18 thoughts on “Quantitative Easing Explained

  1. Bah, Austrian rubbish. Bernanke was Time person of the year for a reason; he’s pretty awesome. CPI<2% is dangerous, and the gov't should do whatever's necessary to keep it up. The Fed is taking extraordinary measures, but only because Rupublicans are stopping gov't stimulus.

  2. Rubbish, “CPI <2% is dangerous", give me a frigging break.

    Charles Bean of the BOE found empirically that -2% was optimal.

    "The Fed is taking extraordinary measures, but only because Rupublicans are stopping gov't stimulus."

    Oh sweet Jesus you've got to be kidding me. They had deflation and rapidly increasing unemployment during the stimulus.

  3. Oops, by CPI I meant “inflation”.

    “Charles Bean of the BOE found empirically that -2% was optimal.”
    Bullshit.

  4. Quantitative easing is the right solution if the problem is deflation. It is not the right solution if the problem is contraction.

  5. ““Charles Bean of the BOE found empirically that -2% was optimal.”
    Bullshit.”

    Um okay. I’m bullshitting am I? Maybe you’ll change your mind when I dig up the quote from his paper, on my other computer.

    He’s no bum either.

  6. Right.

    Bean (Australian Econ Rev, 1999) inferred 0 to +2% inflation, based on the idea that the regulated wage market stuffed up market equilibration.

    Gilman (Aust Econ Rev, 1998) reckoned 0 to -2% was optimal, looking more closely at menu costs, adjustments and distortions of cash flows altering investment decisions (noted in accounting literature as far abck as the 1970s and repeating von Mises’analysis).

    It’s a real stretch to say inflation less than 2% is “dangerous”, and that the QE should go on because the (failed) stimulus has ended.

    The idea we need to inflate away “hedonistic” elements of goods andservices is flawed and has been applied in flawed manner. US policymakers assumed that computer quality followed Moore’s law, not actual increases in computer output/end user capabilities.

    Central banks should maintain liquidity in the banking system in a price neutral (but not engendering price neutrality) manner. In other words, they should aim for the neutrality of money.

  7. Alright, I should have said less than 1%. It’s generally believed to be dangerous.

    “inferred 0 to +2% inflation”
    Nope. A quote from the paper:
    “the implied increase associated with the broadening of the band from 0-2 per cent to 0-3 per cent in New Zealand also moves in the fight [sic] direction”

    “reckoned 0 to -2% was optimal”
    In 2003 he said:
    “…evidence of a strongly significant negative effect of inflation on growth. This is qualified by findings of a “threshold” rate of inflation, above which the effect is strongly significant and negative, but below which the effect is insignificant and positive. For industrialized country samples, this threshold level has been tested for and found to be very low, at a 1% inflation rate (?), although others have assumed (without such testing) higher thresholds of 2.5 %.”

    “US policymakers assumed that computer quality followed Moore’s law”
    Rubbish.

    “inflate away “hedonistic” elements of goods andservices”
    “they should aim for the neutrality of money”
    I can’t work out what you mean by either of these statements.

  8. “Alright, I should have said less than 1%.”

    No, THAT’s still nonsense. It is still inflationary all the way down to 0%. How on earth did the US and UK survive the 19th century with unprecedented growth and average (low) deflation?

    Remember the only deflation the US has suffered recently was during the middle to end of the Obama stimulus. Deflation in that instance was a consequence, not a cause of economic ruin.

    Excessive & prolonged inflation or deflation, or shocks are dangerous.

    So we both move the goal posts a bit and I reckon you ignore (completely) Gilman’s paper on Australia which has a 0 to -2% band, and the issue over menu costs is exaggerated considering how far we’ve liberalised the labour market since inflation targeting begun.

    This menu price thing is crap too. It is merely one sided. Deflation will suit some peoples menu costs as well.

    What about asset misallocation? If rental yields are 3%, the equity market returns 13% and inflation is 3%, obviously this will distort investment decisions. (As will excessive or persistent deflation).

    The recession Australia had at the end of the 1980s was a classic credit cycle induced recession.

    How on earth do you conclude that inflation less than 1% is “dangerous”? How do you explain away a century of economic progress?

    ““US policymakers assumed that computer quality followed Moore’s law”
    Rubbish.”

