Cullen Roche interview

[Tom Brown]

Just curious, is everybody on the same page here regarding these definitions? (of M0, MB, M1, M2, etc?). Those change depending on what country you're talking about. For the US they are:

http://en.wikipedia.org/wiki/Money_supply#United_States

M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits
M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
MZM: 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed because its velocity has historically been the most accurate predictor of inflation. It is M2 – time deposits + money market funds
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
M4-: M3 + Commercial Paper
M4: M4- + T-Bills (or M3 + Commercial Paper + T-Bills)
L: The broadest measure of liquidity that the Federal Reserve no longer tracks. Pretty much M4 + Bankers' Acceptance

Also, there's a table towards the top which makes it easy to see which money designations are subsets or super sets of others.

[Ad Orientem]

I knew it! Thirteen pages in roughly 48 hrs. Before even glancing at the comments I knew it can only mean one of two topics...

a) Another libertarianism vs the world. Or...
b) Austrian vs MMT/MMR thread.

[Gumby]

Just curious, is everybody on the same page here regarding these definitions? (of M0, MB, M1, M2, etc?).

Yes, that is what I use. Good clarification.

[Tom Brown]

Does QE cause inflation?

I actually think that's a very interesting question. I think there are some things that are definitely NOT true about QE: There's no fixed money multiplier such that if MB increases then M1 or M2 etc will definitely increase by some fixed multiplier. QE is not the same as the government sending everyone a check, which would definitely be inflationary. It's not the same as legalizing counterfeiting, which also would definitely be inflationary.  QE is also not the Fed overpaying people for worthless assets ... "bags of dirt" as Cullen likes to say, although QE1 did involve some overpaying. So it's not as simple as "more money = higher prices" as far as QE goes.

The monetization issue is an interesting one for me. Cullen is pretty clear that he doesn't think that QE is monetization. His main argument here is that the Fed is not making a market for Tsy debt: that market exists outside of the Fed's purchases. If the Fed were to stop purchasing Tsy debt the market for it would not collapse.

Assuming Cullen is correct, could we get to a place accidentally where the Fed **is** making the market for Tsy debt, such that if the Fed stopped making purchases the Tsy bond market would collapse? I don't think so, but people like this (Vincent Cate):

http://howfiatdies.blogspot.com/

have worked out a bunch of scenarios wherein this kind of thing does sneak up on us... but rather than the Fed stopping its purchases, the bond buying/owning public starts to panic, which forces the Fed to pick up the Tsy bond purchasing slack, etc, in a positive feedback loop. Some of Vincent's thinking on this is kind of fun to read, and he's convinced that historically we are in dangerous waters. I'm not convinced by his arguments, but I don't write him off as insane either. (BTW, Vincent has a contest up for finding a counter example: he'll pay $100 if you can find one, and he's a man of his word too: I split the $100 prize money with JP Koning and Mark Sadowski on a previous contest).

New Keynesians (NKs) and post-Keynsians (PKs) are in a similar place regarding QE I think: they both take the position that it's not inflationary in our current circumstances but also it doesn't do as much good as QE promoters say it will. NKers and PKers differ as to why. NKers say it's because of the "liquidity trap" we're experiencing at the zero lower bound (ZLB).

The Market Monetarists (MMs) think QE is better than nothing (they're similar to NKs on this point actually), but they argue that without clear communication from the central bank (CB), its effects are pretty much undone. If the CB acted like Chuck Norris, then the hot potato effect (HPE) would be much more powerful and QE's effectiveness would be multiplied such that only a small QE program could be very effective. Essentially if the market perceives that QE has not **permanently** increased MB, then it becomes a very weak mechanism. Here's my favorite Scott Sumner piece on this:

http://www.themoneyillusion.com/?p=23314

That article is very much worth reading! Some people would argue that we're essentially in his case 5b right now. Scott disagrees, stating that we're closer to case 5c, although he admits in the comments to "Jared" that we may be somewhere in between 5b and 5c due to uncertainty about when interest rates might eventually increase.

Now check out his case 7: the case of the cashless society. I think that case in particular is very interesting. Especially his remark about the zero bound, which effectively gives us cases 7b and 7c to match cases 5b and 5c.

