Kotlikoff goes off the deep end

I hate writing this post, because Laurence Kotlikoff is a highly respected economist who has done important work on the long run fiscal liabilities of the government. And after reading this, those of you who don’t know him will (wrongly) think he’s a crackpot. But he wrote this for Forbes, and it calls for a reply:

In his parting act, Federal Reserve Chairman Ben Bernanke has decided to continue printing some $85 billion per month (6 percent of GDP per year) and spend those dollars on government bonds and, in the process, keep interest rates low, stimulate investment, and reduce unemployment.

Trouble is, interest rates have generally been rising, investment remains very low, and unemployment remains very high.

Bernanke’s dangerous policy hasn’t worked and should be ended.  Since 2007 the Fed has increased the economy’s basic supply of money (the monetary base) by a factor of four! That’s enough to sustain, over a relatively short period of time, a four-fold increase in prices. Having prices rise that much over even three years would spell hyperinflation.

And while Bernanke says this is all to keep down interest rates, there is a darker subtext here.  When the Treasury prints bonds and sells them to the public for cash and the Fed prints cash and uses it to buy the newly printed bonds back from the public, the Treasury ends up with the extra cash, the public ends up with the same cash it had initially, and the Fed ends up with the new bonds.

Yes, the Treasury pays interest and principal to the Fed on the bonds, but the Fed hands that interest and principal back to the Treasury as profits earned by a government corporation, namely the Fed. So, the outcome of this shell game is no different from having the Treasury simply print money and spend it as it likes.

The fact that the Fed and Treasury dance this financial pas de deux shows how much they want to keep the public in the dark about what they are doing.  And what they are doing, these days, is printing, out of thin air, 29 cents of every $1 being spent by the federal government.

The “interest rates have generally been rising” comment is a bit misleading, as the 10 year bond yield is still very low, and part of the increase was expectations that the QE policy would be discontinued.

Much more importantly, he’s flat out wrong when he said that the Fed is printing money to finance the budget deficit. That is simply not true. He is implicitly assuming that the monetary base is “high-powered money.” That was true before 2008, but is no longer true. The Fed is merely exchanging interest-bearing reserves, which are liability of the federal government, for Treasury securities, which are different liability of the federal government. The Fed is not monetizing the debt.

I have heard one financial guru after another discuss Quantitative Easing and its impact on interest rates and the stock market, but I’ve heard no one make clear that close to 30 percent of federal spending is now being financed via the printing press.

That’s an unsustainable practice.  It will come to an end once Wall Street starts to understand exactly how much money is being printed and that it’s not being printed simply to stimulate the economy, but rather to pay for the spending of a government that is completely broke “” with long-term expenditures obligations that exceed its long-term tax revenues by $205 trillion!

This is an outrageous claim, the sort of thing you’d normally see at crackpot websites on the internet. The idea that Ben Bernanke (a moderate Republican) is printing money to bail out the federal government is insulting and absurd.

When Wall Street wises up to our true fiscal condition (and, some, like Bill Gross already have), it will dump long-term bonds like hot potatoes.  This will lead interest rates to jump and make people and banks very reluctant to hold money earning no return.   In trying to swap their money for goods and services, the public will drive up prices.

As I often say, when the markets tell you that your theory is wrong, believe the markets, don’t believe your theory.

His post is entitled “Is hyperinflation just around the corner?”   The answer is no. Two percent inflation is just around the corner, and the corner after that, and the corner after that …

That’s if were lucky, if were unlucky we’ll get 1% inflation.

HT:  Macus Nunes


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72 Responses to “Kotlikoff goes off the deep end”

  1. Gravatar of Smug lib saying your 45% marginal taxes are 2 low Smug lib saying your 45% marginal taxes are 2 low
    2. October 2013 at 07:02

    “he’s flat out wrong when he said that the Fed is printing money to finance the budget deficit.”

    Not exactly. Had the FED not done this where would rates be? And how would that impact the Treasuries ability to borrow and spend. It certainly would not be as easy as it is now.

    Also, QE may be having a contractionary effect. Think about this: The net effect of QE has been to take treasuries out of the economy and replace them with excess bank reserves. Bank reserves can effectively never leave the Fed system, and as such we have removed money from the economy. The only effect that has been expansionary is keeping rates low.

    Peter Stella explains this much better than I do.

    http://www.voxeu.org/article/exit-path-implications-collateral-chains

  2. Gravatar of ssumner ssumner
    2. October 2013 at 07:10

    Smug, No QE since 2009? We’d be in a depression by now, and long term nominal rates would be even lower. But that does raise a good point. The federal government’s fiscal situation would be even worse if we had not done QE. But that doesn’t mean QE is monetizing the debt, that just means really bad, highly contractionary monetary policies cause depressions which leads to big budget deficits and a more challenging fiscal environment.

    Bank reserves certainly can leave the banking system, and the markets tell us that QE is expansionary, so I very much doubt they are contractionary.

  3. Gravatar of policy wank policy wank
    2. October 2013 at 07:14

    Kotlikoff is most definitely a crackpot. Have you ever seen his appearances on BloggingHeads with Glenn Loury? He says all kinds of absurd things. You should go on BH.tv with Loury. He’s managed to do two shows mostly about the Fed without mentioning any actual monetary policy.

  4. Gravatar of Tyler Healey Tyler Healey
    2. October 2013 at 07:16

    Low interest rates are effectively a fiscal drag, which explains why they have failed to raise employment. Rodger Mitchell explains here: http://mythfighter.com/2012/09/11/low-interest-rates-the-sneak-tax-on-you/

  5. Gravatar of Roger Sparks Roger Sparks
    2. October 2013 at 08:15

    Exactly why is it that bank loans increase the money supply but public loans to the government do NOT increase the money supply?

    If your answer is that “bank loans are derivatives” and public loans to the government are “peer to peer loans”, you have what I think is the correct answer.

    Let’s expand on this.

    Bank “loans create deposits”. If we carry this assumption to the bank balance sheet, the loan total should equal the deposit total. (Deposits here would be all bank deposits, not just demand deposits.) Data show that this condition actually occurred just prior to the 2001 and 2007 recessions. At this point, we could consider all deposits as being derivatives of loans, with serious implications for the valuation of underlying assets and the ability of borrowers to repay the loans.

    On the other hand, public loans to the government are a recycle of original base money supply. The path of recycle is: The government borrows from the public, thereby reducing deposits owned by the public. Government pays it’s bills, resulting in increased deposits owned by the public. The government borrows again and the cycle repeats.

    Deposits do not increase with government borrowing because the money supply is recycled. Government Debt increases with each cycle revolution but Government Debt is not considered “money supply”.

