Good points on QEII

Following QEII I noticed a bunch of snark, sarcasm, and general analysis focusing on what we know (how an increase in the money stock, or inflation expectations, impacts upon the general economy) – this was troubling, as I wanted to find some analysis of exactly how QEII is supposed to function 😀

That is why it was good to see a post from Marginal Revolution, and a post from Econbrowser, discussing a few of the issues to keep an eye on.

I would still agree overall with Scott Sumner’s point that we should judge the policy based on where market expectations for future inflation move – however, the idea that there could be a sharp step change in inflation expectations at some point in the future, that the transition path of QEII is uncertain, that there are costs from a potential “asset bubble” in exchange rate markets, and that countries with weak financial institutions may struggle are important risks.

IMO though, these are risks – they do not suddenly indicate that QEII is bad policy.  And in fact, I would say ex-ante, with inflation expectations below the Fed’s implicit target and unemployment above the natural rate QEII made some sense.  An explicit inflation target, or even direct transfers to households, may have mad more sense – but were obviously not practical in a political sense.

11 replies
  1. Miguel Sanchez
    Miguel Sanchez says:

    Well my forecasts are looking good so far:

    For my own part, the ‘snark’ about QEII is less about whether or not it has an effect, and more about the fact that I don’t think it was necessary. The US economy was being stimulated long before QEII came into the picture: long-term interest rates began falling in April, the US dollar on a broad index turned lower in early June. We’ll never know how far they would have gone in the absence of QEII, but it’s ludicrous to suggest that they would have remained static in the face of clear signs that the economy was slowing.

    Result? The US numbers have been turning higher again, from as early as August. Now that QEII is out of the way, that fact is starting to penetrate into a few more skulls, and I suspect it won’t be long before the mainstream view is back to where it was at the start of this year: US as the pillar of strength, Europe as the basketcase.

    Of course you’ll then have people screeching that QEII has ‘failed’ because interest rates are going up instead of down. But that will miss the point that it’s simply self-correcting market forces at work – just as it was on the way down.

  2. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    Indeed your forecasts are looking good.

    I didn’t take your comments as snarky – as you actually explained what you were thinking. I have others in mind who have not commented here 😉

    For me it is largely a measure of inflation expectations – they seemed to have crawled back up following QEII into the range they were after. I agree with you on interest rates, and in truth I think a lot of people on both sides are just making a lot of noise at the moment.

    I will of course reiterate my desire for them to have an explicit inflation target 😉

  3. Tribeless
    Tribeless says:

    I really have a comprehension problem with economists. Though mainly around how Matt constantly refers to how policy can’t be made without ‘value judgements’ (his term) / philosophy (mine), yet thinks he can analyse a scenario without reference to the ‘value judgements’ that led to the mechanisms being examined. Because we have it here again.

    Miguel: you refer to QE II (fine), Fed controlled interest rates (fine), but then, quote, that it’s simply self-correcting market forces at work regarding the regarding the response of interest rates (huh?).

    The first two factors are facets of central planning, and because of that, then we’re not really talking ‘market forces’ as the pricing mechanism at all: are we? There are so many policy distortions is seems absurd to bring in the notion of market forces?

    I don’t think you can answer that, but in order to straighten my own mind, and for Miguel, if you live in America and have your savings on, say, bank term deposit, are you happy, from the point of view of your own self-interest, about the centrally planned policy of QE II?

    And your answer to this same question if you own equities on the DOW?

    (You don’t have to answer for gold 🙂 )

    I’ve been following (Austrian) William L. Anderson’s (Mises Institute) blog where he specifically responds to public statements made by Krugman. The below link is to his post on ‘Why No Hyper-Inflation’. It’s the first post of his that he has shown ambivalence as to his conclusions, which has me perplexed all the more (in regards to QE II).

  4. Matt Nolan
    Matt Nolan says:


    “Though mainly around how Matt constantly refers to how policy can’t be made without ‘value judgements’ (his term) / philosophy (mine), yet thinks he can analyse a scenario without reference to the ‘value judgements’ that led to the mechanisms being examined.”

    It is a policy post – of course I am making value judgments 😉 I have tried to be explicit about this fact in the for new readers section at the top of the blog – it is one of the issues with wanting to make methodology posts (where I make the difference explicit) and policy/news related posts (where it is a given that I am making personal value judgments).

    As I’ve said, I couldn’t reach a conclusion unless I make a value judgment, ergo when I make a conclusion I have made value judgments. In the post when we discussed this, I was saying it was ridiculous to say Bernanke didn’t understand economics BECAUSE the author had disagreed with his value judgments – that was all.

    “The first two factors are facets of central planning, and because of that, then we’re not really talking ‘market forces’ as the pricing mechanism at all: are we?”

    Monetary policy is akin to some form of central design – we wouldn’t disagree there. It occurs because society determined that the certainty provided to all other markets from changes in the general price level being consistent was worth any loss in efficiency from the process of creating currency. When Miguel mentioned self correcting markets, he was talking about every other market.

