Reply to Krugman

I dodged a bullet.  When I first read Krugman’s reply I thought I had blown it by mis-remembering (is that a word or a Bushism?) what he had said about unconventional monetary stimulus.  So I went back through his old posts and found the one I was thinking of.  Then I noticed that someone named Thomas had beat me to the punch.  I thanked him, because false charges need to be answered quickly or they will believed.  For those who don’t know what I am talking about, here is the link to the post where Krugman denies my claim that he said unconventional monetary policies might be very risky.

Of course the term ‘unconventional monetary policy’ doesn’t appear in the quotation he provides, but it does appear early in my letter.  More importantly, I provide examples of indexed bonds, long term T-bonds, foreign bonds, etc.  I really don’t see how he could have missed the point that I was talking about unconventional monetary policy.  Now here is the link from January, where he says that although conventional monetary policy (which he defines as base money for T-bills) is no longer effective, some have proposed unconventional open market purchases.  Then he says those would be very risky.  I don’t see a problem with the way I characterized his remark, although I suppose the most likely explanation is that we each misunderstood what the other one meant.  I’ll explain below how this misunderstanding probably came about.  But first here’s the key part of what Krugman said in January:

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

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

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

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

The first two paragraphs seem pretty clear, Krugman’s view that we are in a liquidity trap has a very specific meaning—trading zero interest cash for zero interest T-bills has no effect.  He specifically says that he is not making that argument for long term bonds, corporate debt, etc.

Regarding paragraph 3, I am not engaged in giving different definitions of liquidity traps in my letter.  I am arguing that unconventional monetary policies can work.

In my letter I did engage in picking and choosing among risky assets, assets that the Fed might have to resell at a lower price.  Exactly what he referred to above.  It seems to me a very natural inference that Krugman implied in the 4th paragraph that he understood that if pushed to the extreme (say $10s of trillions in purchases of unconventional assets) that we would generate inflation.  But also that (in Krugman’s view) the problem with this policy is that if we pick the wrong assets the taxpayers might lose a lot of money.  If that’s not what he meant by paragraph 4, if he thinks that no amount of unconventional asset purchases would boost AD, then say so.  But I doubt he will say that is what he meant by “we don’t know how well these unconventional measures will work.”  Krugman knows that we could buy up common stocks, real estate, all kinds of stuff—and no serious economist believes that if the Fed bought up the entire world’s stock of wealth we’d have no inflation.

Now Krugman might reply that I didn’t mention all those wacky ideas in my letter, so how was he to know?  My reply is that he was the one who drew the sharp line between liquidity traps and non-liquidity traps.  T-bills in, long term debt out.  “Period. End of story.”  You can’t get much more definitive than that.  If he thinks long term T-bonds, indexed bonds, and foreign government bonds should be in the liquidity trap circle, then say so.  If he does then I’ll add agency debt, and AAA bonds to my letter.  If he adds those I’ll add stock index funds.  (I hope we don’t get to the point where I have to add real estate in Kabul, Afghanistan!)

I suppose there is a theoretical argument that long term T-bonds could be added; according to the “expectations hypothesis” of the yield curve the expected rate of return on those bonds is now close to zero for the next few months.  But Keynesians are usually fairly pragmatic about things like this, so I presume he probably accepts the “term premium” hypothesis, which suggests that yield curves usually slope upward because long bonds are riskier.  (No, I don’t have a quote for that assumption, it’s just a hunch.)  But even if I am wrong, it was his mistake to leave the wrong impression about long term bonds in his January post.

And I also think it’s a big mistake to look at monetary policy from a finance perspective, as if base money and T-bills are exactly the same thing.  Instead, I would emphasize the excess cash balance approach.  OK, the base has gone up from 800B to 1600B or so, but how much reserves can banks reasonably be expected to hold?  (Especially if they are charged an interest penalty—I’d still like to know why that won’t work.)  And I don’t think the public regards cash and T-securities as perfect substitutes.  Even in this near-zero interest rate environment the public’s demand for cash has risen only modestly.  If the Fed bought $10s of trillion in U.S., foreign and other high quality bonds, does anyone seriously believe people are suddenly going to go around with all those extra Federal Reserve Notes in their wallets?