    Here is the hard-to-understand part: The public does not have the deposits needed to keep this recycle going unless the Federal Reserve provides enough money to the banking system. We already saw that all bank deposits were the result of loans in the 2001 and 2007 periods. Where could the additional deposits needed for increased government loans come from? Only the Federal Reserve, which has the power to “print money”.

    This printed money does result in increased bank deposits that can be tracked with data, BUT, the deposits are drawn down nearly as fast as created by exchange into Federal Debt. The Federal Reserve, with it’s QE programs, is replacing Federal Debt with deposits. The result is obvious when looking at the current ratio of bank deposits to bank loans.

    So “Kotlikoff” would be right to say that the government is printing money. Only the government can create money (the banks create “derivative money”) and bank deposits are increasing in a near level loan creation environment. The only logical conclusion is that government is printing.

    Perhaps Government Debt SHOULD be considered as part of the money supply.

  6. Gravatar of lxdr1f7 lxdr1f7
    2. October 2013 at 08:41

    Roger Sparks

    Loans create deposits. That doesnt mean the only way a deposit comes into existence is through a loan.

  7. Gravatar of lxdr1f7 lxdr1f7
    2. October 2013 at 08:45

    “As I often say, when the markets tell you that your theory is wrong, believe the markets, don’t believe your theory.”

    Markets seem to be quite dysfunctional maybe even corrupted. I wouldn’t interpret the markets as gospel.

  8. Gravatar of ssumner ssumner
    2. October 2013 at 08:57

    Tyler, Never reason from a price. Interest rates don’t tell us much about monetary policy, they mostly reflect the condition of the economy.

    Roger, Government debt cannot be money, as its nominal price is not fixed.

    lxdr, They are not perfect, but they represent the best estimate of future trends that we have. Over the past five years the markets have been much more accurate than economists or policymakers.

  9. Gravatar of Tom Tom
    2. October 2013 at 08:58

    While I like your critique of Kotlikoff’s conclusion, because I’m also sure we’re in no near-term risk of hyperinflation, I think you’re wrong about the Fed not printing money.

    Further, I think it much better that, right now, the Fed prints money to pay for the politically demanded gov’t spending, than that the gov’t increases taxes. Yes, I’d rather they reduce spending. In fact, I’d be kind of happy with 10% of GDP as gov’t spending, and 5% taxes, and a balanced budget based on the gov’t printing the other 5% in new money. (But that’s a different rant.)

    To show that the Fed is not now printing money, you need to describe what the Fed would be doing if they WERE printing money. And then how QE is not that money printing. But I think QE is a flavor of money printing. (And should be continued at least until inflation is above 5%, the 10 year lowest unemployment rate. )

  10. Gravatar of Bill Woolsey Bill Woolsey
    2. October 2013 at 09:17

    Scott:

    You are wrong about creating money to finance the deficit.

    Most money pays interest. Just because bank reserves pay interest doesn’t mean they aren’t money.

    Paying interest on money, base or otherwise, just means the demand for money is higher than otherwise.

    Now, if you assume a one interest rate economy, and the interest rate on base money is assumed to be higher than the “market” interest rate, then you get weird, corner-solution results. But the problem is the one interest rate thinking.

    Anyway, with the Fed paying higher interest rates on reserves than the interest rate on T-bills, it is pretty clear that creating money to fund the government isn’t saving the Treasury any money.

    The problem with Kotlikoff’s argument is that he is implicitly assuming that the Fed will not reduce the quantity of base money in the future if the demand by banks (and others) choose to hold less. Maybe he has some reason why they cannot reduce the quantity of money, or cannot reduce it enough.

    In my view, the reason we don’t have hyperinflation is that most market participants believe the Fed can and will reduce the quantity of base money such that any decrease in the demand to hold base money can occur without causing more than approximately 2% inflation.

    If Kotlikoff is right, we should be in a corner solution where only the Fed is buying government bonds, bonds the Fed isn’t buying are seeing skyrocketing yields, and yes, we have plenty of spending on goods and services, as well as rising prices for them.

  11. Gravatar of Aidan Aidan
    2. October 2013 at 09:30

    Kotlikoff has been a crank for years now.

  12. Gravatar of ssumner ssumner
    2. October 2013 at 10:20

    Tom, You asked;

    “To show that the Fed is not now printing money, you need to describe what the Fed would be doing if they WERE printing money.”

    I thought that was pretty obvious from the post, they’d have to be creating high-powered money in large quantities. Instead they are mostly creating interest-bearing reserves.

    Bill, I agree that reserves are money. But the phrase “printing money to finance the debt” means actually printing money. The reserves that are being created are not printed. That’s the key difference. There is no fiscal gain to the government from swapping one interest bearing asset for another, except in the indirect sense that it expands the economy, which is of course desirable.

    When Latin American governments used to print money to monetize the debt, they were printing non-interest bearing currency. That’s when you get hyperinflation. There is nothing particularly inflationary about the Fed’s actions, the effect on inflation is just a few basis points.

  13. Gravatar of Mike Mike
    2. October 2013 at 10:28

    ” I thought that was pretty obvious from the post, they’d have to be creating high-powered money in large quantities. Instead they are mostly creating interest-bearing reserves.”

    Reserves are high powered money right?

  14. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. October 2013 at 10:41

    There are a few problems with Kotlikoff’s phrasings. For example, he writes:

    “…the outcome of this shell game is no different from having the Treasury simply print money and spend it as it likes.”

    Actually, for all practical purposes, it is *Congress*, not Treasury (or the Fed) that spends money. Treasury has no control over appropriations and virtually zero control over how money is spent.

    But, on the larger point, Kotlikoff is more right than wrong. He wrote:

    “And what they are doing, these days, is printing, out of thin air, 29 cents of every $1 being spent by the federal government.”

    and

    “I have heard one financial guru after another discuss Quantitative Easing and its impact on interest rates and the stock market, but I’ve heard no one make clear that close to 30 percent of federal spending is now being financed via the printing press.”

    The objection here seems to be to the use of the term “printing” and “printing press”. I would be more sympathetic to that criticism if I thought that economists had a unanimous view as to what those terms mean. It appears that, as with so many terms thrown around, they don’t. So, it’s easy to choose one’s own definition and then to call someone else’s different usage as “absurd”, “insulting” or whatever. After all, didn’t Bernanke in an unguarded moment not so long ago refer to QE as the Fed’s “printing press”? I think Kotlikoff gives enough context to know what his usage is.

    Where Kotlikoff is factually correct is that for every $100 of current government deficits (the amount Congress spends over what it takes in), only about $71 is “financed” through Treasury issuances purchased by the general public (domestic and foreign).