Even though Scott explicitly tells people he's not interested in accounting or banking, that doesn't mean that he's not aware of how the system works. A lot of PK types annoy Sumner and other MMs by making the mistake of thinking MMs are ignorant about those issues, when in reality, they pretty much do understand how the system operates, but philosophically, it still doesn't matter much to them. The reason for this can be inferred from Scott's story and his seven cases in the above article. Nick Rowe is more inclined to think that banks can be important, at least in the near to mid term. This maybe isn't his best article on the subject, but it's pretty good:

http://worthwhile.typepad.com/worthwhil ... ecial.html

Cullen fundamentally disagrees with Scott and other Market Monetarists because he thinks of bank deposits as equivalent to base money (what Scott calls "medium of account" (MOA)). I think Cullen has an excellent argument for that, but Nick Rowe (another MMist) has some good arguments against this as well. Scott and Nick don't fully agree on these concepts either. Here's one of many good Nick Rowe articles on the subject:

http://worthwhile.typepad.com/worthwhil ... hange.html

So to me the question is not very clear cut at all. I think people like Peter Schiff tend to make an oversimplified case for high inflation or hyperinflation. Someone like Vincent Cate actually makes some better arguments I think, even though he's an amateur (like me!).

Other Austrians, like Mish Shedlock, think Schiff is completely wrong about hyperinflation. Mish has an attitude towards bank deposits more in line with PK types (like Cullen). Shedlock basically argues that since credit money can shrink due to deleveraging at the same time the CB is pumping up base money, the overall effect can be a wash or even deflation. Where I differ with Shedlock is in his interpretation of "fractional reserve banking" and how that works. He seems to think that a 100% reserve requirement would fix a lot of problems, but I don't see it. Perhaps increasing the required capital ratios would have more of an effect. MMer Nick Rowe tackles that question here:

http://worthwhile.typepad.com/worthwhil ... atios.html

Sorry for the long rambling piece, but I just wanted to point out some arguments that make the whole question of QE and inflation a lot less straightforward than some people make it out to be. As Vincent Cate points out, we are in some uncharted waters here (in the US) and in Japan and the UK. It'll be very interesting to see what happens. But I doubt very much we'll have a case like Zimbabwe or Argentina wherein the "independence" of the CB is completely eliminated, and the CB becomes simply a mechanism whose sole purpose is to enable unlimited gov deficit spending.

Also, I highly recommend reading the blogs of JP Koning and David Glasner on any of these issues. JP is especially strong on defining exactly what the medium of account (MOA), unit of account (UOA), and the medium of exchange (MOE) are. He comes up with some really interesting historical examples to illustrate his points. He also explores a concept he calls the "convenience yield" which goes a long way to describing the effects of QE in an understandable way. Also, the monetaryrealism.com blog is very good: especially articles by JKH. Nick Edmonds and Ramanan also maintain related blogs worth reading. You can find them in the comments section to many Nick Rowe and JKH articles.

http://jpkoning.blogspot.com/

http://www.monetaryrealism.com

[Kshartle]

Does QE cause inflation?

I actually think that's a very interesting question. I think there are some things that are definitely NOT true about QE: There's no fixed money multiplier such that if MB increases then M1 or M2 etc will definitely increase by some fixed multiplier. QE is not the same as the government sending everyone a check, which would definitely be inflationary. It's not the same as legalizing counterfeiting, which also would definitely be inflationary.  QE is also not the Fed overpaying people for worthless assets ... "bags of dirt" as Cullen likes to say, although QE1 did involve some overpaying. So it's not as simple as "more money = higher prices" as far as QE goes.

Do you find it interesting that Dallas fed Chair Fisher that he fears serious inflation if the Fed doesn't end QE but also thinks markets and bond prices could fall significantly if the program is ended? In his words the Fed may have "painted itself into a corner".

