Skip to main content

Quantitative easing

Since additional fiscal stimulus is out of the question, Fed Chairman Bernanke is planning another round of monetary policy action.  It's rather weak tea, but basically they're going to try and push up the inflation rate a bit by buying a huge mess of treasury bonds.  It's the functional equivalent of printing some money.  I think this is an area where people's intuitions (printing money bad! strong dollar good!) can lead them astray.  The usual suspects are howling about "debasing the dollar," but Karl Smith gives a great explanation of why we need this sort of thing, in the context of arguing that Bernanke is not doing enough:
Virtually all economists agree that disinflation and deflation are caused by a shortage of dollars in the economy. The majority agree that such deflation is accompanied by a rise in unemployment. If inflation is too many dollars chasing too few goods, then deflation is too few dollars chasing too few goods. As a side effect some of those goods are never caught. No one buys them, their producers lay off workers and unemployment rises...

The economy is being dragged down by the spiral of ever lower inflation. As banks and businesses see inflation fall, it only increases their incentive to sit on the cash they have. As I mentioned before, if we reach outright deflation then they can earn a profit simply by stockpiling money in vault. Every year as prices fall the money locked in that vault would become more and more valuable.

However, money locked in a vault does nothing to support economic growth. It does not fund new investments, new workers or new products. Without that base of new investment or new spending, prices fall further, goods are discounted more deeply and the deflation spiral worsens. We could power out of such a spiral by raising inflation expectations. The Fed could promise that any decline in prices today would be met by an equal rise in prices tomorrow. Any business considering sitting on its cash would know that know that this is a losing proposition. What it gains by taking advantage of disinflation today, it will lose when exposed to re-inflation tomorrow.
See here and here also.

Comments

Popular posts from this blog

Why Did Reality Winner Leak to the Intercept?

So Reality Winner, former NSA contractor, is in federal prison for leaking classified information — for five years and three months, the longest sentence of any whistleblower in history. She gave documents on how Russia had attempted to hack vendors of election machinery and software to The Intercept , which completely bungled basic security procedures (according to a recent New York Times piece from Ben Smith, the main fault lay with Matthew Cole and Richard Esposito ), leading to her capture within hours. Winner recently contracted COVID-19 in prison, and is reportedly suffering some lingering aftereffects. Glenn Greenwald has been furiously denying that he had anything at all to do with the Winner clusterfuck, and I recently got in an argument with him about it on Twitter. I read a New York story about Winner, which clearly implies that she was listening to the Intercepted podcast of March 22, 2017 , where Greenwald and Jeremy Scahill expressed skepticism about Russia actually b

Varanus albigularis albigularis

That is the Latin name for the white-throated monitor lizard , a large reptile native to southern Africa that can grow up to two meters long (see pictures of one at the Oakland Zoo here ). In Setswana, it's called a "gopane." I saw one of these in my village yesterday on the way back from my run. Some kids from school found it in the riverbed and tortured it to death, stabbing out its eyes, cutting off its tail, and gutting it which finally killed it. It seemed to be a female as there were a bunch of round white things I can only imagine were eggs amongst the guts. I only arrived after it was already dead, but they described what had happened with much hilarity and re-enactment. When I asked why they killed it, they said it was because it would eat their chickens and eggs, which is probably true, and because it sucks blood from people, which is completely ridiculous. It might bite a person, but not unless threatened. It seems roughly the same as killing wolves tha

The Conversational Downsides of Twitter's Structure

Over the past couple years, as I've had a steady writing job and ascended from "utter nobody" to "D-list pundit," I find it harder and harder to have discussions online. Twitter is the only social network I like and where I talk to people the most, but as your number of followers increases, the user experience becomes steadily more hostile to conversation. Here's my theory as to why this happens. First is Twitter's powerful tendency to create cliques and groupthink. Back in forum and blog comment section days, people would more often hang out in places where a certain interest or baseline understanding could be assumed. (Now, there were often epic fights, cliques, and gratuitous cruelty on forums too, particularly the joke or insult variety, but in my experience it was also much easier to just have a reasonable conversation.) On Twitter, people rather naturally form those same communities of like interest, but are trapped in the same space with differe