    If I were to try to develop an analogy for this financing situation, I would say the Fed is financing the remaining $29 by providing “bridge loans” through QE. So, my question is: If one disagrees that the Fed not financing about $29 of the government’s current deficits, then I would ask you to tell me who is.

    Whether or not those bridge loans will be re-financed to the public remains to be seen and therefore whether or not this is ultimately “printing money” also remains to be seen.

  15. Gravatar of Smug lib saying your 45% marginal taxes are 2 low Smug lib saying your 45% marginal taxes are 2 low
    2. October 2013 at 10:52

    So Scott, just to be clear, you’re trying to say that the fed is not printing money because they are not putting ink to paper? I have a load of respect for you but this seems absurd.

  16. Gravatar of Don Don
    2. October 2013 at 10:58

    “…make people and banks very reluctant to hold money earning no return.” This seems like a very good thing to me!

  17. Gravatar of Max Max
    2. October 2013 at 11:10

    Scott, “When Latin American governments used to print money to monetize the debt, they were printing non-interest bearing currency. That’s when you get hyperinflation. There is nothing particularly inflationary about the Fed’s actions, the effect on inflation is just a few basis points.”

    The quantity of paper money isn’t fixed any more than the quantity of reserves is fixed. So, literally printing money is not more inflationary. What is (hyper)inflationary is if the central bank is unable to reduce the quantity of money (because it’s buying worthless or overpriced assets, such as government bonds that nobody else would buy).

  18. Gravatar of Matt McOsker Matt McOsker
    2. October 2013 at 11:25

    How can anyone say the Fed is monetizing the debt when the treasuries they do buy are in the secondary market. This is the same as any FOMC operation to manage the FFR in the past (when we were not at the zero bound).

  19. Gravatar of John John
    2. October 2013 at 12:11

    Why would 2% inflation be luckier than 1% inflation. Wouldn’t you rather have 1% inflation and 4% real growth rather than 2% inflation and 3% real growth. For a more interesting question, wouldn’t 1% inflation and 4% real growth be better than 2% inflation and 4% real growth other things being equal? I thought the point of NGDP targeting was to stimulate higher real growth by providing a stable macro background not just a way to generate higher inflation right now.

  20. Gravatar of ssumner ssumner
    2. October 2013 at 12:59

    Mike, Obviously not if they are interest-bearing!

    Vivian, You said;

    “So, it’s easy to choose one’s own definition and then to call someone else’s different usage as “absurd”, “insulting” or whatever. After all, didn’t Bernanke in an unguarded moment not so long ago refer to QE as the Fed’s “printing press”?”

    Oh come on, I obviously wasn’t calling his claim absurd because of the way he defined printing money, but rather his claim as to Bernanke’s motivation.

    Smug, The term “printing money” means creation of high-powered money. I am using the standard definition, it’s Kotlikoff who has chosen the weird definition. In any case, however you define the term ‘printing money,’ Kotlikoff is wrong. If you claim that interest-bearing reserves is “printing money” then it is no longer true that printing money is highly inflationary, and it is no longer true that printing money is equivalent to monetizing the debt. People are getting too obsessed with definitions; it is the content of his post that is important.

    Max, I don’t think we need worry about that problem.

    John, Good point, I should have been clearer. I meant that if the Fed did enough stimulus for 2% inflation, then ceteris paribus we’d be better off than if they just did enough stimulus for 1% inflation. But yes, if the 2% inflation came from an adverse supply shock that would be bad.

  21. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. October 2013 at 13:06

    “Oh come on, I obviously wasn’t calling his claim absurd because of the way he defined printing money, but rather his claim as to Bernanke’s motivation.”

    Actually, it was not so obvious. Perhaps you could spell out, exactly, what you believe he claimed Bernanke’s motiviation was or is, if not “printing money”.

  22. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. October 2013 at 13:09

    Scott,

    As an addendum to the prior comment, I wonder if you could also address the query of who, exactly, is financing 29 cents on the dollar of current federal deficits, if not the Fed?

    Thanks.

    Viv

  23. Gravatar of Tommy Dorsett Tommy Dorsett
    2. October 2013 at 14:33

    The argument that QE has been contractionary because the Fed is supposedly contributing to a safe asset shortage as some critics have argued FAILS on multiple fronts: bond yields have tended to RISE during ‘QE on’ periods and fall during ‘QE off periods’, (which should be what happens if it works), up-ending and invalidating this silly argument in its entirety. Moreover, divisia M4 has tended to accelerate during QE periods (as David Beckworth had showed) and nominal growth has been steady in the USA (unlike the EZ) despite the most swift fiscal consolidation since the 1950s. None of that is consistent with the ‘QE has been a net negative’ argument unless one is reasoning from the wrong price change and failing on every count from an analytical perspective. It’s really a cottage industry of nuts and cranks when it comes to the Fed/monetary policy.

  24. Gravatar of dpaff88 dpaff88
    2. October 2013 at 15:15

    Kotlifkoff has been talking this way for years. From 2011:

    http://www.kotlikoff.net/category/blog-tags/hyperinflation

    Submitted by Larry Kotlikoff on Fri, 02/25/2011
    http://www.kotlikoff.net/content/how-close-america-fiscal-crisis

    So according to him in early 2011, USA is bankrupt “today”. What gibberish this person continues to speak.

  25. Gravatar of dpaff88 dpaff88
    2. October 2013 at 15:24

    Also this from 2010:

    “Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices.”

    http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html

    LK was always in the deep end. Another Very Serious Person who got it wrong.

  26. Gravatar of Lorenzo from Oz Lorenzo from Oz
    2. October 2013 at 15:35

    The disease of not being able to tell the difference between tight money and sound money (Kotlikoff is arguing for the former, moving even further away from the latter), it does seem to be very widespread.

  27. Gravatar of Matt McOsker Matt McOsker
    2. October 2013 at 16:01

    Viv, that debt has already been sold. The Fed is not buying it directly from the treasury, but in the secondary market. The treasury will have no problem selling debt if or when QE ends.

  28. Gravatar of Vince Cate Vince Cate
    2. October 2013 at 16:36

    For it to be reasonable for you to claim we are not headed for hyperinflation you should first explain your theory of hyperinflation. What causes it? How does it start so suddenly? Why does it go on so long? Why is it hard to stop? Does your theory match historical cases? Etc. After you explain your theory then look at the current situation and see if your theory says there is a risk of hyperinflation or not.

    I have collected about 30 different explanations for hyperinflation. Looking at these, I think Japan, the USA, and UK are really at risk. But if you have a theory of hyperinflation different from all of these, I would really like to hear it. I will be fascinated if your theory matches historical cases but says these 3 countries currently have no risk.

