How could it be any other way? Sumner needs help as SW has just come up with some novel reasons why monetary policy is powerless now-SW even goes further and seems to think that what's needed to get our economy going at the proper speed is more government debt. Sumner sniffed at the idea that QE could be deflationary-surely no one thinks that!
"As far as I know everyone who seriously follows QE knows that the program is inflationary. The only serious debate is whether it has only a tiny inflationary effect, or whether it has a modest inflationary effect. I can’t imagine anyone claiming it’s been deflationary. For God’s sake the dollar fell by 6 cents against the euro on the day QE1 was announced! Does anyone seriously think a 6 cent depreciation in the dollar is deflationary? So why develop models to explain empirical results that don’t exist? I don’t get it."
To be sure, Sumner yesterday confessed to being in over his head in the all the controversy around SW's recent claims. He would have to leave it outsourced to Nick Rowe and indeed, even Krugman and Delong.
" I don’t have any views on Williamson’s model as my math is so weak it would take me a month to have an intelligent opinion. I disagree with his empirical claim (as does David Beckworth), but that’s a different issue."
"The comment was left at the end of a Andy Harless post, which I read several times. I cannot even find a tiny error in Andy’s post—it seems exactly right. And Williamson completely misses the point in his comment:
"The problem here is not so much the analysis—if he had said “you have to get deflation if the system doesn’t completely blow up” he’d be basically correct. So why am I nitpicking? Because Andy says as clearly as anyone could want that the long run equilibrium will be either deflation or the system blowing up:
"Andy’s criticism of Kocherlakota was aimed at the claim that the Fed might need to consider raising rates to avoid deflation. The ECB tried that in 2011. How’s it working out?"
"As far as I know everyone who seriously follows QE knows that the program is inflationary. The only serious debate is whether it has only a tiny inflationary effect, or whether it has a modest inflationary effect. I can’t imagine anyone claiming it’s been deflationary. For God’s sake the dollar fell by 6 cents against the euro on the day QE1 was announced! Does anyone seriously think a 6 cent depreciation in the dollar is deflationary? So why develop models to explain empirical results that don’t exist? I don’t get it."
To be sure, Sumner yesterday confessed to being in over his head in the all the controversy around SW's recent claims. He would have to leave it outsourced to Nick Rowe and indeed, even Krugman and Delong.
" I don’t have any views on Williamson’s model as my math is so weak it would take me a month to have an intelligent opinion. I disagree with his empirical claim (as does David Beckworth), but that’s a different issue."
However, not to worry. Here is Mark Sadowski to the rescue:
"I don’t know how Mark Sadowski has time to find all this stuff, but if he were to become a blogger he’d immediately be one of the top macro bloggers in the world. In any case he dug up a comment from 2010 that pretty much proves that Nick Rowe, Paul Krugman and Brad DeLong are right. Steve Williamson is misinterpreting the equilibrium relationship between inflation and interest rates."
"The comment was left at the end of a Andy Harless post, which I read several times. I cannot even find a tiny error in Andy’s post—it seems exactly right. And Williamson completely misses the point in his comment:
Andy,You’re making no sense. What Narayana is arguing is just standard monetary theory. If the central bank targets the nominal interest rate at a low enough rate forever, you have to get deflation. By arguing against this you’re making yourself look silly. By the way, Narayana, was born in the US. His mother is American, his father was Indian (thus the name), and he grew up in Winnipeg. A brilliant man.
"The problem here is not so much the analysis—if he had said “you have to get deflation if the system doesn’t completely blow up” he’d be basically correct. So why am I nitpicking? Because Andy says as clearly as anyone could want that the long run equilibrium will be either deflation or the system blowing up:
It’s true that a low fed funds rate can exist, in long run equilibrium, only if people expect deflation (or if money is worthless).
"Andy’s criticism of Kocherlakota was aimed at the claim that the Fed might need to consider raising rates to avoid deflation. The ECB tried that in 2011. How’s it working out?"
"Williamson had absolutely no reason to call Harless’s post “silly.” That’s makes me think he did not understand the point, and that he agrees with Kocherlakota. I’m pretty sure that even Kocherlakota no longer agrees with Kocherlakota. It’s an indefensible argument."
As I said yesterday, I've never been a SW fan as until now the only thing he seemed to be about if facile Krugman bashing. However, here I found his results rather interesting. I particularly like the fact that he seems to think the solution is more government debt-with such low interest rates this is clearly the right time. Or if it isn't then we have to admit there will never be a right time for it.
On the other hand, while Cullen Roche may agree with SW that QE can be deflationary I don't know that he agrees that answer could be to raise interest rates-which SW had argued for back in 2010. I think I get the idea that QE could be mildly deflationary. For one thing, what ever QE has done, it hasn't been very inflationary. At best it's been Sumner's door number one: a very mild inflationary effect. It's not at all hard to believe that it's had no inflationary effect at all. From there it's not so far from believing it could have had a deflationary effect-after all, inflation is 1.1%.
Still, I don't know anyone that thinks you raise interest rates to get us a faster recovery or inflation. The argument of Nick Rowe and friends that the trouble is that SW confuses cause and effect makes some sense when you consider this claim. It's one thing for the economy to remain very weak for awhile which leaves us with lower interest rates. It's quite another to claim that low interest rates are the cause of the long term weakness.
"According to my theory of how cars work, if I press down on the gas pedal, that will cause the speed to increase, and that will cause the speedometer needle to rotate clockwise. But if I grab the speedometer needle, and rotate it clockwise, this will not cause the speed to increase and the gas pedal to go down. I admit I have never tried doing this, to test my theory empirically, but I am 99.99% sure it won't work. But according to the equations I have just written down, it should work just fine. Simply read the same equation from right to left."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/a-simple-story-about-reversibility-of-causation.html#more
The idea that higher interest rates actually lead to higher growth and inflation is just a total mixing up of cause and effect. So the claim that QE is deflationary is maybe not so crazy as it first sounds-but that the solution it to raise interest rates is indeed.
Still, I don't know anyone that thinks you raise interest rates to get us a faster recovery or inflation. The argument of Nick Rowe and friends that the trouble is that SW confuses cause and effect makes some sense when you consider this claim. It's one thing for the economy to remain very weak for awhile which leaves us with lower interest rates. It's quite another to claim that low interest rates are the cause of the long term weakness.
"According to my theory of how cars work, if I press down on the gas pedal, that will cause the speed to increase, and that will cause the speedometer needle to rotate clockwise. But if I grab the speedometer needle, and rotate it clockwise, this will not cause the speed to increase and the gas pedal to go down. I admit I have never tried doing this, to test my theory empirically, but I am 99.99% sure it won't work. But according to the equations I have just written down, it should work just fine. Simply read the same equation from right to left."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/a-simple-story-about-reversibility-of-causation.html#more
The idea that higher interest rates actually lead to higher growth and inflation is just a total mixing up of cause and effect. So the claim that QE is deflationary is maybe not so crazy as it first sounds-but that the solution it to raise interest rates is indeed.
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