Stephen Williamson, 'Deflationary QE' and What Have We Learned

      I guess it depends on who you ask. While SW's "New Monetarist' model is very complicated, I kind of like what he came up with. I mean he has declared there's a liquidity trap and that the only way to help the recovery is to increase public debt. This is much ore an anti Sumner point than an anti Krugman point. 

      http://diaryofarepublicanhater.blogspot.com/2013/12/stephen-williamsons-teachable-moment.html

      Still depending on who you ask there's a lot on the line. Nick Rowe thinks a hell of a lot is on the line but he can't seem to explain quite what. 

       "I have no (obvious major) problems with Steve's formal model. It is in Steve's interpretation of that formal model where I have a very big problem. If Steve had said 'This model shows that the central bank should not target a rate of inflation south of XYZ, because if it did so the inflation rate would fall over the edge of a bottomless cliff' I would be OK with it. But instead Steve is saying 'This model shows why inflation will not in fact go south of XYZ, because there is no equilibrium inflation rate over the edge of a bottomless cliff'."

    "This is not an isolated example. This is very much the same problem I have had with some of the things Narayana Kocherlakota has said. Something somewhere went very deeply wrong with the way macroeconomics is done in some places. I do not know why it went wrong like that."

     "This is not about politics or ideology. Explaining everything in terms of politics or ideology is one of those witchcraft explanations that only ignorant people use, who practice witchcraft themselves, and so think everyone else is a witch. I am pretty sure I am more right-wing than Steve is. This is about how we do economics."

     http://diaryofarepublicanhater.blogspot.com/2013/11/stephen-williamson-on-zlb-interest.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

     I don't get it. If the model isn't the problem then how is it about 'how we do economics?'

     This is one of the enigmatic ideas of this whole inter mainstream Neoclassical debate. It's wrong to criticize someone's model because you don't like their model. However, you can just decide that you don't like their result even if you can't show anything wrong with how they've used their own model. 

     Nick seems to have a determination on this almost like it's a crusade. Thou shalt not do economics this way! Listen to his comments in his post to David Andolfatto:

      "If Steve were just some random person on the internet, it wouldn't matter (much) to me if he said things I thought were totally wrong. But he's a lot more than that. (And so are you.) So I get upset, and worried about the future of economics. So you and Steve are just going to have to get this point right. I'm going to do my (inadequate) best to make damned sure you see the problem and get it right."

     Krugman criticizes SW for failing to use microfoundations-if you claim that QE is deflationary how do you explain this at the level of individual, rational behavior?

     http://krugman.blogs.nytimes.com/2013/12/02/immaculate-stability-wonkish/?_r=0

     Nick Rowe in his latest post seems to think that the problem is about individual agents as well-how do we explain it at this level? To show how desperate it's become Nick actually goes there: he asks what's the representative agent doing while all this is going on?

      http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/the-effects-of-nominal-interest-rates-on-inflation.html

      Yet, I wonder if Nick is right when he says it's not about politics or ideology but 'how to not do economics.' After all, this result directly contradicts Market Monetarism which is a very important ideological consequence. So I kind of like SW's result-however, exactly he got there. I mean he's saying that we need more public debt. Amen, brother. For years I haven't been a fan of his-too much Krugman razzing. However, maybe he's even on the right track here. 

      On the other hand, his answer to Krugman's complaint about no MF is a step back. 

      "Telling stories outside of the model we have written down opens up the possibility for cheating. If everything is up front - written down in terms of explicit mathematics - then we have to be honest. We're not doing critical theory here - we're doing economics, and we want to be treated seriously by other scientists. I think this quote is to the point:"

Academic economics, the stuff that is in the textbooks, is largely based on mathematical reasoning. I hope you think that I am an acceptable writer, but when it comes to economics I speak English as a second language: I think in equations and diagrams, then translate. The opponents of mainstream economics dislike people like me not so much for our conclusions as for our style: They want economics to be what it once was, a field that was comfortable for the basically literary intellectual.

   "That was written by Paul Krugman, in 1996"

     http://newmonetarism.blogspot.com/2013/12/stories.html#comment-form

    This is back to SW's belief in the elitism of the economists who alone understand the economic world. As only a small group of specialists understand economic affairs they should run it with no interference from the unwashed citizen. This is in line with Sumner's monetary mandarins. 

      http://diaryofarepublicanhater.blogspot.com/2013/10/central-bank-independence-and-scott.html

     Cullen Roche wants to know what took SW so long to figure out that QE is deflationary. He argued that back in 2009. 

     "You showed up over 3 years too late.  In August of 2010 I mentioned that QE would likely be more deflationary than inflationary: 

“What is equally interesting (in addition to the fact that QE is not economically stimulative) with regards to this whole debate is that this policy response in time of a balance sheet recession is not actually inflationary at all.  With the government merely swapping assets they are not actually “printing” any new money.  In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits.  This might have made some sense when the credit markets were frozen and bank balance sheets were thought to be largely insolvent, but now that the banks are flush with excess reserves this policy response would in fact be deflationary - not inflationary.  Why would we remove interest bearing assets from the private sector and replace them with deposits when history clearly shows that this will not stimulate borrowing?”

     "Those of us who understood how QE works at an operational level were never worried about it causing high inflation.  In fact, the threat of deflation or disinflation was always the bigger threat from QE.  You didn’t need an economic “model” to figure this out.  You just needed to understand double entry bookkeeping, some banking basics and a basic framework of the monetary system.  It’s strange that it took so many smart people so long to figure this out…."

    Read more at http://pragcap.com/wait-qe-might-be-deflationary#ohYem16TTIweQby9.99

    "Sumner insists that we 'all know' that inflation is at least mildly inflationary. If it is, it's very mild indeed. I mean what kind of inflation would we have if we didn't have QE3 considering that it's 1.1% right now?