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

  29. Gravatar of Benjamin Cole Benjamin Cole
    2. October 2013 at 16:41

    QE is monetizing debt—a good idea right now. I am a double crackpot.
    One problem is that some of the QE outlays seem to end up as inert bank reserves. But enough QE spending is stimulative to make it effective.
    Another thought: Eventually, the Fed has to sell its hoard of QE bonds and extinguish the cash—that is to say, the monetization is temporary. Better if law were changed to allow the monetization to be permanent.
    There! I broke the taboo! I said I like monetizing debt!

  30. Gravatar of Matt McOsker Matt McOsker
    2. October 2013 at 17:58

    Ben, one issue is there are 2 definitions of monetization floating out there. One is turning bonds, which are not defined as “money” to reserves which is defined as money. The other is that the fed is financing the deficit. The latter is not operationally correct.

    Vince, we are not headed to hyperinflation so don’t hold your breath.

  31. Gravatar of Vince Cate Vince Cate
    2. October 2013 at 18:16

    By what theory of hyperinflation do you judge that we are not headed to hyperinflation?

  32. Gravatar of Vince Cate Vince Cate
    2. October 2013 at 18:21

    Hyperinflation is something of an obsession of mine. I have been using Google to find anything interesting on hyperinflation for about 4 years now. I have debated hyperinflation with many people. I really have not found any solid theory of hyperinflation that would make Japan look safe from hyperinflation. I honestly would very much like to understand if you know of a reasonable theory for explaining hyperinflation that makes Japan look safe from it.

  33. Gravatar of Mike Mike
    2. October 2013 at 18:50

    ssummers

    So reserves are not high powered money when they are interest bearing? How are they not high powered?

  34. Gravatar of Tom Brown Tom Brown
    2. October 2013 at 19:19

    Time to put the bat signal up… Mark A. Sadowski, what do you say? Has Kotlikoff gone off the deep end?

  35. Gravatar of Vince Cate Vince Cate
    2. October 2013 at 19:33

    Forbes is targeting a wide audience. In general usage “printing money” means “making more money”. I have a collection of over 100 other ways to say “making more money”:

    http://howfiatdies.blogspot.com/2010/11/euphemisms-for-printing-money.html

  36. Gravatar of Vince Cate Vince Cate
    2. October 2013 at 19:37

    If the Treasury sells bonds to Goldman Saches and Goldman Saches sells them to the Fed then in 1 hop most of the public has been fooled. Normal money laundering takes many hops to be safe. But here one hop, which might only take miliseconds, and many people think the Fed is not monetizing. So easily fooled it is sad.

  37. Gravatar of lxdr1f7 lxdr1f7
    2. October 2013 at 22:09

    “Bernanke’s dangerous policy hasn’t worked and should be ended. Since 2007 the Fed has increased the economy’s basic supply of money (the monetary base) by a factor of four! That’s enough to sustain, over a relatively short period of time, a four-fold increase in prices.”

    Looking at historical data of the last 50 years CPI and base haven’t increased on the same magnitude.

  38. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. October 2013 at 22:13

    “Viv, that debt has already been sold. The Fed is not buying it directly from the treasury, but in the secondary market.”

    That’s irrelevant as to who is financing. I don’t care if that debt previously changed hands 100 times. If I hold a debt instrument and sell it to you, I’m no longer “financing”, you are. The cumulative someones are *currently* “financing” 100 percent of the debt. If not the general public, then who is? Why are you reluctant to answer that question?

    “The treasury will have no problem selling debt if or when QE ends.”

    Let’s hope so. But, which rate will then prevail and what will the discount be? Will they incur a loss in selling? And, that is exactly the point. Again, no analogy is perfect (otherwise it would not be an analogy) but I think it is useful to consider this a sort of bridging loan.

  39. Gravatar of Lorenzo from Oz Lorenzo from Oz
    2. October 2013 at 22:35

    Vince Cate: for hyperinflation to occur, the monetary base has to hugely and continually overhang the demand to hold money. Typically, by continuing to dramatically expand as demand to hold money continues to drop, especially after feedback effects begin to operate. This is why the massive expansions in the monetary base in the 1930s did not lead to hyperinflation: the demand to hold money was high and the monetary base did not continue to expand in the way required to create hyperinflation when that demand began to fall.

    BTW wars lead to hyperinflation:

    (1) because states massively increase their liabilities without commensurate increasing their ability/willingness to pay. One way to eliminate those liabilities is to inflate them out of existence. This is why one gets postwar hyperinflations–typically, however, by losing states. The post WWI hyperinflations were of this form (Germany, Austria, Hungary–all losing states saddled with huge reparations on top of their domestic liabilities). There was inflation in the winning countries, but not remotely at hyperinflation levels.

    (2) because the expected period when the money will not be legal tender (in fact, will be banned by the new government) becomes closer and closer, leading to the “burning potato” effect where the potatoes will turn to ash at the end of the last round. This is why one gets “catastrophic defeat approaching” hyperinflation (e.g. Confederate States of America).

    There are various reasons why states might choose to expanding their monetary base faster and faster–and even more rationalisations: the head of the Reichsbank during the 1923 Weimar hyperinflation said that the Bank was simply responding to the demand for money (not, one notes, the same as the demand to hold money). But what happens to the price of anything if it is supplied at whatever levels folk ask for it?

    But hyperinflation always comes down to the monetary-supply and money-demand Marshallian scissors operating to continually push the swap value of money towards zero and so the price level towards infinity. Which is why the typical solution is to move to a new money with the intention of creating quite different expectations about its future path. (Understanding hyperinflation requires understanding how it ends.) Hyperinflation is always a monetary phenomena; but a supply and demand one.

  40. Gravatar of Benjamin Cole Benjamin Cole
    2. October 2013 at 22:37

    BTW. John Cochrane has a post to the effect that QE is actually contractionary, and also a response, that Cochrane liked, that QE lowers the cost of capital while supporting wages. This leads to jobless recoveries as businesses invest in labor-saving equipment. Like Home Depots’ self-check out stands.

    So now here is an expanded list of why QE is no good.

    1. It is hyper-inflationary.
    2. It is inert, does nothing. the Fed is merely swapping assets.
    3. It does not help the broader economy, but does cause bubbles, EMT notwithstanding.
    4. The Fed ends up with a big balance sheet. (Why that is harmful, I do not know, but I know it is bad.)
    5. QE causes “unquantifiable financial risks.”
    6. QE is actually contractionary, by locking money up in reserves. (Although I guess that means we can fight inflation through QE in the future, pay down the national debt, and make sure banks have all the reserves they want, and make a slight profit on their reserves. No bank failures!).
    7. QE causes jobless recoveries, because labor does not lower its price, but capital costs go down, and this leads to business buying labor-saving equipment.