Does he just not understand QE? See I think he understands it perfectly. If they end the program or even go a significant time (say 2 years) without increasing it, recession will set in. If they never stop increasing the rate of expansion the dollar will eventually reach a crisis. 

http://www.foxbusiness.com/economy-poli ... te-bubble/
http://www.moneynews.com/StreetTalk/fed ... /id/544474


Even Bernanke admits the risk of serious inflation from QE. He just thinks it's worth the risk:

"With murmurs at the FOMC growing louder every time the Fed Chairman and his acolytes express support for ultra-loose monetary policy and continued quantitative easing, Ben Bernanke faced the Senate Banking Committee where he once again defended his tenure as central bank chief.  The Chairman told policymakers the “benefits of asset purchases, and of policy accommodation more generally, are clear,”? but did note “there is no risk-free approach to this situation.”?

Admitting the possibility of spiraling inflation and of destabilizing the financial system, Bernanke said the risk of doing nothing is even worse."

http://www.forbes.com/sites/afontevecch ... -chairman/

Does Bernanke not understand that QE can't cause rising prices because it's just an asset swap that leaves equity positions the same?

[systemskeptic]

Moda / Gumby,

Is the absence of QE deflationary? 

That is, if the Fed had not embarked on QE would we have been in more of a risk for deflation, or be in a more deflationary state than today?

[Tom Brown]

Kshartle,

If you want to ask someone about Mr. Fischer's comments, why not try asking Benjamin Cole. He made a recent comment about that, and Ben does guest posts for both Marcus Nunes and Lars Christensen, so he probably knows a bit more about Mr. Fischer's position than I do. Here's a link:

http://www.themoneyillusion.com/?p=25914#comment-313615

I'm sure Mr. Cole will disagree with Mr. Fischer's opinion, and he'll be able to give you a much better argument why than I could. Just comment right on Sumner's blog there addressing Mr. Cole, and I'm pretty sure he'll get back to you.

Better yet, read some of the comments there from Mark A. Sadowski. He's the world's hardest working econ blog commentator ... why he doesn't have his own blog is a complete mystery, but I know of no one better at producing a strong fact based argument in extremely short order. I don't always agree with him, but if I ever do go up against him, I want to make sure I have all my ducks in a row. Read his comments there in Sumner's most recent piece today:

http://www.themoneyillusion.com/?p=25932

If you address Mark on Sumner's blog or Marcus' ... you're pretty much guaranteed to get a timely response.

As for Bernanke, address Sumner directly. I'm sure he'd have an interesting opinion on that.

The fact is the hyperinflation that was promised to occur over the last six years by many people didn't. Will it in the future? I doubt it will be hyperinflation, but how about high inflation? Could be! I really don't know. Larry Kudlow and Art Laffer have both publicly abandoned their "hyperinflation" stance. Many of the skeptical traditional monetarists have abandoned it as well, although they are still generally opposed to QE. It's easy to cherry pick examples with opinions one way or the other.

What I was trying to point out in my exceptionally long comment above was that the reality so far has not matched the hyperinflationists' claims and that there are a host of opinions offering explanations, some having to do with what the core nature of money is. I think anybody trying to figure out what is going on would do well to listen to some of them. Is money primarily a medium of exchange (making bank deposits the dominant form) or primarily a medium of account (making base money the primary kind). Do expectations of future interest rates have anything to do with it (Sumner's cases 1 - 7)? Does deleveraging completely swamp any small effect QE could have added (PKs and Shedlock type Austrians)?

Cullen has an excellent article up explaining the circumstances which lead to hyperinflation. It's not simply a case of an overly ambitious QE program:

http://papers.ssrn.com/sol3/papers.cfm? ... id=1799102

Vincent attempts to refute Cullen here point by point, but I don't think very successfully. Here's Vince responding to Mish's latest Austrian-style attack on hyperinflationists:

http://howfiatdies.blogspot.com/2014/01 ... at-is.html

Another unique opinion I forget to mention was that of Mike Sproul who's a backing theory / free-banking advocate. He's got his own website so you can ask him. He argues that the concept of fiat money is mostly a fiction. Even in the US today, we don't truly have fiat money because every $ issued by the Fed or a bank is backed by a $'s worth of assets (another reason for keeping track of the liabilities side of everyone's balance sheet, including that of the CB). In the Fed's case, those assets are Tsy bonds. True fiat money is very rare and will often lead to hyperinflation because it has no backing. Exceptions (fiat w/o hyperinflation) are even rarer (like the ghost money of Somalia ... read JP Koning for a description of that):