    With regards to Krugman, he does enjoy exaggerating things. BUT, here he is right that there is not inflationary pressure.

    Commodity prices have moved structurally higher, the relative price of those SHOULD be higher – that is part of the free market. Actual increase in the “general price level” have been muted. We don’t want monetary policy to blunt the effectiveness of prices to represent value – and at the moment the value of commodities relative to manufactured goods has risen.

    I have a post on export and import prices later today that might put some of this in context – although its focus is quite different.

  5. Tribeless
    Tribeless says:

    Attacking this from another angle. Notpc has just put up an interesting (guest) post from Casey Research regarding QE II.

    From that post I extract the following:

    What is the problem with QE II?

    Forget inflation, the problem with QE II is its antecedent and a priori fact that for it to have been possible then a) there had to be a system of fiat money, and b) that fiat money system had to be controlled by the central power; the State.

    The ability of the State to print money has meant they (believed) they could spend big to grow the State in (my) life, and at the cost of my freedom, but without adverse repercussions for the State. The result of that has been, as I always will be when you give politicians the reigns over your life, the State has grown way too big and has taken on such an amount of debt it is now insolvent. And the only way to fix that will be QE III, IV and so on. But all that can do is collapse their currency, and with that, the high standards of living the US once enjoyed. (Although even that I don’t care about: my primary concern is the freedoms I’ve lost in every aspect of my life via a Nanny State mentality that predominates in the West).

    So if you look at QE II as a matter of pulleys and levers, and yes, no rampant inflation (yet), then outwardly it (might) be fine, but examined from a philosophical perspective, proving you can’t separate economics and philosophy, QE II denotes a complete and utter disaster, which is (my) serfdom (Hayek) to Nanny State.

    Compare this to Miguel’s post at the start of this thread, where the economist response is only at the level of pulleys and levers, thus completely ignores what is really the important point here. No need to answer, as we have reached the point at which we both just bang our heads against the brick wall of the other’s (mistaken) viewpoint.

    I look forward to the export/import post.

  6. Tribeless
    Tribeless says:

    Now wait a cotton picking minute: there’s a Miguel just posted to the NOTpc thread and in full agreement with it (as I am). Surely that cannot be the same Miguel as on the header comment to this thread? (But how many Miguel’s can there be following NZ economics blogs).

    Miguel: how an you write the comment here and then the one there? They contradict from the stance of intent, if nothing else.

  7. Matt Nolan
    Matt Nolan says:


    “Forget inflation, the problem with QE II is its antecedent and a priori fact that for it to have been possible then a) there had to be a system of fiat money, and b) that fiat money system had to be controlled by the central power; the State.”

    If an individual does not want to use fiat money they can barter and trade – that is fine. So it isn’t coercive at that level.

    Also, the inflation target is known (even when it is implicit in the US) and it provides a smooth path for the growth in the general price level. As a result, the government is simply providing a service for society to ensure that underlying real changes in value are transparent – monetary policy is not determining what the long-run real rate of return is, or what individual prices are, so it is not trying to coerce action or act “nanny stateish”.

    I agree that there are costs from having a central authority running monetary policy – but in this case society has determined that these efficiency costs are worth it, given the benefit of certainty and SUBSTANTIAL reductions in the volatility of the general price level. Here, you may have a different value judgment than me – that is fine – but it is specifically along the weights involved in weighing up this trade-off where we would disagree.

  8. Miguel Sanchez
    Miguel Sanchez says:


    I just popped in for some quick gloating; you’d probably find that we’re not that far apart if I bothered to explain myself fully. Short answer is: the US dollar and long-term interest rates (which are NOT Fed-controlled) have fallen and the economy is responding; that would have happened with or without QEII. To the extent that QEII contributed to those moves, I think that represents an over-easing that will soon show up in stronger activity and inflation (already apparent in asset & commodity prices, will show up in the CPI soon enough).

    You can save your scorn about “the economist response”, because even “the level of pulleys and levers” will tell you that debasing your money is self-defeating in the longer run. But as a trader, I would be very interested in the fact that money-printing can give the economy a short-term sugar rush, which might push rates and the dollar higher.

    At a time when the usual mob was screeching that QEII would push the US dollar ever lower and send the NZD to parity, I think that was quite a clever call to make. Ergo, gloating.

    Oh, and the other Miguel is not me. But since you mention it, I used to post under this name on, but when they introduced registration, someone else swiped it first – there is an imposter out there!

  9. Ian
    Ian says:

    My apologies for using this particular text authored by Mr. Miguel Sanchez, my comment is very general in nature.
    I am a ‘non-expert’ in economics and literally stumbled across this website by accident.
    Having read the obviously shrewd, intelligent and educated remarks of some of the authors, I remain mystified by the complex nature of the international economic structures and working practises.
    How in heaven did things get so complicated and diverse, to the point where no-one really understands what is really going on?
    My vote would be for a return to some more simplicity and sanity in economics, maybe then we would have a chance of really managing and thriving in the marketplace, not booming and busting as we seem to repeatedly do?

Comments are closed.