    Yes they did.

    http://blog.adamnash.com/2008/02/27/inflation-hedonics-and-how-silicon-valley-may-have-wrecked-our-monetary-policy/

    I’ve never heard of the website but it has direct quotes from a critical book on Greenspan. The abuse of the hedonic prices is well known.

    for example:

    James Grant, editor of the always insightful Grant’s Interest Rate Observer, was one skeptic who took the trouble to dissect the complicated subject that Greenspan seemed to accept at face value. In the spring of 2000, Grant published a study by Robert J. Gordon, a Northwestern University economics professor, who had prepared for the Congressional Budget Office a paper with a shocking revelation:

    *There has been no productivity growth acceleration in the 99% of the economy located outside the sector which manufactures computer hardware… Indeed, far from exhibiting a productivity acceleration, the productivity slowdown in manufacturing has gotten worse: when computers are stripped out of the durable manufacturing sector, there has been a further productivity slowdown in durable manufacturing in 1995-99 as compared to 1972-95, and no acceleration at all in nondurable manufacturing.*

    Grant backed that thunderbolt up with another study conducted by two economists, James Medoff and Andrew Harless. Their contention was that the use of a hedonic price index grossly misrepresented the actual data.

    The Austrian stuff is 100% good economics when you take out the oddball stuff by Rothbard’s followers.

    It is hard to fault the ABCT theory (which of course isn’t the explanation to all business cycles) here:

    SHAND, ALEXANDER H. (FOREWORD G.L.S. SHACKLE) The Capitalist Alternative: An Introduction to Neo-Austrian Economics
    Wheatsheaf Books, 1984, First Edition. (ISBN: 0710802625)

    I think it is chapters 9 & 11 but maybe 10. Easier to read than a whole book by Mises.

  9. “How on earth did the US and UK survive the 19th century with unprecedented growth and average (low) deflation?”
    “How do you explain away a century of economic progress?”
    The Russian economy had unprecedented growth under socialism, too.

    “middle to end of the Obama stimulus”
    No. Deflation started a couple weeks after the bill passed. Deflation ended while less than a third of the money was spent. It would have been much worse without the stimulus.

    “you ignore (completely) Gilman’s paper”
    I have the paper right here. You ignored my rebuttal.

    “distort investment decisions”
    And rightly so. The whole point is to manipulate people to increase GDP.

    “How on earth do you conclude that inflation less than 1% is “dangerous”?”
    With the exception of massive increases in productivity, deflation is correlated with bad performance.

    “Austrian stuff is 100% good economics”
    Haha. “a href=”http://mises.org/daily/3540”>Mises himself was insane:
    “There is no such thing as quantitative economics.”

    My opinion is that we should print money whenever we can get away with it.

  10. “The Russian economy had unprecedented growth under socialism, too.”

    ???

    It worked out so badly they reverted back to the NEP. If they had such sterling growth rates, why did it fail? The “success” can be explained by the fact that pre revolution, they were feudal. This hardly proves that deflation harmed 1800s America or the UK.

    “I have the paper right here. You ignored my rebuttal.”

    A rebuttal doesn’t mean moving on to the next paper he wrote. 0 to -2% for Australia. Your rebuttal was that more generally he found a different target and so did Bean (but both did under different circumstances and in context, noting that menu costs are less relevant given we have deregulated our labour market), your claims that inflation being less than 2% or 1% is “dangerous” aren’t supported. In any instance they’ve shown a band arguably between -2% and +3%. To then infer inflation less than 2% or 1% is dangerous and is necessary because the stimulus stopped (why?) is taking license. After all, the stimulus resulted in job losses and deflation.

    “And rightly so. The whole point is to manipulate people to increase GDP.”

    No. This doesn’t increase GDP. It creates disasterous business cycles. Even if you take an outcome based approach, you still have to consider the role of distorting investment decisions, time inconsistency and the role of inflation in discoutning any gains. Sure in 1988 Australia had excellent growth. At the same time PPI and industrial output figures were showing signs of stress and in 1990 we had a recession.

    In 1992, were we better off for having the boom bust cycle or not?

    “With the exception of massive increases in productivity, deflation is correlated with bad performance.”

    Yes well. Why do you keep on calling inflation between 0% and 1% deflation though? How can you just change definitions like that when we’ve seen the hedonistic presumptions about CPI were rubbish?