    I may have missed a couple reasons why QE is no good, and I ask readers pass them along.

  41. Gravatar of lxdr1f7 lxdr1f7
    2. October 2013 at 22:54

    Benjamin Cole

    Add these. The fed isnt attaining its inflation or UE targets.

    QE is like trickle down economics. Instead of giving business tax breaks hoping for the money to trickle down the fed is hoping asset price increases sprinkle some money into the broader system. They are hoping that all the unemployed and people with no assets except maybe their car or a house “rebalance portfolios” to get the economy going.

  42. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. October 2013 at 22:55

    “..a response, that Cochrane liked, that QE lowers the cost of capital while supporting wages.”

    Not exactly. The comment Cochrane quoted did not make any claim that QE supports wages:

    “If wages can’t adjust down quickly but capital costs do, this could easily encourage companies to engage in capital intensive investment to the detriment of labor. I think of home depot replacing check-out workers with check-out computers.”

    http://johnhcochrane.blogspot.fr/2013/09/is-qe-contractionary.html?showComment=1380741811463

    While I’m not that “author” of that point, it is precisely one a made here not too long ago and, to my recollection, Scott agreed. Why would this be controversial?

  43. Gravatar of Benjamin Cole Benjamin Cole
    3. October 2013 at 00:30

    Vivian-

    Okay, I used the word “support” to mean that wages “can’t adjust down quickly.”

    That strikes me as semantics. Actually, I doubt wages ever adjust down quickly, due to powerful social norms pertaining to lowering worker pay in nominal terms. Such nominal wage-cuts are understood to be punitive.

    I cannot answer for Sumner, but my take is that automation never cuts employment (macro-economically speaking), except in rare contexts. That is usually a Luddite (and left-wing) canard.

    If the gist of that letter to Cochrane is true, then we could increase employment by requiring that check-out counters use abacuses going forward, and outlawing bar codes. And outlaw earthmoving equipment, mandating the use of shovels. And if that doesn’t work, to paraphrase Milt Friedman, then we mandate spoons.

    I never thought that the low cost of capital would be cited as a negative by conservative economists, and cited as a factor distorting business investment decisions, and even compelling businesses to “inefficiently” allocate capital to labor saving devices.

    Yes, let’s raise the cost of capital and do business a favor.

    What is it about QE that just makes right-wingers go nuts? It is not about economics—it would take a psychiatrist, or sociopathologist to answer that one.

  44. Gravatar of Benjamin Cole Benjamin Cole
    3. October 2013 at 00:39

    lxdr1f7:

    I share some concerns that QE does not just put money into the hands of people who would spend it, that being the lower-middle-class, for example.

    However, that could happen through the tax code, and QE together—that is, eliminate Social Security taxes for a year, and do QE hard and heavy. Or rebate sales taxes. I think you are blaming QE for faults of the tax code.

    Also, the problem is not with QE, but the Fed’s timid use thereof, and their general indecisiveness. They should say we are going to pour it on, and then they should do so, no doubts anywhere about it. Fat City baby here we come.

    We have the infrastructure, we have the educated population, we have the business smarts—the only thing missing is lots of cash in circulation.

    BTW: My idea, for a national lottery with more winners than losers, and in which most winning tickets are “small” (around $100, say), and paid in cash at your 7-11, gets no traction anywhere. Scott Sumner sneers at my idea, while others refuse to even acknowledge it. I like trickle up.

    (Lottery winners would have to provide their SS number, and no more than $100 in winning tickets could be cashed on any day (to prevent packagers from buying lots of tickets).

    Print, baby, print.

  45. Gravatar of Vivian Darkbloom Vivian Darkbloom
    3. October 2013 at 01:01

    “Okay, I used the word “support” to mean that wages “can’t adjust down quickly.”

    You are evading the objection. Nobody is saying anything about wages being sticky (failing to downward adjust in a recession). The question is, what does QE have to do with preventing that from happening? The original comment you paraphrased said nothing to that effect; however, your summary of the comment (and subsequent reply) imply that QE would hinder the downwards adjustment.

    I recall the following remark made by a real economist: “I did not mean to imply QE boosts wages in the short run.”

    https://www.themoneyillusion.com/?p=21241

    Of course, that is not the same as QE *preventing wages from falling* in the short-run, but that appears to have been the gist of your mis-translation. If true, would that help your short-run employment case?

    I have no doubt that, given sufficient time, employment will catch up. After employees (or their children) are re-trained and educated. But, as a famous economist once said about the long-term…. And, the comment you cited said nothing about the long-run equilibrium.

    The simple point is that in a recession when interest rates are low and wages don’t adjust, capital gains an advantage over labor. If QE drives interest rates down (even if it has not short-term effect on wages) does that make investment in machines somewhat more attractive than labor?

    And, you think I’m a right wing conservative economist? You flatter me.

  46. Gravatar of Vivian Darkbloom Vivian Darkbloom
    3. October 2013 at 01:34

    “I never thought that the low cost of capital would be cited as a negative by conservative economists, and cited as a factor distorting business investment decisions, and even compelling businesses to “inefficiently” allocate capital to labor saving devices.

    Yes, let’s raise the cost of capital and do business a favor.”

    Who’s citing it as a negative? To quote Scott, you really do seem to be in a black and white world. There was a simple point raised in that comment which, again, seems rather uncontroversial on its face. And, who said the effect was “inefficient”? If it were inefficient, I would certainly expect business would react differently to the relative costs of capital and labor than they do. This is not a matter of making a qualitative or moral judgement—it’s simply trying to see things as they are.

    “What is it about QE that just makes right-wingers go nuts? It is not about economics””it would take a psychiatrist, or sociopathologist to answer that one.”

    You may correct me if I’m wrong, but I’m going to assume that comment was directed at me.

    First, please explain what, exactly, you believe makes me a “right-winger”? I don’t know it has a precise definition, so I’ll leave that to you. As a second step, you might elaborate why you think that is bad.

    Then, please explain why in the hell you seem to think I am against QE or the particular movement being espoused here?

    What strikes me about many of the commenters here, and yes, Benjamin, I’m directing this at you, is that there seems to be a negative reflexive response to anything you believe may remotely be critical of the whole monetary stimulus/NGDP targeting policy that is advocated here. I guess there is a certain comfort in belonging to a group or a movement or a party or whatever that gets you in this mood.

    The fact is, Benjamin, in following these discussions, I’m fairly sympathetic to the policies advocated (I guess that’s what makes me a “right-winger”?). It’s just that unlike you, I’m not a card carrying member (of this, or anything else). So, when someone raises a fairly non-controversial point about the effect of QE and interest rates and the interaction with wages and the labor market, I’m willing to accept that, yes, there may be a (small?) countervailing cost. That’s true of any policy, monetary, fiscal or whatever. There’s no point in denying it, what matters is whether, on balance, a particular policy is the right thing to pursue.

