devices.

  22. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 09:36

    re: “The only way to get zero interest rates in the long run is with a highly contractionary monetary policy, as in Japan, which has seen almost no growth in AD in 25 years.”

    First, banks don’t loan out existing deposits. That’s not a new theory. It’s a very old irrevocably established one.

    You get confused people, like George Selgin, saying just the opposite:

    “This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

    That’s an insane statement. And if you don’t know banks create deposits when they lend/invest, that they don’t loan out existing deposits, then you can’t understand macro-economics or money and central banking period!

    The smartest guys in the room get it exactly backwards:

    Not many people understand that banks create new money whenever they lend/invest with the nonbank public. And all monetary savings originate within the payment’s System (not outside it as Thornton said):

    Dr. Daniel Thornton is a former skilled FRB–STL economist, but he conflates stock with flow.

    Re my comment to Dr. Thornton: “Savings are not a source of “financing” for the commercial bankers”

    Dan Thornton reply:
    Thu 3/9/17, 2:47 PMYou
    See the graph below.
    Daniel L. Thornton
    D.L. Thornton Economics LLC

    My response back: “Never are the commercial banks intermediaries (conduits between savers and borrowers), in the savings-investment process.”

    The source of interest-bearing deposits is other bank deposits,
    directly or indirectly via the currency route (never more than a short-term seasonal situation), or through the member bank’s undivided profits accounts.

    Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot per se increase the size of the banking system. Time deposits, e.g., negotiable CDs, rather than being a source of loan funds, are the indirect consequence of prior bank credit creation

    So Japan’s problem is the volume of bank-held savings period. Bank-held savings have a zero payment’s velocity. And if you don’t understand that you can’t be an economist.

  23. Gravatar of Gene Frenkle Gene Frenkle
    7. September 2020 at 09:43

    Spencer Hall, West Virginia is one of the whitest states and it happens to have the lowest per capita income…but Trump didn’t tell them they created their s hole and so they should pay to fix it up. Trump threw money at the coal miners (probably all of one race) because that money would go straight back into the depressed West Virginia economy and so giving money to the coal miners was a no brainer!!

  24. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 09:57

    Both stagflation and secular stagnation were predicted in 1961. The period from 1961 until 1981 was where bank deposit innovation drove velocity higher (offsetting the impoundment of savings).

    The DIDMCA of March 31st 1980 put an end to the increased velocity of the residual transaction deposits.

    The deceleration in velocity since 1981 is responsible for lower N-gDp growth. It is exactly as predicted:

    The deceleration in N-gDp was axiomatic, as predicted:
    NSA N-gDp’s growth rates by decade, percent ∆:

    1970’s growth = 1.76
    1980’s growth = 1.15
    1990’s growth = 0.76
    2000’s growth = 0.52
    2010’s growth = 0.43

    Unless commercial bank-held savings, monetary savings, are expeditiously activated, put back to work, back into circulation, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in Alvin Hansen’s 1938 secular strangulation (not because of the widely bandied about, erroneously believed: robotics, not because of demographics, not because of globalization).

    As Dr. Pritchard’s economic syllogism posits:

    #1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
    #2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
    #3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” Circa 1959

    Pritchard’s theory matches Dr. Philip George’s theory: “The Riddle of Money Finally Solved”:

    #1 “The velocity of money is a function of interest rates”
    #2 “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
    #3 “When the interest rate is zero the velocity of money will tend to zero. This is because there is no incentive to move their accumulated savings out of demand deposits.”
    #4 “When interest rates go up, flows into savings and time deposits increase.”
    #5 “Holding interest rates down does nothing to boost investment because the problem is falling consumption.”

  25. Gravatar of Gene Frenkle Gene Frenkle
    7. September 2020 at 10:12

    Spencer Hall, reparations combined with a housing program to move descendants of slaves into affordable housing that they own as well as free college tuition would increase velocity.

  26. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 11:41

    @Gene Frenkle

    I’m against reparations. It’s God’s boomerang. The black communities are largely composed of lazy people. And that is a fact.

  27. Gravatar of Gene Frenkle Gene Frenkle
    7. September 2020 at 12:38

    Spencer Hall, did you throw a tantrum when Trump bailed out the coal miners?? Why do you think West Virginia is such a s hole?

  28. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 13:49

    Gene Frenkle: re: “tantrum”

    I call a spade a spade. If you’re going to give preferential treatment to any one group, make sure it pays off. Affordable housing for the blacks is a joke. Do you actually know any black people?