    No Tinos, Mises wouldn’t call what I do economics. He’d call it public finance or private project evaluation. Everyone else would call it economics these days.

    Economics strictly speaking was theory. He did not work, in his own opinion as economist except when he was a university professor or an adviser. He worked in banking and economic history otherwise.

    It was a nomenclature idea. Big deal. Marshall still had valid macroeconomics even if it was called political economy.

    Modern economics arises from the marginalist breakthroughs of the Austrian school. To reject the Austrian school entirely is to misunderstand economics.

    “My opinion is that we should print money whenever we can get away with it.”

    You never get away with it except when there is a demand for it. Inflation simply means supply is outstripping demand.

    How can you prove generally that inflation is utility enhancing – given the obvious inference from Okun’s Law that inflation ought to be minimised to maximise welfare?

  11. “???”
    Under socialism, Russia went from being agrarian to space age in a matter of decades.

    “reverted back to the NEP”
    You’re forgetting the next part of the story.

    “If they had such sterling growth rates, why did it fail?”
    Probably mostly social issues.

    “This hardly proves that deflation harmed 1800s America or the UK.”
    Firstly, the 19th century didn’t just have deflation. Secondly, my point is that America doing “fine” doesn’t prove deflation is not a bad thing, either. (Especially since that deflation wasn’t even monetary in nature.)

    “A rebuttal doesn’t mean moving on to the next paper he wrote.”
    Yes it does. He changed his mind!

    “It creates disasterous business cycles.”
    Oops, I was wrong. The whole point is actually to smooth over the cycles, with long-term growth improvements as a secondary reason. Pure capitalism fails to provide a smooth economy. Without Bernanke/Obama (e.g. if Schiff were in charge) the US would probably be in a depression right now.

    “In 1992, were we better off for having the boom bust cycle or not?”
    Firstly, it started in the US. Secondly, I’m thankful it wasn’t worse.

    “Why do you keep on calling inflation between 0% and 1% deflation though?”
    ’cause it’s getting awfully close.

    “How can you just change definitions like that when we’ve seen the hedonistic presumptions about CPI were rubbish?”
    It’s a fact that CPI with hedonic regression is superior to CPI without it.

    “It was a nomenclature idea.”
    No. Austrians really are cranks. Mises continues,
    “It is not possible to assign individuals to classes of men reacting in the same way.”
    It obviously is. I am likely to use Translink, Sydney people aren’t.

    Rothbard is even worse:
    “The use of the calculus, for example, that has been endemic in mathematical economics assumes infinitely small steps. … Human action takes place in discrete steps, not in infinitely small ones.”
    After reading crap like that I’m somewhat ashamed I ever took these people seriously.

    “You never get away with it except when there is a demand for it.”
    We’ve been getting away with it just fine for decades!

    “the *obvious* [emphasis added] inference from Okun’s Law that inflation ought to be minimised to maximise welfare?”
    lol

  12. So Tinos, the Soviet Union had fantastic growth rates after the NEP did they?

    The “next stage” was the five year plans and collecivitisation. Are you serious Tinos? By the time Stalin died, the private farm plots could earn at least four times as much as the collectivised plots did.

    “Probably mostly social issues.”

    Yes, the Soviet Union allowed dissent etc…

    “Yes it does. He changed his mind!”

    He didn’t change his mind. He studied a different data set (Australia vs Ireland?). Do you think academics now aim to discredit their own work? That said, your ideas about low inflation being dangerous are still wrong, even by his updated research.

    “The whole point is actually to smooth over the cycles, with long-term growth improvements as a secondary reason.”

    How well does the cycle get smoothed when you actually increase unemployment, depress output further and create deflation?

    “Without Bernanke/Obama (e.g. if Schiff were in charge) the US would probably be in a depression right now.”

    Are you kidding?

    http://portalseven.com/employment/unemployment_rate_u6.jsp

    Obama has managed to keep total unemployment high.

    Let’s look at the counterfactuals.

    http://michaelscomments.wordpress.com/2010/07/02/june-2010-unemployment-numbers-theyre-real-and-theyre-spectacular/

    Pretty damning stuff on the Keynesian orthodoxy, and a validation of austerity.

    “It’s a fact that CPI with hedonic regression is superior to CPI without it.”

    Except that the hedonic variables that have been used were entirely spurious. Do you think you can ever design one that is good enough to be useful?