    So, you tell me who is more “nuts” and in need of therapy. A hanger-on and a person who needs to belong to a group so that he can blindly follow along or someone who tries to do a little thinking for herself?

  47. Gravatar of Vivian Darkbloom Vivian Darkbloom
    3. October 2013 at 02:09

    Oh, I forgot. ☺Great blogging.☺

  48. Gravatar of Ralph Musgrave Ralph Musgrave
    3. October 2013 at 02:12

    Kotlikoff is right. If I have $X of Tresuries and I sell them as part of the QE operation, I get a check for $X from the Fed. What’s that if it’s not money?

    Or have I missed something?

  49. Gravatar of Benjamin Cole Benjamin Cole
    3. October 2013 at 03:59

    Vivian-

    Oh dear, a lot to answer for here.

    Okay, I incorrectly assumed you were another right-wing economist, and I also incorrectly assumed that you hopped on Cochrane’s “All Aboard, Any Anti-QE Views Welcome, Even Contradictory Ones” bandwagon. Cochrane seems to collecting, airing and responding positively to every anti-QE view, to what end I do not know. It is just what a right-wing economist does. Or a GOP economist.

    As for this: “And, who said the effect was “inefficient”? If it were inefficient, I would certainly expect business would react differently to the relative costs of capital and labor than they do.”

    That is Cochrane’s word, “inefficient.” (!)

    Go check his answer to that question. He says that if QE compels businesses to migrate to “inefficient” allocation of capital to machines over labor, then it is reducing the demand for labor. Why businesses would “inefficiently” allocate capital is left unexplained, but Cochrane suggests that with QE lurking, they will. Those ultra-low interest rates lure them into unwise decisions, I guess.

    Okay, you and Cochrane are wrong, however; the use of machines never reduces the demand for labor, if aggregate demand is maintained (or better yet, grows). If machines do a better job, then costs and prices are lowered. Consumers have more money left over and spend it elsewhere. Autoworkers replaced by machines become hairdressers, foofing up the independent-thinking Vivian’s hair-do, as she now has more money to spend, as her car costs less.

    QE does lower interest rates? Okay, but when we are in or near ZLB? My take is that QE raises interest rates by boosting aggregate demand, leading to a more-robust economy. But even if QE lowers rates, and businesses buy more machines, that still will not decrease overall employment as long as AD is growing…

    QE and wages? I consider wages sticky, so moving nominal aggregate demand up is the best solution to a recession…Cochrane is just panting for deflation, and said so in a recent post. He stated that his fancy models revealed that only a swift bout of deflation would result in a steady growth path thereafter…(what deflation means to real estate markets,borrowers and banks …ouch and ouch. Banks stop lending, meaning real estate goes down, meaning banks stop lending….)

    Lastly, perhaps I am nuts and in need of therapy (I just wished therapy worked). But at least I confine my mental illnesses to my private life, and not my profession (as in the case of right-wing-GOP economists and their perverted obsession with QE).

    I actually do not totally belong to the Market Monetarist group either. I think forward guidance is a weak pillar (I will explain if you care), and I would just print money and dump it on city streets if I could. Or, as I explained above, a national lottery with more winners than losers. For that matter, I would goose payouts at horse tracks. My idea of forward guidance would be to tell people we are going to print money until the sewers are clogged with Benjamin Franklins, and the Fed has paid off the entire national debt. I also like hyperbole, but only a very little of it.

    I am not obsessed with inflation, and if it ran towards five percent I would not worry that much–some in the MM community have called five percent inflation “runaway.” The whole 1960s has been re-cast as a failure due to “too high” inflation, says the MM camp. That was a decade in which real per capita income rose by 30 percent and the PCE deflator hit 4.5 percent in 1969. Boy, if that is a bad decade, give to me bad decades again. I don’t have that many left, btw.

    The MM community minces around too much for my tastes. Central banker-itis. We need to just blows the doors open at the Fed and print, baby, print.

    Great blogging? Yes, Scott Sumner is a great blogger—and I sometimes disagree with him.

    I am glad you think independently. Keep posting. Great posting, btw. 🙂

  50. Gravatar of Benjamin Cole Benjamin Cole
    3. October 2013 at 04:09

    Ralph Musgrave:

    I agree with you–QE monetizes debt. I think that is a good thing, in current context.

    Now, some bond sellers to the Fed might just stuff their money into the bank. That might explain some of the swelling excess reserves.

    But overall that does not make sense. If you own a Treasury, then you are liquid (five days a week you can sell quickly) and you have zero credit risk and you have a yield.

    If you sell bonds to the Fed and move to cash in a bank, you have no risk, you have immediate liquidity—but no yield and maybe minor fees.

    So, the only reason to sell a Treasury bond to the Fed is to spend the money you receive, or bank it planning to buy stocks or property, or to actually buy stocks and property. And, we have seen property and stock markets rally on QE.

    QE should just be a lot bigger, or ramp up monthly until certain targets on inflation and employment or NGDP are reached.

    Aggressive targets.

    The Fed should blow its doors open and print, baby, print. Bernanke should get a muscle shirt and a headband, make a power-fist and shout, “I will print money until the plates melt, and then I will issue scrip! And listen closely: I am taking off my wing-tip shoes!”

    Then we would see Fat City again.

  51. Gravatar of Matt McOsker Matt McOsker
    3. October 2013 at 05:42

    Vince – here is the theory.

    Let’s take the two most cited Weimar Germany and Zimbabwe.

    1) Weimar owed huge war reparation debts in foreign currency. They printed and then had to massively sell their fiat to convert to foreign. All that selling killed their currency relative to others. Now on top of that the Ruhr was occupied by France and Belgium to extract reparations pretty much killing production of key goods. Lots of many chasing few goods lead to inflation.

    2) Zimbabwe had a civil war that destroyed production of key exports, and other products were scarce. It was too much money chasing too few goods. Zimbabwe experienced a 50% drop in output. Zimbabwe’s extreme and uncontrollable inflation made it the first””and so far only country in the 21st century to experience a hyperinflation. Zimbabwe’s economy really does not compare to the UK, JApan or US economies in terms of output. Part of the output lost was due to emigration as well.

    So both cases had a loss in output, which I have to imagine increses velocity as people spend quickly to get scarce goods.

