David Glasner vs. Scott Sumner on QE, Monetary Offset

    In recent days there's been more than a little discussion of QE with Market Monetarists declaring that if you admit that QE has had any effects then clearly they've been vindicated.

    http://diaryofarepublicanhater.blogspot.com/2013/11/cullen-roche-takes-on-mark-sadowski.html

    http://diaryofarepublicanhater.blogspot.com/2013/11/id-like-to-welcome-mark-sadowski-to.html

    For my part, it's clear that the market got really spooked by taper talk back in June, however, I'm still not sure just how much vindication the MMers really get. Sumner and friends tend to live in a world that economists would call Confirmation Bias Avenue as everything exactly makes his point or so he claims. The fact that the economy hasn't dropped off the face of the earth shows that the fiscal multiplier is zero and that Keynesianism is dead. The trouble is that everything with Sumner is all or nothing-either QE whollly vindicates everything he's ever said or it had no effect whatsoever; with the economy how do we know that if there were no sequester we still wouldn't have had a higher growth rate-it's almost certain that we would have.

   We've also had a good deal of discussion recently regarding the effects of expansion of the MB with Mark Sadowski claiming he's done some Granger Causality tests that show the connection.

   http://diaryofarepublicanhater.blogspot.com/2013/11/mark-sadowski-and-joshua-wojnilower-on.html

   Joshua Wojnilower argues that contrary to Mark's argument, the MM model predicts that QE should have done more than just prevent deflation but rather create considerable inflation.

   http://diaryofarepublicanhater.blogspot.com/2013/11/right-away-i-love-joshua-wojinlowers.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

  I've noted in the past that David Glasner may be a Market Monetarist but he's a straight shooter and much more honest in his arguments than Sumner. 

   http://diaryofarepublicanhater.blogspot.com/2013/10/scott-sumner-vs-david-glasner-on-fiscal.html

    He now has some questions about QE and its effectiveness. 

    "why has this recovery been so weak? Well, Paul Krugman, channeling Larry Summers, offered a demographic hypothesis in his column Monday: that with declining population growth, there have been diminishing investment opportunities, which, together with an aging population, trying to save enough to support themselves in their old age, causes the supply of savings to outstrip the available investment opportunities, driving the real interest rate down to zero. As real interest rates fall, the ability of the economy to tolerate deflation — or even very low inflation — declines. That is a straightforward, and inescapable, implication of the Fisher equation (see my paper “The Fisher Effect Under Deflationary Expectations”)."

     "So, if Summers and Krugman are right – and the trend of real interest rates for the past three decades is not inconsistent with their position – then we need to rethink revise upwards our estimates of what rate of inflation is too low. I will note parenthetically, that Samuel Brittan, who has been for decades just about the most sensible economic journalist in the world, needs to figure out that too little inflation may indeed be a bad thing."

     "But this brings me back to the puzzling question that causes so many people to assume that monetary policy is useless. Why have trillions of dollars of asset purchases not generated the inflation that other monetary expansions have generated? And if all those assets now on the Fed balance sheet haven’t generated inflation, what reason is there to think that the Fed could increase the rate of inflation if that is what is necessary to avoid chronic (secular) stagnation?"

     "The answer, it seems to me is the following. If everyone believes that the Fed is committed to its inflation target — and not even the supposedly dovish Janet Yellen, bless her heart, has given the slightest indication that she favors raising the Fed’s inflation target, a target that, recent experience shows, the Fed is far more willing to undershoot than to overshoot – then Fed purchases of assets with currency are not going to stimulate additional private spending. Private spending, at or near the zero lower bound, are determined largely by expectations of future income and prices. The quantity of money in private hands, being almost costless to hold, is no longer a hot potato. So if there is no desire to reduce excess cash holdings, the only mechanism by which monetary policy can affect private spending is through expectations. But the Fed, having succeeded in anchoring inflation expectations at 2%, has succeeded in unilaterally disarming itself. So economic expansion is constrained by the combination of a zero real interest rate and expected inflation held at or below 2% by a political consensus that the Fed, even if it were inclined to, is effectively powerless to challenge."

     "Scott Sumner calls this monetary offset. I don’t think that we disagree much on the economic analysis, but it seems to me that he overestimates the amount of discretion that the Fed can actually exercise over monetary policy. Except at the margins, the Fed is completely boxed in by a political consensus it dares not question. FDR came into office in 1933, and was able to effect a revolution in monetary policy within his first month in office, thereby saving the country and Western Civilization. Perhaps Obama had an opportunity to do something similar early in his first term, but not any more. We are stuck at 2%, but it is no solution."

     http://uneasymoney.com/2013/11/18/the-internal-contradiction-of-quantitative-easing/

     Glasner not only declares that there is no HPE now-as money is almost costless to hold-but that the only way that monetary policy can effect private spending is through expectations. This is an argument I made in a recent discussion in the comments with Mark-that it's only expectations at this point. Yet, Glasner makes the further point that as the Fed clearly seems much more willing to undershoot than overshoot the inflation target this harms its ability to shape expectations. He suggests that the Fed is just as impotent due to politics as fiscal policy has been of late. 

     In Sumner's paper-linked above by Glasner-on why the fiscal multiplier is zero, he argues that fiscal policy ineffectiveness is one of the byproducts of the recent focus of CBs on inflation targeting. This is a point I've made a number of times at Sumner's blog. However, we have another choice than simply agreeing never to use fiscal policy ever again for demand stabilization-the the other choice is to rethink the inflation fighting regime.

     I see that Sumner has his own post on QE where he argues that so much has been necessary thanks to IOR. 

    "Back in late 2008 a few money market funds got into trouble and were in danger of “breaking the buck.” That’s due to their policy of pricing each share at $1.  The solution is to allow the price to fluctuate.  The Fed should have given the industry 6 months to prepare for negative interest rates.  Instead they bailed them out and propped up interest rates at 25 basis points, in order to insure they would never break the buck."

    "If not for the money market industry the Fed could have already cut the fed funds target to around negative 0.25%, and the same for the interest rate on reserves.  In that case (and assuming the IOR also applied to vault cash) it’s likely that most of the ERs would exit the banking system and end up in safety deposit boxes.  But three trillion dollars is a lot of Benjamins, and despite the cash hoards you observe in places like Japan, a more likely outcome would have been hyperinflation.  Obviously that would not be allowed, so what this thought experiment really shows is that with that sort of negative IOR the Fed could have gotten the stimulus it wanted with much less QE."

    http://www.themoneyillusion.com/?p=24867

    As usual, Sumner is making absurdly strong statements. If there was no IOR or even a negative IOR of -.25 this would have been enough to have greatly strengthened the recovery?!