    Mises isn’t a crank. Taking a comment about interpersonal utility and concluding it must be untrue because people have similarities in geography, race etc pretty much rejects standard, orthodox models that use utility – like trade models, edgeworth boxes etc.

    To discredit Rothbard, you haven’t chosen a paticularly good quote. Calculus works but it is still an abstraction. His ideas about money are weird.

    “We’ve been getting away with it just fine for decades!”

    Sure, if you’re a debtor, not on a fixed income and assume that it maximises GDP with no distortionary effects on investment (choosing uneconomic projects over economic projects – a process that ultimately leads to a fall in labour demand and creates the foudnations for the bust).

    How exactly did we get away with it in 1990? Like I said, the inidicators showed in 1988 the stage was set for a bust.

    Panama has no central bank –

    “Panama Has No Central Bank”

    Mises Daily: Thursday, April 26, 2007 by David Saied

    0% to +2% inflation. Generally just under 0% inflation to 1% inflation. Macroeconomic stability, high growth.

    Can you explain why this has worked – considering you said before inflation under 2/1% was “dangerous”?

    You need to seriously consider this given you have called Austrians cranks (not completely unfounded) and have come up with a unsupported argument for moderate to high inflation.

    Tinos, on a final note – why can’t you understand that Okun’s Law implies that minimising inflation will lead to a higher GDP growth path? What do you think happens when labour gets more expensive? Do you think inflation or spreading scarce labour more thinly across a range of economic AND uneconomic projects helps?

  13. “the Soviet Union had fantastic growth rates after the NEP did they?”
    “Are you serious Tinos?”
    Yes & Yes.

    “He studied a different data set (Australia vs Ireland?). Do you think academics now aim to discredit their own work?”
    This comment has convinced me you’re just trolling.

    If not, do yourself a favour and spend an hour looking at this from a mainstream point of view. That is, assume the Austrians are completely wrong, and mount an attack on them. I honestly don’t see how a reasonable person could take them the least bit seriously after seeing both sides of the debate.

    At least any mathematicians or physicists reading this will get a good laugh from those Mises & Rothbard papers I linked to.
    “As an example of the height of the absurd, I offer in evidence… Sengupta treats a transaction of exchange as a complex number.”

  14. If collectivisation was such a great success (not really *orthodoxy* either), why did collectivised plots have 25% or less output than privately held plots by 1953?

    I’m not trolling (you seriously ask this of me after asserting, contrary to the data that the Soviet Union had higher productivity AFTER collectivisation?). Gilman didn’t change his mind. He had two datasets and came up with two sets of similar but different results.

    “That is, assume the Austrians are completely wrong, and mount an attack on them.”

    That doesn’t make sense. Austrians are intertwined with the mainstream. We should go back and reject marginalism and back to classical economics? Smith, Ricardo and Cantillion only?

    Some of the Austrian narrative needs to be rejected wholesale because it IS quite silly. 100% banking, a rejection rather than a judicious use of quantiative methods, Rothbards bizarre definition of money and the pacificism of the Lew Rockwell types.

    “Mainstream” i.e, debunked Keynesian macroeconomics cannot explain the 1990 recession. The Austrian theory fits it to a tee. The repudiation of team Obama’s forecasts pre and post stimulus are a daming repudiation as well. In the Australian case, hidden unemployment rose more than the number of jobs Rudd claimed to create – the rest of the fall in output was taken in by the flexibility of the labour market and falls in immigration.

    You haven’t said why Austrian theory is wrong, but rather, why the rehection of mathematics was a poor choice to start with and has lead to some absurdities.

    I once piped up on Organisations and Markets in favour of free banking, using standard macroeconomics…to which I was told the quantity of money identity was invalid to be used in this instance…but if you have read enough or done enough econometrics by now, you’ll know how rigourous you need to be to do it well. An econometrics major I work with reckons a very large majority of empirical work is flawed. If the quant. methods are that bad, the analysis is, by definition…not good economics.

    But still – I think it’s fair to say we’ve moved away from the idea that we need inflation for stability and growth.

  15. The soviets empire was funded by eating neighboring nations. Once it was contained it was only a matter of time before it failed.

  16. This is one step above Pauline Hansonism (i.e *lets print money to get rich*). Tell me why you’re “ashamed” to have once opposed this Tinos.

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