    So if you take M*V=P*Y

    M – Money Supply
    V – Velocity
    P – Price
    Y – Output

    So
    P = V + M – Y
    1000 = 1000 1000 -1000
    3000 = 2000 2000 -1000
    3500 = 2000 2000 -500

    Look what happens when output drops in combination with increased velocity and money supply. In Zimbabwe Velocity increased as people spent their money immediately. I made these numbers up to illustrate the point. Increase output in the formula and price goes down assuming supply and velocity stay constant. Now I know there may be controversy over output, in that money effects output, and should keep it growing. But, wars may be an exception that can destroy output despite changes in money supply.

    Here is a paper on their inflation from St Louis Fed:
    http://www.dallasfed.org/assets/documents/institute/annual/2011/annual11b.pdf

    Now let’s look at more modern times, UK, Japan and US have all executed QE’s and there is no hyperinflation to be seen, and we have not lost major output of key goods. The latter are plentiful, and I have not looked but the US has decent output stats.

  52. Gravatar of ssumner ssumner
    3. October 2013 at 05:51

    Vivian, Bernanke’s motivation is obviously to boost aggregate demand, not to bail out the US government. We’re not a banana republic yet. The deficit is being financed by the public, by taxpayers, not by the Fed. The interest-bearing reserves, is a liability of the public. They’re the ones that have to pay the interest.

    Vince, hyperinflation occurs when governments don’t have enough tax revenue or borrowing ability to service the debt. The US is not even close to being in that position. If we were you’d see it in the 30 year bond market.

    Mike, I’m not sure what you’re asking. High-powered money is money that doesn’t earn any interest, and also money that’s created by the government. If the money pays interest, it’s not high-powered money.

    Ben, Cochrane needs to tell the financial markets that it’s contractionary so that they start moving in the “correct” direction.

    Ralph, I explained that in the comments above. It is money, but it is certainly not “printing money to monetize the debt.” That is where you exchange non-interest bearing high-powered money for interest-bearing debt. The Fed is not doing that.

  53. Gravatar of Ralph Musgrave Ralph Musgrave
    3. October 2013 at 05:52

    Benjamin,

    Another reason to sell Treasuries is that if and when QE is reversed, you’ll probably make a profit. The Fed buys Tsys when rates are low and bonds values are high. And when the Fed sells them back to you, rates will be on the up, and bond prices will probably be low. (Not that I’m an expert on bond trading, please note).

    As regards going wild with QE, I don’t like that idea: I much prefer fiscal stimulus. That’s because QE channels stimulus into the economy via the rich. Second, it stimulates investment and not much else. Third, fiscal stimulus can be spread widely throughout the economy: public and private sector. I.e. fiscal stimulus (at best) is not distortionary. But I appreciate that if the economic illiterates in Congress won’t do fiscal stimulus, then QE is the only alternative.

  54. Gravatar of Vivian Darkbloom Vivian Darkbloom
    3. October 2013 at 06:19

    “The deficit is being financed by the public, by taxpayers, not by the Fed. The interest-bearing reserves, is a liability of the public. They’re the ones that have to pay the interest.”

    Thanks, Scott. But, that more or less confirms what I suspected. Sure, the taxpayers are ultimately liable. Just like when a bank makes a loan its shareholders and depositors are doing the financing. In this instance, the Federal Reserve is providing the principal for this financing by creating those reserves. In effect, the Fed is acting as the (undisclosed) agent of taxpayers. In the same sense, we could say that banks don’t provide financing—their shareholders and depositors do.

    But, isn’t this more or less Kotlikoff’s point? I read him as suggesting that taxpayers don’t understand their role in all of this—what they hear from the Fed and Bernanke is that they are doing this to keep down interest rates without disclosing the taxpayer’s current stake and the potential stake in any unwinding. I did not read him as saying the effect is current monetization, although I clearly read him as warning that it could end up that way.

  55. Gravatar of Roger Sparks Roger Sparks
    3. October 2013 at 07:05

    ssumner,

    “Roger, Government debt cannot be money, as its nominal price is not fixed.”

    Perhaps you would find it more acceptable to say “Perhaps Government Debt should be a MEASURE of money supply”. That is a less definite statement than “Perhaps Government Debt SHOULD be considered as part of the money supply.”

    Government debt is a record of consumed deposits and a record of deposits which will be restored in the future. It follows that Government Debt is a record of two events, each occurring in a different time period.

    If the lender wishes to spend his Government Debt before the end of a time period, it is a trivial step to sell the loan, albeit that he may suffer a small discount. The net effect of easy convertibility and new owners of deposits, is that the perceived money supply has increased. This is very similar to bank lending although not nearly so direct.

  56. Gravatar of Neil Neil
    3. October 2013 at 07:10

    “As I often say, when the markets tell you that your theory is wrong, believe the markets, don’t believe your theory.”

    Dr. Sumner fails to see the inflation manifesting in the stock market. Look how much money has piled into it since 2009. All of this is due to monetary policy. When the markets finally come to the realization that the stock market will collapse without a continuous supply of QE, then investor money will start rushing into U.S. dollar alternatives, such as precious metals, and the inflation will begin to take hold with a vengeance. When will this happen? Who knows. The markets were surprised once already at the September Fed meeting. They will be surprised once again when they don’t taper at the December meeting. Then Yellen will take the helm. At that point watch for QE to actually increase sometime in 2014. So it would seem reasonable for one to assume that inflation could start to take hold near the end of 2014. But these things have a habit of going on for longer than you think they will, so let’s say by the end of 2015, the markets should start to realize that the Fed cannot exit without destroying the Western banking system, and Kotlikoff will be proven correct in his assessment of the situation.

  57. Gravatar of James in london James in london
    3. October 2013 at 12:47

    Lorenzo. “The burning potato effect”. I love that. Not sure if you originated it, but it is the first time I’ve read it.

  58. Gravatar of Vince Cate Vince Cate
    3. October 2013 at 12:59

    ssumner, if Japan’s interest rates go up something like 2% then the interest on their debt would be more than the taxes collected. At that point would you agree that they “don’t have enough tax revenue or borrowing ability to service the debt.” I think this mean’s Japan’s central bank will buy up just about every bond that comes for sale to keep interest rates down. As soon as inflation rates start to go up I expect a panic to get out of JGBs, where the central bank will monetize at amazing speeds. Do you think Japan is at risk for hyperinflation?

    Collapsing production and tax base is one way that government deficits get out of control and you can get hyperinflation. There are many other ways to get out of control deficits.

  59. Gravatar of James in london James in london
    3. October 2013 at 13:07

    I like the phrase “monetizing the debt”. I agree Bernanke isn’t setting out to do this, but I also agree with Benjamin Cole in a way, to be successful with QE he has to succeed a bit in monetizing the debt. That’s the point.

    You want more money created than there is demand for it. You just don’t want Bernanke to be too successful. You want the “hot potato effect” but not the (and my favourite new phrase) “burning potato effect”.