  29. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 13:57

    The only thing I agree with is “Paying for college helps young people get college degrees which everyone believes is a very positive thing…the fact their parents can’t help them out isn’t their fault”

    But my old man didn’t get through paying for med school until he was 45.

  30. Gravatar of Gene Frenkle Gene Frenkle
    7. September 2020 at 14:44

    Spencer Hall, the reason I support reparations is because I am friends and colleagues and acquaintances with so many descendants of slaves that wouldn’t get reparations due to having too high an income. I also know a white guy from West Virginia and one time he remarked about how much nicer newer double wides are than the single wide he grew up in.

  31. Gravatar of Postkey Postkey
    7. September 2020 at 15:04

    “The Mathematical Model of Modern Monetary Theory”

    “Steve Keen’s lightbulb moment on modern monetary theory
    Posted on August 29 2020”

  32. Gravatar of Postkey Postkey
    7. September 2020 at 15:12

    “An injection of 100 units of money by the central bank is turned into 500 units by the banking system thanks to a multiplier of 5.”


    “As a by-product of QE, new central bank reserves are created. But these are not an important part of the transmission mechanism. This article explains how, just as in normal times, these reserves cannot be multiplied into more loans and deposits and how these reserves do not represent ‘free money’ for banks. . . .
    Moreover, the new reserves are not mechanically multiplied up into new loans and new deposits as predicted by the money multiplier theory. QE boosts broad money without directly leading to, or requiring, an increase in lending. While the first leg of the money multiplier theory does hold during QE — the monetary stance mechanically determines the quantity of reserves — the newly created reserves do not, by themselves, meaningfully change the incentives for the banks to create new broad money by lending. It is possible that QE might indirectly affect the incentives facing banks to make new loans, for example by reducing their funding costs, or by increasing the quantity of credit by boosting activity.(1) But equally, QE could lead to companies repaying bank credit, if they were to issue more bonds or equity and use those funds to repay bank loans. On balance, it is therefore possible for QE to increase or to reduce the amount of bank lending in the economy. However these channels were not expected to be key parts of its transmission: instead, QE works by circumventing the banking sector, aiming to increase private sector spending directly.”

    “The reality of how money is created today differs from the description found in some economics textbooks: • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

  33. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 15:13

    re: “Economies do work in a circular fashion as what I spend becomes your income”

    B.S. An expansion of time (savings) deposits in the payment’s system is prima facie evidence of a leakage which collects in the form of unspent balances.

  34. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 15:22

    re: “L.O.L..”

    Truly exhibitionistic and predictable.

  35. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 15:39

    re: ““An injection of 100 units of money by the central bank is turned into 500 units by the banking system thanks to a multiplier of 5.”

    Tell me what’s wrong with that model? As an example, it is accurate. There is a money multiplier, it is bank credit divided by required reserves.

    Legal reserves were only “binding” between c. 1942 until 1995. By mid-1995 (a deliberate and misguided policy change by Alan Greenspan), legal (fractional) reserves ceased to be binding – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating “low-reserve tranche” and “reservable liabilities exemption amounts” c. 1982) and lower reserve ratios (requirements dropping by 40 percent c. 1990-91), and reserve simplification procedures (c. 2012), combined to remove reserve, and reserve ratio, restrictions (i.e., Chairman Alan Greenspan spuriously reduced legal reserve requirements by 40 percent to speciously / artificially counteract the July 1990-Mar 1991 recession precipitating the real-estate boom, the precursor of the GFC). This year Powell has made the same mistake.

    My money multiplier was 206:1 pre GFC. Charles Hughes Smith put it @ 219:1

    The validity of the money multiplier (commercial bank credit expansion coefficient) as a predictive device is predicated on the assumption that the commercial banks will immediately expand credit and the money supply (invest in some type of earning asset), if they are supplied with additional excess reserves.

    The inconsequential volume of excess reserves held by the member commercial banks between 1942 until October 2008 provides documentary proof that the DFIs undoubtedly did (always less than $1 billion).

    The remuneration of interbank demand deposits by Bankrupt-u-Bernanke emasculated the FRB-NY’s “open market power”, its power to instantaneously inject ex-nihilo, and gratis, showering deposit liabilities both exogenously and endogenously, into the payment’s system — by Lorie K. Logan (Manager of SOMA as well as Executive Vice President of the New York Fed’s Markets Group’s “trading desk”).

    After 1995, the commercial banks became non: “e-bound” (Dr. Richard G. Anderson’s term). See the truistic money multiplier, SA article and contributor, Charles Hugh Smith, “Bank Reserves and Loans: The Fed Is Pushing On A String”

  36. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 15:46

    And also see: “Quantitative Easing and Money Growth: Potential for Higher Inflation?