http://jpkoning.blogspot.com/2013/03/or ... omali.html

Actually he has another article about ghost money up recently (you can find even more using the search box at the bottom of the right hand column):

http://jpkoning.blogspot.com/2014/01/ma ... money.html

Mike Sproul leaves comments. Here's his site:

http://www.csun.edu/~hceco008/realbills.htm

Personally, I think Mike has a point, and we are a LONG ways from ghost money or unbacked money. Although hyperinflationist Vincent and Mike have a good interaction on Vincent's page worth checking out. Vincent tries to explain hyperinflation in terms of the backing theory, and show how we are in deed in danger of it here in the US.

[Tom Brown]

... BTW, regarding the question of the true nature of money: MOA or MOE, there have been literally 100s of blog pages written on that recently, going back to 2009. I got interested because the consequences seemed huge to me, and the opinions were very sharply divided, even amongst people otherwise in the same camp. Rowe, Sumner, Woolsey, Saturos, Koning, Glasner ... all chimed in repeatedly on this score: with Rowe vs Sumner being perhaps the most surprising match up of adversaries.

So given Mark A. Sadowski's reputation for bringing empirical evidence to the table, I finally asked him to weigh in, but he declined saying that he couldn't figure out a good way to make an empirical test out of it. Ha! ... all that "ink" spilled, and perhaps the best talent for finding empirical tests had to throw up his hands. So ultimately perhaps that question is not as important as I thought it was. I think the reason is that in the Market Monetarist camp (where that question seems to come up most frequently), the consequences disappear in the LONG term. I still think it's important though because PK and some Austrian thinking depends on the answer: they just never really get interested in arguing the issue. They just assume (for the most part) that MOE is the answer.

[Tom Brown]

... as you can probably tell, I tend to follow the post-Keynesian (PK) outlook in general, but there are a lot of variations in that camp. At the same time I'm very intrigued with the Market Monetarist (MM) outlook. I have a lot of respect for MMists like Mark Sadowski, and I always take what he has to say pretty seriously. In that light, I was somewhat surprised to hear Sadowski praise PKers JKH (from monetaryrealism.com) and Nick Edmonds (Ramanan and Winterspeak too). Sadowski also praised the models used by Ramanan and Nick Edmonds in particular. I'm not very familiar with Nick's site, but I think it's worth a look, because I plan on paying more attention to it in the future:

http://monetaryreflections.blogspot.co.uk/

and Ramanan:

http://www.concertedaction.com/2013/06/ ... economics/

Some of the better PKers tend to put a lot of emphasis on getting the accounting correct, which makes me inherently trust them more! In fact I use a John Hatzius quote on the title strip of my blog:

"If you can’t explain it with accounting, you can’t explain it." -- JKH

Another good thing about that group of PKers, is they are good at self-policing the PK camp: they don't hesitate to heavily criticize sloppy work on their own side.

... but MMer Sadowski is happy to help them out on that account... after leaving a set of highly detailed and evidence filled comments on Steve Randy Waldaman's Interfluidity blog (contradicting what Steve was arguing), Steve ended up crossing out two or three of his entire blog posts (and leaving them there in strikethrough) with large red "BULLSHIT" watermarks across each. In the end he ended up thanking Mark for demonstrating conclusively that his posts were complete bullshit. Now that's a blogger I can really respect! I really did admire Steve for owning up to his mistakes there... and I gained a new respect for Marks talents too!

So don't ask me (except for the lowest level mechanics maybe)... If you are truly interested in learning something and challenging your own current opinions, ask ANY of those very knowledgeable people I mention above!

[Gumby]

Moda / Gumby,

Is the absence of QE deflationary? 

That is, if the Fed had not embarked on QE would we have been in more of a risk for deflation, or be in a more deflationary state than today?