  60. Gravatar of Lorenzo from Oz Lorenzo from Oz
    3. October 2013 at 13:58

    James in London: it just seemed a natural extension of the original metaphor. I also have no idea if anyone has ever used it before.

  61. Gravatar of wiretap wiretap
    3. October 2013 at 15:06

    Interesting debate on cost of capital vs. employment. Michael Pettis wrote an interesting piece from the opposite viewpoint, before his blog exploded. The gist of it was that Spanish wages are falling, but the cost of capital is high, so regaining competitiveness versus Germany is not on the table in the near term.

  62. Gravatar of ssumner ssumner
    3. October 2013 at 16:26

    Vivian, You said;

    But, isn’t this more or less Kotlikoff’s point?”

    No, Kotlikoff is wrong. If you can find some part of his argument that is correct, please let me know. You seem to be reading something into his argument that isn’t there.

    Roger, I’ve never known anyone to go shopping with a purse full of government bonds. So I don’t think that bonds are very close substitute for money. Yes, government bonds can easily be converted into cash, but then you still need cash to purchase goods and services. So money is still special.

    Neil, You said;

    “Look how much money has piled into it since 2009.”

    Next time I visit Wall Street I have to remember to ask them to show me the room where they keep all the money that has piled into the stock market since 2009. It makes my hair hurt when I read people talking about money going in the markets. Money goes through markets, whether they rise or fall. Don’t confuse rising asset prices with money going in the markets. When the stock market crashed in October 1987 a record amount of money “went into” the stock market.

    Vince, I don’t know where you get your data but if you just think for a moment it’s obviously wrong. The net debt in Japan is around 100% of GDP, maybe a little bit more. You’re talking about an extra 2% or so of GDP. Japan could easily raise that money with higher taxes. And of course you ignore the fact that if interest rates have gone up by 2% then nominal GDP growth will go up by more than 2% because they are at the zero bound. So the Japanese government would actually be better off in that scenario.

    James, Yes, of course you’d like to do a little bit of monetizing the debt, just enough to get inflation up to 2% or nominal GDP growth up to 5%. But of course that’s not what, Kotlikoff is talking about.

  63. Gravatar of Vince Cate Vince Cate
    3. October 2013 at 19:01

    Thanks. There may in fact be a problem with my numbers.

    The Japanese ministry of finance web site made it seem like interest on the debt was already 25% of taxes even at near zero interest rates. From this people calculated how small an increase in interest rates would use up all the taxes. However, Krugman says this 25% includes principle for bonds coming due. If Krugman is right, then I think Kyle Bass, and someone trying to rebut him, have been confused as well.

    http://krugman.blogs.nytimes.com/2010/07/04/japanese-interest-payments/?_r=0

    http://www.forbes.com/sites/stephenharner/2013/02/11/cooler-heads-the-rebuttal-to-kyle-basss-japan-market-meltdown-scenario-from-jpmorgans-jesper-koll-and-masaaki-kanno/

    FRED graph shows Japanese public debt getting to 220% of GNP back in 2011. I have heard the current figure is around 240% of GNP. What do you mean by “net debt”?

    http://research.stlouisfed.org/fred2/graph/?g=n2j

  64. Gravatar of Vince Cate Vince Cate
    3. October 2013 at 19:13

    In the Japanese Ministry of Finance budget summary it says “National Debt Service”. Page 6 shows this as 24% of expenditures.

    http://www.mof.go.jp/english/budget/budget/fy2013/01.pdf

  65. Gravatar of Vince Cate Vince Cate
    3. October 2013 at 19:19

    Since Japan is spending about twice what it gets in taxes, 25% of expenditures would be about 50% of taxes.

  66. Gravatar of James in London James in London
    3. October 2013 at 22:22

    Potatoes and debt monetization. Agreed about your post on the often stimulating, but here very disappointing Kotlikoff. But when explaining NGDP targeting to non-specialists, or to those who might see some merit in Kotlikoff’s views, simple metaphors and disarming honesty are powerful weapons.

  67. Gravatar of Joe Eagar Joe Eagar
    3. October 2013 at 23:22

    Debates on CA imbalances are always confused and obfuscated, and I think it’s for this reason: some people are debating the sustainability of the imbalances themselves, while others are debating the sustainability of the underlying *causes*.

    From a simple historical point of view, it’s fairly obvious that CA imbalances, so long as they aren’t absurdly large, don’t tell us much about an economy’s long-term sustainability or growth trajectory.

    In the U.S. case, I think it’s fairly obvious that we cannot sustain large CA deficits, because their underlying causes (the Asian preference for dollars, the collapse of the eurozone, low American savings rate, etc) aren’t all that sustainable.

  68. Gravatar of ssumner ssumner
    4. October 2013 at 03:59

    Vince, If you are going to study hyperinflation then you really need to use net debt figures. Net debt is debt owed to the public. I.e. the total amount of government debt, minus that debt owned by the Japanese government. As an analogy, if General Electric held 50% of their own bonds, then their net debt would be 1/2 of their gross debt.

    James, Good point.

    Joe, I believe the US CA deficit is sustainable, for the foreseeable future.

  69. Gravatar of Vince Cate Vince Cate
    4. October 2013 at 04:54

    ssumner, thanks!

  70. Gravatar of Atungp Atungp
    5. October 2013 at 07:39

    ssumner,
    While the reserves is interest-bearing, just like the treasury papers, interest rates are still quite different between bank reserves and long term treasury papers. So the Fed is paying small interest on reserves, but collecting larger amount of interests from treasury papers, and then remit the return to treasury department. May not be an outright monetization, but isn’t the Fed still helping the Treasury finance the deficit?
    Put differently, if the Fed slows bond-buying, Treasury will have to raise money from the markets. Whether long term rates would go up or down is anybody’s guess. What’s a good framework to put things into perspective?

  71. Gravatar of ssumner ssumner
    5. October 2013 at 07:54

    Atungp, I understand what you are saying, but it is not correct. The IOR rate is higher than the rate on T-bills. It’s true that longer term bonds have higher rates, but that is deceptive, as it reflects a market expectations that short rates will rise over time. When they do the IOR rate will have to rise as well, so there is no free lunch for the federal government by having the Fed buy longer term bonds.

    If there were, we’d be getting lots of inflation.

  72. Gravatar of Scott Sumner thinks that where money earns interest, it’s no longer money. | The Jefferson Tree Scott Sumner thinks that where money earns interest, it’s no longer money. | The Jefferson Tree
    7. October 2013 at 10:27

    […] made the bizarre claim recently that Laurence Kotlikoff is wrong to claim that QE involves printing money. Sumner’s […]

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