I think Krugman’s key misunderstanding of my letter was that he didn’t see that I was thinking in terms of that excess cash balance transmission mechanism.  Now before people accuse me of being an inflationist, let me emphasize that I don’t actually favor such massive increases, as I believe they would lead to hyperinflation.  The key point is that if the Fed says they intend to do whatever is necessary, and start down that road, you will quickly see inflation expectations rise in the financial markets.  The Fed needs to watch those carefully and cut back at the slightest sign of overshooting.  It won’t work perfectly, the circularity problem prevents that unless we can get index futures targeting adopted.  But it will get us to a point much better than where we are today.

If Krugman reads this reply I hope he doesn’t respond “now Sumner is proposing the Fed buy land in Kabul,” but rather gives my ideas a sympathetic reading.  If he then disagrees, fine.  I hoped for a serious discussion of the $10s of trillions of dollars in relatively safe debt that could be purchased, and also my proposal for limiting excess reserves.

In the developing world 10s of millions of poor workers are losing jobs, partly (not entirely), due to excessively deflationary monetary policies in the U.S., Europe, and Japan.  It is a very important issue.  Even much more important that most people realize in relatively affluent America.  In Krugman’s defense, he was one of the first to realize the threat of severe recession (when others were worried about inflation.)  I hope we can continue the conversation.



37 Responses to “Reply to Krugman”

  1. Gravatar of Alex Golubev Alex Golubev
    2. March 2009 at 12:11

    i’m afraid that we’re gonna end up in a metaphysical discussion of economic definitions. i would surrender the point about “liquidity traps” and “conventional monetary policy” and propose that a “BANANA” would be more effective than “fiscal stimulus”. Does Krugman really have any pull with the current administration. The Big Picture blog might be more influential.

  2. Gravatar of Kirk Kirk
    2. March 2009 at 12:14

    Why spend so much money and effort re-inflating an asset bubble? Finally, assets are returning to values that are starting to make sense in a fundamental sense. I don’t know about real estate in Kabul, but houses where I live are still over-priced. Bond yields are already too low to rebuild consumer wealth. Stocks have been over-priced for two decades.

    Why not target debt relief instead?

    Or better yet, raise wages.

  3. Gravatar of Jeff Jeff
    2. March 2009 at 12:38

    Scott, if you’re hoping for a reasonable response from Krugman, you’re dreaming. In the very next post after his reply to you, he trots out again his assertion that the increase in the monetary base during the Depression proves that Friedman and Schwartz (FS) were wrong. He does so in the context of critizing a speech in which Bernanke himself admitted that Fed mistakes were responsible for much of the Great Depressions severity and longevity.

    Of course, what FS actually said was that although the monetary base increased somewhat during the Depression, the Fed did not do enough. In fact, Bernanke’s speech was largely about 3 episodes related in FS wherein the Fed purposefully tightened policy when they should have been doing the opposite.

    So, the question then becomes, did Krugman actually read the Bernanke speech he criticizes? Has he read FS? If he hasn’t, he’s pontificating on things he knows little about. If he has, he’s being dishonest. I have previously pointed out the error in a comment on Krugman’s site, so I’m inclined to the latter point of view. But either way, it’s hard to take him seriously.

  4. Gravatar of ssumner ssumner
    2. March 2009 at 12:53

    Alex, Thanks I’ll check out that blog,

    Kirk, FDR raised wages sharply in July 1933, and it delayed recovery for years. See my earlier post about FDR’s wage policy.

    Jeff, Thanks, I agree about F&S. I wrote a letter to the NYR of Books complaining about the way Krugman distorted their argument in the Monetary History, but they didn’t publish it.

