18
Feb
2014
Has QE EVER Worked?
I ask at my latest Mises Canada post.
On Twitter, Josiah Neeley wanted me to defined “worked.” I responded: “Economy was awful, central bank doubled (at least) balance sheet in short time, economy seemed fine, balance sheet back to normal.”
(1) Since the primary criterion for “worked” to many Keynesians would be: QE stopped the financial sector from collapsing and it avoided a massive banking failure as in the 1930s, it worked very well.
(2) “Look at what the Japanese central bankers had to do, to contain the public’s expectations about price inflation. When their CPI stopped (gently) falling and began rising, in the mid-2000s, the central bank drastically reduced its monetary base–that’s the red line falling off a cliff. “
That is untrue. Your own graph shows that inflation was flat when the Bank of Japan reduced base money.
(3) Who is this post even directly against? Market monetarists? Not all, but many Keynesians say that monetary policy is feeble and ineffective during severe recessions when expectations are pessimistic and when demand for credit falls or stagnates.
That QE did not stimulate a sufficient level of investment to restore full employment is entirely what many Keynesians/MMTers predicted:
“So I don’t think quantitative easing is a sensible anti-recession strategy. The fact that governments are using it now just reflects the neo-liberal bias towards monetary policy over fiscal policy. What will motivate consumers to borrow if they are scared of losing their jobs? Why would a company borrow if they expect their sales to be depressed? The problem is a failure of demand which has to be addressed via demand measures – that is, fiscal policy. Overall, you can only take a horse to water ….!
There are also those that claim that quantitative easing will expose the economy to uncontrollable inflation. This is just harking back to the old and flawed Monetarist doctrine based on the so-called Quantity Theory of Money. This theory has no application in a modern monetary economy and proponents of it have to explain why economies with huge excess capacity to produce (idle capital and high proportions of unused labour) cannot expand production when the orders for goods and services increase.”
http://bilbo.economicoutlook.net/blog/?p=661
Bill MItchell, Quantitative easing 101, March 13, 2009
Lord, oh Lord, tell me how QE stopped bank failures and how easy it will be to reverse.
If I can’t get you to define hyperinflation, surely you can explain the above.
If a more reasonable standard of “badly managed banks should go bankrupt, and taken over by newer, better managers, then QE is a failure.
Bailouts of Japanese banks caused zombie banks.
Answer: The Fed massively expanded its balance sheet during the 1930′s and the U.S. prospered greatly during subsequent decades.
I know Mark Sadowski analyzed what happened with the Fed’s balance sheet recently…….
The emperors leading the Roman Empire killed thousands of people. A millenium and a half later, we are prospering.
I love playing correlation is causation too.
No…… post hoc ergo propter hoc
LK,
Based on your mark-up pricing thing you should really think that QE will boost output.. The CB buys assets for new money. People spend some of that new money. GDP increases. As prices are set administratively this leads to mostly real and not nominal changes. That is: output increases and inflation doesn’t.
“The CB buys assets for new money. etc. “
No, the actual effect of QE on AD is not enough to stimulate enough investment to create high employment,
When a central bank buys assets from private banks, the new base money becomes the banks’ reserves/excess reserves.
But in bad recessions demand for credit collapses or stagnates.
But the banks can only fund investment or consumer spending via new debt.
But consumers and business people will have pessimistic expectations during recessions. They won’t load up on debt just because private bank reserves have increased.
QE had a t least 2 effects that should boost AD
1. Under QE the CB buys assets that have a risk-premium above zero. This reduces risk-adjusted interest-rates and should increase lending (businesses that previously had to pay 5% will now pay a lower rate and so borrow more).. This will increase I.
2. QE increases the value of assets (because the CB increases the price when it buys them). Most Post-Keynesians assume a consumption function that of which wealth is a part.. QE increases wealth. This will increase C.
Clearly you profound reading difficulties: “**not enough to stimulate enough investment to create high employment”**.
Why so fast with the insults, LK ?
The 2 effects listed would clearly allow you to increase AD to any level you wanted to.
So why would it not be the case that it couldn’t generate “enough to stimulate enough investment to create high employment”.
(As this is Bob’s blog I should probably add “You must be a total retard not to see that” – but I will refrain, as it would not be conducive to a serious discussion.).
As this is Bob’s blog I should probably add “You must be a total retard not to see that”…
It troubles me greatly that someone would write such a thing. I don’t have time to edit everybody’s posts. But yeah I will start zapping things when they get out of hand.
Just a reminder:
http://consultingbyrpm.com/blog/2011/11/god-as-author.html#comment-28993
“The 2 effects listed would clearly allow you to increase AD to any level you wanted to.”
That is false.
(1) The demand for credit will not necessarily be increased merely because you increase bank reserves, because businesses and households may have deeply pessimistic expectations about the future.
(2) in 2009 and subsequent years there was a serious problem of excessive private debt. Households and businesses were engaging in increased leveraging, which contracts demand.