I don't think QE, on its own, helped us avoid deflation. I think QE played a role in manipulating interest rates to in an attempt have an affect an enormous private credit market and shadow banking system (~$100 trillion markets). And it enables banks to bid up financial assets (with no underlying support for those assets). So, perhaps QE has more psychological effects than real effects (makes people flock to gold, etc.). But, the idea that QE is very inflationary and the absence of QE is very deflationary... no, I wouldn't say that. I think it's just recomposing assets.

From my view, any real "reflation" would come from Congressional spending — which is essentially a pure helicopter drop (whereas QE isn't). But, I don't personally think a $1 trillion helicopter drop from Congress creates a tremendous amount of inflation in a ~$50-$100 trillion market — if it did, there would be a tremendous amount of inflation every year. Maybe a few areas of that economy see a little inflation or reflation, but I think most people are getting worked up over a relatively small drop in the ocean when you look at the big picture.

The biggest "fear" for many is that increasing the monetary base will supposedly "multiply" the broader money. But, again, as we've shown above, there's no evidence that is true.

[moda0306]

Moda / Gumby,

Is the absence of QE deflationary? 

That is, if the Fed had not embarked on QE would we have been in more of a risk for deflation, or be in a more deflationary state than today?

Do you actually mean the program of QE, or just large amounts of Open Market Operations "monetizing" in general?

QE actually refers to a special "monetizing" program targeting long-term bonds (and MBS's) rather than short-term treasury debt.

- I think targeting MBS's did prevent deflation, as it showed that the fed was willing to put a floor beneath the MBS market.

- I think targeting LT treasury bonds is largely useless at lowering long-rates, because I think those long-rates and preventing deflation, as long-rates are set by expectations of future short-term bond rates, and for every ounce of recover the fed CAN induce, it will put upward pressure on long-term bond rates.

- I think Open Market Operations COULD be somewhat anti-deflationary, since it reenforces the fed's position that short-term rates are to be set low, but rates are quite naturally low, due to the otherwise deflationary environment with high private debt default risk.




Kshartle,

I pointed this out before, but maybe it went unnoticed by you (or your respnse went unnoticed by me).

You seem to think that T Bonds/bills are NOT money and therefore a swap of those for reserves should drive inflation since it gives us more tools to "bid up the price of assets," but I think you're missing how much the existence of those t-bonds/bills give us that ability.

If banks can truly create money via credit (I think we can agree on this), this money-creating ability is MUCH more dependant on goo collateral by borrowers than by simply "having more ability" to print money given to the banks by higher reserves (which is functionally a myth anyway).

If I have $100,000 of T-Bonds, nobody else in the economy has to give up the cash for me to "bid up prices," for two reasons.

1) Technically, I don't think there is a law prohibiting me from buying something with bonds.  It's simply not done often.

2) Even if I couldn't, I could merely take out a loan from the bank with the bonds as collateral, allowing me to bid up prices.

In fact, I've seen this before (essentially) where a guy used his life insurance cash-value to "help" the bank have a good reason to "create" him some money.

So where is the rationale that I can't "bid up prices" with t-bills/bonds?

[Tom Brown]

Here's a great example of Nick Edmonds using his modeling skills to critique some MM ideas about what happens with increases in the base money supply (QE essentially):

"Certain monetarists would assert that, given time, there is a fixed relationship between the quantity of base money and the price level. ..."

http://monetaryreflections.blogspot.co. ... -term.html

I don't know what Sadowski might say to that particular one, but I'd be interested to know.

[Gumby]

Here's a great example of Nick Edmonds using his modeling skills to criticize MM ideas about what happens with increases in the base money supply (QE essentially):

"Certain monetarists would assert that, given time, there is a fixed relationship between the quantity of base money and the price level. ..."

http://monetaryreflections.blogspot.co. ... -term.html

"Wait and see" economics always gives me a chuckle. It certainly may be right over the long term. But, we may all be dead by then, and its defenders seem to have an awful lot of patience.

[moda0306]

Kshartle,

One more thing.... and sorry if you've answered this before...

But what would your opinions of "monetizing debt" be in Canada where they have a 0% reserve ratio?  ... meaning that there is literally no affect on a banks ability to lend by enacting "QE" type programs.