  5. Gravatar of P.E. Bird P.E. Bird
    2. March 2009 at 13:03

    The fact that Krugman and DeLong linked to your article is a message that what you are saying makes some sense to them – but they can’t come out and say so.

    While the public’s demand for cash may be rising only modestly (I might debate that), the banks’ demand for cash is apparently without limit.

    The bailout cash and backstops were never intended to be used as quantitative easing – it is staying on the banks’ balance sheets. When Ben said he would drop cash from helicopters, he forgot to tell us the helicopters would only be hovering above Wall Street.

    The cash won’t be put into circulation. So these unconventional tools are certainly risky – for us, but not the banks.

    These public economists can’t come out and say so, but at least you are getting some visibility. Keep up a civil conversation and lets see what happens.

  6. Gravatar of gabriel gabriel
    2. March 2009 at 13:12

    Instead of raising wages, freeze payroll taxes for a calendar year. That should be “stimulus” enough for the vast majority of those hit hardest by the economic downturn. It would free up capital in corporations to shore up their own lack of production. Somehow I’m guessing no one in the current admin would ever dare even mention this. Cutting off the flow of “revenue” (such a misleading term for taxation) is akin to putting a one plate limit at an all you can eat buffet to most of the kleptocrats in Washington.

  7. Gravatar of Ken Ken
    2. March 2009 at 13:30

    It seems like our choices are:
    1. Conventional monetary policy
    2. Unconventional monetary policy
    3. Fiscal policy

    What about letting insolvent financial institutions go bankrupt, lowering tax rates that discourage economic activity, and providing financial relief directly to citizens that can’t house or feed themselves because of the emergency situation caused by the bursting of the massive credit bubble? This solution might not allow macro-economists to play god, but I think it would work best for the rest of us.

  8. Gravatar of gabriel gabriel
    2. March 2009 at 13:36


    without the “crisis” how can they enact their plans? Rahm Emanuel says: “You never want a serious crisis to go to waste” thus effective policy would lessen the power grab.

  9. Gravatar of Matt Matt
    2. March 2009 at 13:40

    I agree with Jeff. Krugman may reply once or twice more, but I predict he’ll just ignore any more posts in his direction after awhile. He may even hide it by not posting at all for a short time. He’s a busy guy. I’m sure that gold medal is hard to lug around.

  10. Gravatar of ssumner ssumner
    2. March 2009 at 14:50

    P.E. Thanks for the encouragement. The demand for reserves is certainly almost inexhaustible as long as the Fed pays interest on reserves at a rate higher than they can earn on other safe assets like T-bills.

    Gabriel, I also mentioned the payroll tax cut idea in an earlier reply. I agree.

    Ken, This is an important point. I am not calling on monetary policymakers to play God. I am not calling for any change in the basic goals or strategy of policy, which has been mild inflation targeting for decades (or arguably mild nominal GDP growth targeting.) I am just calling for new tools to achieve that same target they have always sought.

    Even more, I am not sure even new tools would be needed if they stopped doing bad things they only started doing in October (interest on reserves), and had never done before in Fed history. There is your Fed “playing God.” Commit to the target they have always had and stop paying interest–that alone would be a big help, and no policy change at all, not even a tactic change.

    There is no Fed policy of Doing Nothing–any policy setting is a decision. (Except maybe abolishing the Fed, but that’s not reasonable in a crisis.) So let’s set policy at a level expected to do best for the economy.

    Gabriel#2, I saw the Rahm quote. Left wing writer Naomi Klein argued it is awful when right wing governments use crises to enact reforms. How is this different?

    Matt, I knew his reputation, and that it was a long shot. But any debate is good on this issue. This blog was completely unknown a week ago; I didn’t have one comment in the first three weeks (except from a couple friends.)

  11. Gravatar of Jeremy Goodridge Jeremy Goodridge
    2. March 2009 at 14:52

    Great post.

    I agree with Jeff: forget Krugman. He has no interest in spending the time to engage you in a rational debate.

    His posts are so filled with exaggerations, mis-readings of other people, ad-hominem attacks, and various forms of self-promotion, it has just become painful to read.