    Dr. Daniel L. Thornton (former senior economist, FRB-STL)
    D.L. Thornton Economics LLC

    “the close relationship between the growth rates of required reserves and total checkable deposits reflects the fact that reserves requirements apply only to checkable deposits”

  37. Gravatar of Spencer B Hall Spencer B Hall
    7. September 2020 at 21:17

    re: “QE boosts broad money without directly leading to, or requiring, an increase in lending.”

    I’ve taken to only read something that is coherent. I mean the proof is in the pudding.

    But the thing about QE boosting broad money is exactly backwards. QE contracts broad money. I don’t like the way the BOE thinks money is created.

  38. Gravatar of Ralph Musgrave Ralph Musgrave
    7. September 2020 at 21:36

    Scott, Re your claim that MMTers are confused and that there is some sort of difficuly in arranging a near permanant zero interest rate, there’s no difficulty at all, at least in principle. Reasons are thus.

    The larger the stock of base money, over and above what the private sector WANTS to hold, the higher the rate of interest the private sector will demand for holding what it sees as an excess stock of the stuff. Ergo there must be some stock, in terms of dollars, where the private sector demands no interest at all for holding said stock.

    Milton Friedman also advocated the latter sort of “zero interest” arrangement.

  39. Gravatar of Postkey Postkey
    7. September 2020 at 23:53


    Believe the Bank of England or some random blogger on the internet?

    “I don’t like the way the BOE thinks money is created.”

    I’m sure that you will ‘believe’ whatever you want, irrespective of the evidence!

  40. Gravatar of Gene Frenkle Gene Frenkle
    8. September 2020 at 07:21

    The following Politico article shows why this is the perfect time for reparations right when we get the vaccine. So just get people that live paycheck to paycheck a lump sum along with an affordable mortgage and watch the economy boom!

    “Recent economic data and surveys have laid bare the growing divide. Americans saved a stunning $3.2 trillion in July, the same month that more than 1 in 7 households with children told the U.S. Census Bureau they sometimes or often didn’t have enough food. More than a quarter of adults surveyed have reported paying down debt faster than usual, according to a new AP-NORC poll, while the same proportion said they have been unable to make rent or mortgage payments or pay a bill.”

  41. Gravatar of ssumner ssumner
    8. September 2020 at 08:32

    Ralph, You are in way over your head. Money demand is inversely related to the interest rate.

    The only way to set the nominal rate at zero in the long run is to lower inflation enough so that when added to the real interest rate you get zero. That means tight money–as in Japan.

  42. Gravatar of Federico Ricardo Checozzi Federico Ricardo Checozzi
    8. September 2020 at 10:40

    I don’t think this represents keynesian thinking well in this situation. From what I’ve seen (Iván Werning and Paul Krugman), they model it as a supply side recession with demand effects. Stimulus can help even if the true solution is dealing with the virus itself.

  43. Gravatar of Tony Tony
    9. September 2020 at 02:22

    Could it be? I graduated from college in 1983 with a degree in economics. Any questions of Keynesian policy were quickly dismissed by my professors as it was the established philosophy. It forced me to read up on my own Friedman, Hayek and others who were nothing but footnotes and asides in the Keynesian textbooks assigned.
    Now working I don’t see lack of demand I see lack of production. Not enough lumber for construction. Try to buy an appliance and they are in short supply because of a shortage of aluminum. Needed tires for my car and also short supply need to order and wait.
    Will anyone make the connection if a stimulus bill does not pass yet the economy continues to grow?

  44. Gravatar of ssumner ssumner
    9. September 2020 at 08:18

    Federico, Did you see all those Keynesians warning of a fiscal cliff on August 1st?

  45. Gravatar of Dave Schuler Dave Schuler
    10. September 2020 at 04:53

    You wrote:

    The solution is not stimulus, it’s masks plus test/trace/isolate.

    How does that work if isolating is politically impossible? We know that voluntary isolation doesn’t work–Melbourne’s example shows why. People cheat. You can understand the political problem with compulsory isolation when you consider the demographics of prevalence.

  46. Gravatar of Michael Rulle Michael Rulle
    10. September 2020 at 07:58

    Scott as ususal makes the most sense when he stays away from politics—one of the plausible (don’t really know if it is actual) benefits in the long run due to Covid (a benefit can be a benefit, even if we were better off without the condition which created the benefit) is we are learning new ways to do things—which perhaps will have a positive effect when Covid disappears—or diminishes. But—-I really hope one of these vaccines is effective.

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