(3) a lot of businesses look for “quantity” signals (demand for their output), so they are not going to engage in debt financed investment just because private bank reserves increased.
(4) the lending practices of many banks themselves because conservative too after 2008, and they had their own bad asset problems and pessimistic expectations, so that they were also more reluctant to grant credit just as private households and business were reluctant to take on more debt.
It’s never enough because aggregate demand is not what drives aggregate investment.
Aggregate investment is what drives aggregate demand.
In the aggregate, demand for output is in competition with demand for input. In the aggregate, more demand for output actually comes at the expense of demand for input.
I know this is going way over your head now, but at some point you’re going to have to grasp this.
The logic of what you are saying is that you could expand QE to buy up every asset available in the entire economy and it would not increase AD or cause inflation beyond a certain point ?
Is that your view ?
If not, why not ?
This was meant to be a reply to LK (above).
“No, the actual effect of QE on AD is not enough to stimulate enough investment to create high employment”
It is not demand for output that stimulates investment in the aggregate. You are committing the fallacy of composition. That an individual firm depends on demand for output in order to survive, does not imply that aggregate demand is what drives investment.
In the aggregate, investment drives demand, not the other way around.
lK wrote:(1) Since the primary criterion for “worked” to many Keynesians would be: QE stopped the financial sector from collapsing and it avoided a massive banking failure as in the 1930s, it worked very well.”
All at no cost, no tradeoff. Spoken like a true economist;)
Hypothesis: not enough investment.
Idea: make investment more attractive by lowering interest rates.
Idea: induce banks to lower rates by increasing their reserves.
Problem: might not increase investment enough.
I get that Austrians reject the hypothesis. “enough”? Meaningless they say.
I think on similar grounds they should reject the problem. “enough”. Doesn’t look like they do, but whatever.
My question is simpler: who would think Keynesians would reject any of these?
And if they don’t, then LK’s comments about “worked” make sense, don’t they?
It works if it achieves enough.
“I get that Austrians reject the hypothesis.”
But they don’t, Ken B.
Their story is also that there is not enough investment to clear market for capital goods and to clear labour markets: it is just that they think a free market must be allowed to govern interest rates, prices and wages, so that
(1) the bank rate hits Wicksell’s natural rate (which can’t be a single rate in disequilibrium, so their theory does not work).
(2) a monetary rate clears the loanable funds market (which doesn’t work because loanable funds is rubbish)
(3) wage flexibility clears labour markets (which will not happen because relative wage rigidity is a fact of life, probably since the 1890s), and
(4) price flexibility will clear product markets (which will not because most prices are administered prices and do not normally respond to demand)
How can wage rigidity be a fact of life, but only since 1890?
LK, you are missing my point. They think the hypothesis meaningless in a free market, by defn, and Keynesians don’t.
LK:
“Their story is also that there is not enough investment to clear market for capital goods and to clear labour markets”
That is not an Austrian story.
(1) There does not have to be a single interest rate for the Austrian argument about the regulating nature of free market interest rates to be true, nor is it necessary for the Austrian argument about central banks distorting the economy through manipulating interest rates to be true, nor is it necessary for ABCT to be true. Austrians are not arguing as a conclusion that there is only one interest rate. It was a merely a way of understanding the interest rates we don’t see. Add an “s” to every instance of “natural interest rate” and ABCT is still explaining why we have the business cycle.
(2) Loanable funds is not rubbish, and Hayek’s argument about the central bank having to target a single interest rate that clears the loanable funds market, is not Mises’ argument. Mises is the originator of ABCT, not Hayek.
(3) Wages are flexible. Just because they change slower than you prefer, and, just because they don’t instantly adjust, it does not imply that wages will never adjust to clear the market. Wage earners, in a free market, cannot wait years on end before accepting a lower wage rate, unless they are living off their savings, which is a choice they are making and is thus optimal. It is governments that make wages fail to adjust as fast as they otherwise would. And, related to this, it is Marxian exploitation theory being the dominant theory in the general working population that makes it very difficult for even workers to accept a lower wage rate. All these problems can be solved by a free market in practice, and intellectuals and the general working population abandoning Marx in theory. Wages are difficult to adjust for not unsolvable reasons.
(4) False. Look at the PPI index for example. During 2008, when demand fell, you will notice that the index which represents prices fell. Prices do indeed respond to demand. Your spitball attacks on the free market fail.
“Loanable funds is not rubbish, and Hayek’s argument about the central bank having to target a single interest rate that clears the loanable funds market, is not Mises’ argument.”
Yes, it is:
“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute.” (Mises 2006 [1978]: 107–108).
“The ‘natural interest rate’ is established at that height which tends toward equilibrium on the market. The tendency is toward a condition where no capital goods are idle, no opportunities for starting profitable enterprises remain unexploited and the only projects not undertaken are those which no longer yield a profit at the prevailing ‘natural interest rate’”
(Mises 2006 [1978]: 109; from Monetary Stabilization and Cyclical Policy [1928]).
