An overlooked part of what SW has said is that the way to stimulate the economy is to increase public debt. Now just for argument's sake let's assume he is right here. If this is true-and I do think that Krugman also believes this-then SW's claim about QE being deflationary makes sense. Consider Cullen Roche's description of QE:
"“In QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.”
Read more at http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event#YOAoT0YjjY0LDXJf.99
"“In QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.”
Again, assuming that to stimulate the economy we need to increase public debt, its not hard to see why QE which actually decreases public debt is deflationary. A really rich aspect of this is that QE is held up as the Royal Way to avoid Japanese deflation. Market Monetarist commentator Suvy says this in favor of QE over at Cullen's:
"I think the only thing preventing us from becoming Japan has been QE. I view QE as a currency war and it seems to have worked. Our current account deficit has fallen even though China (and others) still continue to buy US debt and it seems like QE is effectively creating capital outflows into these emerging market countries. Without QE, we’d be in a full-scale debt deflation. Japan does some very aggressive QE and ends deflation within months. I don’t know how QE is deflationary."
Yes, let's gloss over that Japan did QE for years and they didn't avoid deflation. I know, Sumner here plays the No True Scotsman game: it didn't work because it wasn't really QE.
"The most glaring example of failed QE is in Japan in 2001. Richard Koo refers to this event as the “greatest monetary non-event”. In his book, The Holy Grail of Macroeconomics, Koo confirms what the BIS states above:
Read more at http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event#YOAoT0YjjY0LDXJf.99
“In reality, however, borrowers – not lenders, as argued by academic economists – were the primary bottleneck in Japan’s Great Recession. If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something. But when there are no borrowers the bank is powerless.”
Read more at http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event#YOAoT0YjjY0LDXJf.99
Here is an excellent analogy that gives you a good flavor of what QE is:
"The central bank’s implementation of QE at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at $100 each, tries stocking the shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behavior should change–sales will remain stuck at about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of QE, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”
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