[Tom Brown]

... for all my blathering on about MM ideas (that I do find intriguing), this is a common refrain from Cullen Roche that seems very hard to argue with:

"Think of it this way – spending is a function of income relative to desired saving. And your “saving”? is not just comprised of “money”?. Instead, it’s comprised of money AND financial assets. If you change part of your saving from a savings account to a checking account do you spend more? No way. So QE doesn’t change that fundamental spending function. " -- Cullen Roche

That's a very simple and direct argument about why QE won't fundamentally change spending patters and thus probably will have little inflationary pressure. I love the way he puts that so simply. Replace "savings account" with "Treasury bond" and the argument is even more to the point (regarding QE).

http://pragcap.com/forums/topic/unprinting-t-bonds

[systemskeptic]

You guys are making this harder than it is.  If QE prevented/reduced the deflation post 2008 then it was an inflationary stimulus... period.  The mechanics and explanation is all hot air anyways because none of it is provable (soft science)

If it helps you to look at it, if CPI was 2% prior to 2008, and it was trending to 0% (deflation) and QE (via whatever means, psychological or physical) kept inflation at 2% instead of letting it trend to 0% -- that was an inflationary effect was it not?

You can't have it both ways, either QE does something or it does not.  If it does nothing then what is the point?  If it does something then it is inflationary (unless you are somehow trying to argue that is is deflationary, which I don't think anyone is...)

To be clear, I am lumping all of the "Fed monetization policy" since 2008 into the generic term "QE"

[Libertarian666]

Another unique opinion I forget to mention was that of Mike Sproul who's a backing theory / free-banking advocate. He's got his own website so you can ask him. He argues that the concept of fiat money is mostly a fiction. Even in the US today, we don't truly have fiat money because every $ issued by the Fed or a bank is backed by a $'s worth of assets (another reason for keeping track of the liabilities side of everyone's balance sheet, including that of the CB). In the Fed's case, those assets are Tsy bonds. True fiat money is very rare and will often lead to hyperinflation because it has no backing.

So a piece of paper (or electronic equivalent) backed by an IOU from an insolvent issuer is not fiat money? That's truly hilarious. Thanks!

[Tom Brown]

Libertarian666, no, if they're insolvent that's a completely different story. The US is not insolvent, nor is Japan nor the UK. If the gov bonds were worthless in any of those countries, they'd be insolvent.

[Tom Brown]

systemskeptic, you write

You guys are making this harder than it is.  If QE prevented/reduced the deflation post 2008 then it was an inflationary stimulus... period.

OK true, but QE1 was definitely a little different that subsequent rounds of QE: in that case the Fed really was overpaying for MBSs. If they don't overpay, it's a lot less clear how inflationary it is.

[Tom Brown]

But what would your opinions of "monetizing debt" be in Canada where they have a 0% reserve ratio?  ... meaning that there is literally no affect on a banks ability to lend by enacting "QE" type programs.

If central banks are doing a series of overnight interest rate targets (perhaps changing the fixed target every six weeks or so), then through the very act of defending their overnight rate target this means that reserve requirements have almost no effect on lending. Scott Fullwiler does a great job of explaining that here:

http://www.nakedcapitalism.com/2012/04/ ... -sign.html

I don't think you'll see much disagreement on this point from PKers or even MMists. They'll disagree on "endogeneity" and exactly what that means, but I don't think you'll see a difference regarding reserve requirements affecting lending in these circumstances.

Capital requirements are a different story! They explicitly fold in all the assets on a bank's BS (not just the reserves).

[moda0306]

You guys are making this harder than it is.  If QE prevented/reduced the deflation post 2008 then it was an inflationary stimulus... period.  The mechanics and explanation is all hot air anyways because none of it is provable (soft science)

If it helps you to look at it, if CPI was 2% prior to 2008, and it was trending to 0% (deflation) and QE (via whatever means, psychological or physical) kept inflation at 2% instead of letting it trend to 0% -- that was an inflationary effect was it not?

You can't have it both ways, either QE does something or it does not.  If it does nothing then what is the point?  If it does something then it is inflationary (unless you are somehow trying to argue that is is deflationary, which I don't think anyone is...)