(1) MF’s statement 1:
“Wages are flexible.”
(2) MF’s statement 2:
“It is governments that make wages fail to adjust as fast as they otherwise would. And, related to this, it is Marxian exploitation theory being the dominant theory in the general working population that makes it very difficult for even workers to accept a lower wage rate. All these problems can be solved by a free market in practice, and intellectuals and the general working population abandoning Marx in theory. Wages are difficult to adjust for not unsolvable reasons.”
———
This is violation of the law of non contradiction.
MF is saying that in the real world “wages are flexible” and “wages are not inflexible”.
PPIs generally contain a significant percentage of flexprice goods, such as raw materials and primary commodities. It is not surprising in the least that they are more flexible than other indices, especially in the historically unusual 2008-2009 recession,
But this does not refute the statement that the
extensive fixprice markets have relatively inflexible prices.
Also, QE as a way to significantly increase AD is a market monetarist idea, not a traditional Keynesian one — apart from some of the Mankiw-type New Keynesians, who really hold monetarist ideas.
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No reasoning. No critical thinking.
I see a pattern.
Yes, I think open-ended, results-dependent QE has worked since Sept. 2012.
Since then the USA has had a 35 percent or so rally in equities, a real-estate recovery in most regions, and decent job growth (last two months excepted). The stop-and-go non-results-dependent QE (QE1 and QE2) was less successful.
Inflation? Still dead. And getting deader. PCE deflator below 1 percent now.
Worth nothing:
From BLS 2/6/14
“Unit labor costs in nonfarm businesses decreased 1.6 percent in the
fourth quarter of 2013, as the 3.2 percent increase in productivity
was larger than a 1.5 percent increase in hourly compensation. Unit
labor costs fell 1.3 percent over the last four quarters. (See table
A.)”
–30–
Okay, unit labor costs (about 75 percent of business costs) are falling, commodities are dead, and there is global competition in most markets.
And the Fed is worried about inflation? How? Why? Where will it come from?
The real question is whether the Fed should have gone to QE harder and earlier, and keyed it on robust growth in nominal GDP. The threat of inflation appears very small.
Benjamin,
“Since then the USA has had a 35 percent or so rally in equities, a real-estate recovery in most regions,…”
then this
“And the Fed is worried about inflation? How? Why? Where will it come from?”
>> I think you partially answered your question. The asset-holding class has done very well during QE. And those real estate prices, in particular, have been buoyed by private equity, not from first time homebuyers. Recall also how core CPI has been relatively tame for over two decades and yet still coincided with a couple massive asset bubbles in tech and housing.
Now, rising asset prices are not, in itself, a problem. But it’s worth noting who are the prime and disproportionate beneficiaries of QE.
Mike T.—
I think the asset prices were more of a recovery rally than fresh new ground rally. Seems like both markets sre flattening out now.
Inflation at record lows.
The funny thing is, if you say the Fed should deliver price stability then you have to give the Fed an “A” since 2008. Prices have hardly budged.
No, that money pouring into equities is inflation. It’s where the newly printed money entering our system. Prices would be lower if not for the Fed propping up the banks and cranking the printing presses.
Even MMT agrees that QE is silly.
Cosmo–
Study up on Market Monetarism.
I have, MMT evolves(err changes) quicker than evolution;)
“Many critics, including me, have worried that this will disrupt the proper functioning of credit markets, and threatens to severely debase the US dollar. (Obviously our warnings on the latter point are either totally wrong, or have yet to be fulfilled.)”
Bob,
Can you explain why you think there is risk of currency debasement ? Obviously if the CB keeps creating new money without limit (like in Zimbabwe or Argentina) they will produce inflation. But if the CB doesn’t like inflation (as the Fed clearly doesn’t) won’t they just stop printing (or start reducing the money supply) when inflation picks up (just like Japan find in 2002) ?
I’m assuming you think one of 2 things
1. At some point inflation will pick up and the fed won’t be able to reign in the money supply fast enough and inflation will take hold against their wishes
2. The fed is run by secret inflation lovers who despite failing to meet their own inflation targets are just playing a long game that will eventually lead to runway inflation.
Can you clarify ?
The Japanese example suggests not that QE leads to runaway inflation but rather than it becomes inflationary (and is stopped) before having much effect on output.
Alright, fess up Bob. Were you the one reader who have your guest post 5 stars on ZH?
😀
I realize you’re kidding Random Guy, but what are you referring to?
Your Mises Canada post was made a guest post on Zero Hedge, and apparently there was only one 5-star rating of the post at some point, although there are more now:
http://www.zerohedge.com/news/2014-02-18/guest-post-has-qe-ever-worked-history
Guys, how the heck do you post comments on mises.ca?