    Here’s a suggestion: Talk to Bernanke — he has REAL power and he’s a much more decent person. And get others with some more readership (e.g. Cowen) to echo your thoughts to Bernanke.

  12. Gravatar of Carsten Valgreen Carsten Valgreen
    2. March 2009 at 15:02


    If the monetary authority starts buying risky assets (possibly with the treasury as credit insurer) then is that not fiscal policy? It is a subsidy in the sense that someone is borrowing at lower rates than they would otherwise have done (what else would be the purpose?). Isnt it therefore hard to distinguish between the two policied in a zero rate environment and arent you and Krugman therefore really debating what kind of fiscal/monetary expansion you prefer to go for first?

  13. Gravatar of Jonathan Dean Jonathan Dean
    2. March 2009 at 15:05

    Dr. Sumner,

    I sincerely appreciate your efforts to engage in solving this economic and financial crisis. Please keep going and I applaud your sincerity and politeness, even in the face of some terse responses (!). Good luck.

    Regards, Jonathan.

  14. Gravatar of Bill Woolsey Bill Woolsey
    2. March 2009 at 15:11


    If you want to impact actual policy, I think you need to decide what policy you want (what should nominal GDP be for the next several quarters) and argue for that.

    That a liquidity trap might be broken by a committment to cause massive inflation followed up by a massive increase in the quantity of money isn’t very relevant to your policy goal.

    Are there actions that the Federal Reserve can take that will get nominal income back to the proper growth path?

    You have proposed stopping interest payments on reserves. You have suggeted looking at charging penalties on balances banks hold in reserve accounts. You have also specified purchasing inflation index bonds. In your rejoinder, you mention long term treasuries, agency bonds, and the like.

    Flesh out the plan a bit better.

    Let your critics respond. This will result in overshooting. The Fed will take losses on the assets you propose.

    And then respond.

  15. Gravatar of Thomas Thomas
    2. March 2009 at 18:23

    No problem! I remembered what Krugman had said and roughly when, so it only took a moment to bring it back up. His response was inexcusable, in my view. I’d think more of him if he’d just ignored your letter, rather than distorted his own position to avoid the merits.

  16. Gravatar of Jon Jon
    2. March 2009 at 19:54

    Bill writes: “That a liquidity trap might be broken by a committment to cause massive inflation followed up by a massive increase in the quantity of money isn’t very relevant to your policy goal.”

    I agree. To be honest, my problem with the LT “debate” is that its the “nuclear option”. Its fine to talk about, but I don’t particularly want to see if the possible policy responses work or what happens afterward.

    The 4th quarter consolidated charge-off numbers just came out at 1.92% they’re right in-line with the 1991 recession. Delinquency rates are substantially less, 6.73% versus 10+% at the peak of ’91. The panic–it’s different this time–is very troubling to me. Its just like bubble mania but in reverse. The subprime implosion was dramatic, but I doubt that its driving the wider bust.

  17. Gravatar of andthenyoufall andthenyoufall
    2. March 2009 at 20:02

    If I understand you, Scott, you think Krugman is concerned (indeed, maybe you too are concerned) that if you print money and buy up most of the stock market, and then later realize you’ve overshot your inflation target, there may be a ton of money on the line.

    I, on the other hand, took Krugman’s concern to be that the Federal Government is even less well-equipped to be an investment bank than the USSR was (and look where that got them!), and also that we know even less about how effectively this sort of monetary policy would work than we do about stimulus packages. So between distortions of market processes and confusions about results, he thinks we need a stimulus in addition to the limited unorthodox monetary policy we are carrying out. Which I imagine is why he didn’t at all recognize his position in your extrapolation.

  18. Gravatar of travis travis
    2. March 2009 at 20:40


    The reason the Fed is paying interest on reserves is because it *doesn’t* want the reserves to go into the economy. In October of last year, it grew tired of asking the Treasury to borrow money and deposit the cash with the Fed so that the Fed could buy corporate paper, mortgages, etc. Instead of this roundabout way to get cash, the Fed decided to directly print cash buy the debt. In order to prevent massive inflation, it had to pay interest on the reserves so that the money wouldn’t go into the economy.