To be clear, I am lumping all of the "Fed monetization policy" since 2008 into the generic term "QE"

Well the term QE gets thrown around a lot when people really seem to mean "Open Market Operations."  I think if we're talking about putting a floor under a market that it previously had not (MBS's), then you could say that QE is inflationary (if we're now measuring "inflationary" as "supporting a price-level" rather than "pushing it up.")

If all we're talking about is trading short-term treasury debt for reserves, when the rate paid on those reserves is HIGHER than the rate the bank was earning on the t-bills, then we're really talking a wash.

But this is NOT what most Austrians are meaning when they argue that it's inflationary... They say that "hyperinflation is coming" or something close to it...(well... that is IF they're willing, for a second, to admit that inflation is a general rise in price level, rather than one of their other definitions).  They calculate this by looking at graphs of an exploding monetary base.  This is where the huge error is... and where we get to an assertion that "QE is not inflationary." 

So definitions are important here.  And we've never said "QE does nothing."  It has an effect on the bond market, especially with MBS's, as does tons of other expectations and fed operations.  It just doesn't have nearly the effect inflationists think it has in a depressed economy.

Further, if the fed had signaled that it wasn't going to support its inflation target at the expense of full-employment, against any promise it's made for decades, then we could have had a more severe deflationary spiral.  Expectations are huge, and QE or OMO are just a part of setting those.  If the fed signals that it wants to depart from its mandate in unpredictable ways in the future, then we very well could have inflation or deflation.

In fact, this is argued as one of the points of how the fed could FINALLY get some traction in the markets, rather than swapping assets (or maybe just along with it), would to set a slightly more irresponsible inflation target, showing that it will hold rates lower further into the future than expected, and this could help further repair balance sheets and actually RAISE inflation slightly to meet their current or even proposed target.

I don't prefer this method of balance-sheet repair, but when fiscal policy isn't being flexed enough, I wouldn't blame the fed for trying something new.

[moda0306]

To be clear, I am lumping all of the "Fed monetization policy" since 2008 into the generic term "QE"

Ah... Didn't see that.  I think the most "stabilizing" force for price level within "QE" is its support of the MBS market. 

The other two forms (buying LT Tsys and ST Tsys) are only inflationary in the context that our monetary system "promises" to balance general price level and unemployment, OMO's are part of that mechanism, and if the fed had literally done nothing at/after 2008 we would have had deflation.

But then again, if the fed ever just said "You know what, we're not coming to work tomorrow," we could very likely see a similar collapse.  1995... 2003... if you just refuse to offer the economic supports the market has built itself around, then we might have a deflationary crisis.

[Libertarian666]

Libertarian666, no, if they're insolvent that's a completely different story. The US is not insolvent, nor is Japan nor the UK. If the gov bonds were worthless in any of those countries, they'd be insolvent.

The US most certainly is insolvent, as its unfunded liabilities amount to tens of trillions of dollars and are increasing at an astronomical rate. There is no possibility of these liabilities ever being paid off without immense inflation.

[Tom Brown]

If the fed signals that it wants to depart from its mandate in unpredictable ways in the future, then we very well could have inflation or deflation.

In fact, this is argued as one of the points of how the fed could FINALLY get some traction in the markets, rather than swapping assets (or maybe just along with it), would to set a slightly more irresponsible inflation target, showing that it will hold rates lower further into the future than expected, and this could help further repair balance sheets and actually RAISE inflation slightly to meet their current or even proposed target.

That is such a good point. That folds in the MMist concern for the CB setting credible expectations, "Chuck Norris" and the NK focus on "forward guidance."

It'd be great if each camp were given their own little world to experiment with to resolve these issues once and for all.

I've always thought that perhaps some sort of online video game could be set up and partitioned in such a way so as to test some of these policy ideas. You'd probably have to offer the players some cash prizes to participate since it might be a pretty dull game.

[moda0306]

Tom,

What do you think of these "unfunded liabilities" so often quoted with incomplete analysis.  If they're indexed to inflation, are we truly doomed?