  19. Gravatar of Milton Recht Milton Recht
    2. March 2009 at 20:45

    The above MIT link is to a 1999 paper by Krugman on liquidity traps and seems to still reflect much of his current thinking.

    Krugman states the reasons for the paper, “The purpose of this paper is twofold. First, it is a restatement of what I believe to be the essential logic of liquidity-trap economics, with an emphasis in particular on how the “modern” macro I initially used to approach the problem links up with more traditional (and still very useful) IS-LM-type thinking. Second, it attempts to examine in a more or less coherent way the various alternative policies that either are in place or have been proposed to deal with Japan’s liquidity trap, ranging from fiscal stimulus to unconventional open-market operations (and it tries in particular to make clear the difference between the latter and the expectations-focused inflation targeting I have proposed).”

  20. Gravatar of travis travis
    2. March 2009 at 20:46

    Quiz: Who wrote the following about fiscal policy in a liquidity trap?

    If you listen to the rhetoric of fiscal policy, however – all the talk about pump-priming, jump-starting, etc. – it becomes clear that many people implicitly believe that only a temporary fiscal stimulus is necessary because it will jolt the economy into a higher equilibrium. Thus in Figure 5 a policy that shifts the spending curve up sufficiently will eliminate the low-level equilibrium; if the policy is sustained long enough, when it is removed the economy will settle into the high-level equilibrium instead.

    If this is the underlying model of how fiscal policy is supposed to succeed, however, one must realize that the criterion for success is quite strong. It is not enough for fiscal expansion to produce growth – that will happen even if the liquidity trap is deeply structural in nature. Rather, it must lead to large increases in private demand, so large that the economy begins a self-sustaining process of recovery that can continue without further stimulus.

    It is in this light that one should read economic reports about Japan today, and perhaps about other troubled economies in the future. For what it is worth, at the time of writing there is nothing in the data that would suggest that anything like the supposed shift to a higher equilibrium is in progress. Indeed, private demand is actually falling, with more than all the growth coming from government demand.

    None of this should be read as a reason to abandon fiscal stimulus – in fact, one shudders to think what would happen if Japan were not to provide further packages as the current one expires. But fiscal stimulus is a solution, rather than a way of buying time, only under some particular assumptions that are at the very least rather speculative.

  21. Gravatar of travis travis
    2. March 2009 at 20:48

    Answer: Paul Krugman

    It would be interesting for him to explain why he thinks that his recommendations to Japanese central bankers 10 years ago don’t apply now. He was the one who wanted a credible commitment by central bankers to an inflation rate. I wonder why he has changed his mind.

  22. Gravatar of Jeff Jeff
    2. March 2009 at 20:58


    The Fed has been asking Congress for years for the authority to pay interest on reserves, and it only recently got it. The implementation date was moved up a bit, but that was mostly because they wanted tighter control over the fed funds rate, which was trading well below the Fed’s target and below the discount rate as well. The thought was that the interest paid on reserves would set a floor under the funds rate. Even after the new policy was implemented, there were a lot of economists wandering the halls at 20’th & C wondering why banks were lending each other funds at lower rates than they could get by leaving them on deposit at the Fed.

    The reason why the Fed has wanted to pay interest on reserves all these years seems to be a desire to reduce “the reserve tax” on banks. The hope was that this would help keep more intermediation in the banking system, rather than the “shadow” banking system. I think it’s evident by now that the right way to accomplish that goal is to let some of the “shadow” institutions that wanted no part of the government in good times have their wish in bad times as well.

  23. Gravatar of Jon Jon
    2. March 2009 at 21:10

    Travis: Although your explanation makes some sense; I think there are gaps in the explanation. In particular, a significant portion of the reserves come from the TAF and PDCF. These funds are not being used to purchase assets. Its a direct creation of money by the Fed auctioned to the banks and sterilized by the reserve accumulation. Under your hypothesis, wouldn’t it make more sense for them to simplify matters by unwinding these facilities?

  24. Gravatar of Steve Darden Steve Darden
    2. March 2009 at 23:23


    Quiz: Who wrote the following about fiscal policy in a liquidity trap?

    Thanks – that was a brilliant quotation. Without privileged access to the Dr. Krugman’s brain I can’t answer your followup “to explain why he thinks that his recommendations to Japanese central bankers 10 years ago don’t apply now.” I believe the same advice is relevant today.

  25. Gravatar of travis travis
    2. March 2009 at 23:49

    @Jeff: There may have been multiple reasons for paying interest on reserves, but the one that I read about had to do with reducing the need to borrow from the Treasury. My guess is that was the most pressing reason, but of course I could be wrong.

    @Jon: You make an excellent point. I think paying interest on reserves unnecessarily complicates monetary policy and I am wondering if Bernanke is having second thoughts due to the inherent sterilization involved when short term rates are so low. If the Fed starts to cut the interest rate on reserves or eliminates it, markets most likely will explode to the upside because reserves are so huge. We are in uncharted and very dangerous waters.

  26. Gravatar of Rob Rob
    3. March 2009 at 05:19

    It seems we are caught between views on what’s going on, and so we are stuck with a variety of disconnected compromises that don’t add up to a coherent policy. Is the current circumstance the business cycle playing out? Or is it kind of a car crash, an accident, a series of unfortunate events that have gone out of control?

    If this is the business cycle, then we can try to stand in the way with one time solutions, but one way or another, and sooner or later, we are sure to pay. If this is all a big misunderstanding, then why doesn’t the Fed just buy up the “toxic assets” and we can all move forward?

    “Tens of trillions.” Hmmm…… Really?

  27. Gravatar of Jon Jon
    3. March 2009 at 07:37

    Travis writes: “If the Fed starts to cut the interest rate on reserves or eliminates it, markets most likely will explode to the upside because reserves are so huge.”

    If this happens it will be a policy choice. TAF and PDCF can be unwound fairly rapidly–they are loans not outright purchases. Ditto for the CPFF, which combined is enough to wipe out the entire pool of excise-reserves without needing a willing counter-party.

    In contrast, people are used to thinking about the Fed’s previously POMO heavy position. In that case, the Fed cannot rapidly unwind because it must find willing buyers. Were the Fed to dump them on the market quickly, it would incur a loss on the transaction.

  28. Gravatar of Jon Jon
    3. March 2009 at 21:40

    “The first two paragraphs seem pretty clear, Krugman’s view that we are in a liquidity trap has a very specific meaning””trading zero interest cash for zero interest T-bills has no effect.”

    As an interesting point: can T-bill rates really hit zero for a sustained period? It seems to me that the answer must be “no”. I suspect that Krugman is guilty of focusing on the interest-rate directly not the effects. A zero-rate means that Fed intends to purchase every T-bill available. So what happens with the money that would have bought t-bills? Moreover what happens to the Treasury’s willingness to borrow using short-term notes?

  29. Gravatar of Alex Alex
    4. March 2009 at 10:34

    You want inflation? Just increase M+B and problem solved. Why are we worrying so much about buy short term, long term, AAA, BBB, Afghan real estate, … There is one thing we know how to do and that is to create inflation, I can’t believe we are having this discussion. Want X% inflation in one year? Just have the treasury issue debt in the amount of X% of (M+B) then have the Fed buy some of the new debt so that M increases by X% (so now M and B have effectively increase by X%). What does the treasury do with the money it received by issuing the new debt? It just prints rebate checks and mails them to the public. Of course for this to work we need one last thing. The government does not have to increase taxes in the future to pay for the higher debt. WTF? (you might think) How can we have more debt and not higher taxes? The trick here is that the government does not have to collect higher income, labor, sales, and all other taxes you see in the tax codes (in real terms). After all we want inflation and inflation is a tax.

  30. Gravatar of ssumner ssumner
    5. March 2009 at 10:53

    Carsten, I know some people consider it fiscal policy , but I don’t. there’s a 50-50 chance of gain, according to the EMH, and if the Fed has inside information, they could buy assets that would go up if their policy was carried through.

    Bill, My petition is the real plan, these were just debating points.

    Jon, If we use market indicators we don’t need a “nuclear option.” Market indicators can be measured in real time.

    andthenyoufall, Yes, I should have been a bit more specific, but even so the implication was clearly there when he said:

    1. Liquidity trap only applies to short term gov. debt.
    2. Other assets could be bought, but there would be risk of capital losses.

    And all I said was “If not mistaken” There was no excuse for him to claim that he’d never implied anything like what I said. He should have spelled out exactly which assets are perfect substitutes for cash, if that’s his view.

    travis, OK, that means there is no liquidity trap. So then pay a lower (but positive) rate, set at a level expected to generate 3% inflation.

    Travis #2, 3#. You are right. And in an earlier post when I was discussing old Keynesian theory and nominal GDP I pointed out that although monetary injections can be permanent, deficits must be temporary. I wish I’d know about the Krugman quote, maybe I’ll attach it later. I’d love to have Krugman help me demolish the foundations of the GT, since he sees himself (partly correctly) as the Keynes of the 21st century. (By “partly” I mean he has some of Keynes’ strengths, and some of his weaknesses.)

    Rob, If we did what I want, we probably wouldn’t have to buy anything, we’d be reducing the bloated MB.

    Jon, Japan had zero rates for quite a few years between 1998-2006. (excluding 2001)

    Alex, I want just a little inflation. Not a lot.

  31. Gravatar of Jon Jon
    5. March 2009 at 20:54

    “Jon, Japan had zero rates for quite a few years between 1998-2006. (excluding 2001)”

    Their repo-rate never went below 0.1. Although I must confess to being somewhat more ignorant of Japanese statistics; so if you can back-up that claim specifically please do.

    Close to zero is not the same as zero.

  32. Gravatar of Jon Jon
    5. March 2009 at 21:09


    It bears repeating that the FF target is a discipline. Although that discipline is based on overnight rates, the Fed has historically monetized Bonds not Bills. Up through 2007, the Fed held a mixture of bonds, mostly clustered around 1-5 yr maturities with a heavy helping of long bonds to boot. So the normal state of affairs is in fact distributed across the yield curve.

    What’s fascinating is that as we find ourselves trending toward a “liquidity trap” the term-structure of the Fed’s balance sheet has become increasingly short. Roughly half of assets now span 30-90 day maturities.

  33. Gravatar of ssumner ssumner
    6. March 2009 at 17:23

    Jon, You know more about this than I do, but I wonder when I read about the ZIRP in Japan, what were they referring to? Is their “fed funds target” or equivalent, different from the repo rate? And thanks for the correction on the debt maturities generally bought by the Fed.

  34. Gravatar of Jon Jon
    7. March 2009 at 07:56

    “You know more about this than I do, but I wonder when I read about the ZIRP in Japan, what were they referring to? Is their “fed funds target” or equivalent, different from the repo rate?”

    I need to look into it more. Their overnight call-rate was indeed very nearly zero; the question is whether that’s decent reflection of borrowing costs.

  35. Gravatar of C1 Worldtimer C1 Worldtimer
    23. March 2009 at 07:09

    I really liked the way they came off

  36. Gravatar of Emily Emily
    3. April 2009 at 06:50

    This is the way things should be, get off what we are on now

  37. Gravatar of TheMoneyIllusion » Paul Krugman is gaining a better understanding of market monetarism TheMoneyIllusion » Paul Krugman is gaining a better understanding of market monetarism
    13. October 2011 at 07:17

    […] because he never really understood our views until now.  Come to think of it, there’s a lot of evidence that he didn’t understand what we were […]

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