Study Echoes Earlier NY Fed Finding
Guest Post by Benjamin Cole
QE may be an acronym for Quantitative Easing, but the Fed says QE really translates into a monetary El Dorado, Fat City and Manna From Heaven. We have hit the jackpot and can slay the national debt dragon—but don’t take my word for it.
I may sound crazy, but am only repeating what Fed economists have essentially said, although they appear curiously indifferent to the ultimate ramifications of their findings.
They say Fed “large-scale asset purchases”—LSAP, or QE by another name—will have little or even minuscule effect on output or prices. Even very large scale LSAP, like quadruple current efforts, will but dent matters. And the Fed now has about $3.7 trillion in bonds under roof, accumulated from LSAP. Do the math, four times $3.7 trillion is $14.8 trillion.
So…the upshot is, we (U.S. citizens anyway, sorry Marcus) can just about pay off our $17 national debt, with a Mt. Everest of fresh Benjamin Franklins. Taxpayers get a nearly $17 trillion dollar “Get Out Debt Jail” card free. About $57k in deleted federal debt per citizen, btw. I like it.
“Wait!” you, the reader says. “If QE-manna is true, where are the screaming headlines, the frothing radio hosts, the emphatic blog posts?” I mean, this is Big News, no? As in XXXXL?
True, these landmark Fed studies appear to have escaped the media’s attention—but to be fair to the “news” industry, Fed PR departments do not appear to be staffed with fireballs. And we know that central banker economists speak a language that could make illicit noontime sex sound dull.
Certainly not dull is Yi Wen, an economist at the St. Louis Fed, and an assistant vice president there. His photo on the St. Louis Fed website is the very essence of intelligence, equanimity and probity. You wouldn’t think Wen has boldly thrust forward the instrument for a heroic and rapine savaging of the national debt.
But he did. Wen just published a paper entitled, “Evaluating Unconventional Monetary Policies—Why Aren’t They More Effective?
In some regards, this is the strangest paper ever published in the history of man, unless that honor goes to a similar paper released by the New York Fed last year.
It is as if federal Bureau of Land Management officials hit the Mother Lode gold mine of all time by a factor of 100, but reported, New Drill Bits Prove Only Moderately Effective in Test Tunnel. In a footnote, the BLM boys tell you that a gold seam extending for miles, nearly pure and 20 feet thick, was unearthed during the test tunneling.
Why do I say that?
Buried in Wen’s Fed econospeak-ese and calculus are these incredible findings:
“Thus, based on our model the Federal Reserve’́s total asset purchases must be more than quadrupled and remain active for several more years if the Fed intends to eliminate the 10% output gap caused by the financial crisis.”
Umm, like about $17 trillion worth of QE, right? That is our outstanding national debt, btw.
“Wait a minute,” you the reader says. “Inflation? As in Weimar Republic, here we come, minus the sauerkraut?”
No!—QE/LSAP is actually anti-inflationary, calmly asserts Wen:
“Our model provides an alternative explanation for the low inflation level. The Federal Reserve’s LSAP alone can depress inflation near the liquidity trap: Once the real interest rate of financial assets is low enough, QE induces flight to liquidity because portfolio investors opt to switch from interest-bearing assets to money. Hence, the aggregate price level must fall to accommodate the increased demand for real money balances for any given target level of long-run money growth…”
BTW, the QE can be permanent, no matter, says Wen.
But Wen, it turns out, is no lone wolf madman prowling the halls in the Federal Reserve. He is part of a pack! His hipster brethren in cosmopolitan Gotham City, that is to say staff economists at the New York Fed, are saying much the same thing.
In a paper published last year, thrillingly entitled The Macroeconomic Effects of Large-Scale Asset Purchase Programs (authored by a trio, Han Chen, Vasco Cúrdia, and Andrea Ferrero), the NY Fed reported, “We consider several robustness exercises and find that the effects (of large-scale asset purchases, or QE) on GDP growth are not very likely to exceed half a percentage point. The inflationary consequences of asset purchase programs are even smaller.”
This upshot of these studies is simply dumbfounding: The Federal Reserve says we can crush the national debt and suffer but trifling inflation as a consequence. Moreover, the Fed knows this but thinks that other topics are far more interesting. As in, “QE is only mildly effective.”
By many lights, disappearing the national debt is not of middling concern. Recognized economists, such as John Cochrane, University of Chicago, have spent professional lifetimes sounding klaxons on the perils of excessive national indebtedness. I assume Cochrane is taking a keen, and perhaps euphoric or even climactic interest in these Fed studies.
Right now, net interest on outstanding national debt runs about $223 billion a year, and the future of federal budgets looks like a Fukushima of red ink. So, paying down debt through QE/LSAP is jackpot-time, just when needed. Pour the QE on all night long, dudes, this is Fat City. Print, baby, print.
The Morning After
As much as I want to believe in QE-manna, something tells me there is limit to this strategy, despite what Fed economists aver.
My instincts tell me a sadder story, and that is that institutional agendas have created a patient and resilient anti-QE culture, inside the Fed. At the heart of the matter is that central bankers do not like easy money and hate to hell the idea of monetizing debt by the easy trillions, measured in multiples. Think cardinal sin.
It strikes me that Fed staffers are struggling to say something negative about QE (along with the entire contingent of anti-QE barkers in blogland). But the QE-naysayers cannot claim that LSAP are hyper-inflationary, or even inflationary much at all, as that manifestly has not happened (and did not happen in Japan, 2002-6, when they did QE the first go-round).
The anti-QE’ers can’t claim LSAP deepens recessions, as that has not happened either. In fact, the 2002-6 QE in Japan was associated with that nation’s only post 1990 recovery.
So what can the anti-QE’ers say? They are flummoxed—but can say QE doesn’t work, or barely, or might work but only at levels that would frighten Superman.
Of course, by taking this stance, the Fed anti-QE’ers have awkwardly backed into the position that the United States has a rare shot a radically slashing the national debt, without recessionary or inflationary consequences, without tax hikes or heartless spending cuts. In fact, ceteris paribus, LSAP will allow tax cuts even while we take a chainsaw to Uncle Sam’s IOUs.
But, like I said, my sixth sense says it ain’t so.
Mr. Econo-Gut tells me QE works, and we can “get away” with monetizing a few trillion in U.S. Treasuries now, stuck in zero lower bound recession-slow-growth-land, as we are, or nearly.
QE now offers a rare cost-free opportunity to slice national debt some, and stimulate the economy, and the U.S. should take it. But there is a limit. Sooner or later, the fresh cash gets spent, into circulation, or invested in other assets, like stocks and property. When things are humming and hot, the Fed will have to stop QE, maybe even sell some bonds.
If the Fed, that is, ever summons enough nerve to do QE hard enough to get us running on “hot” again, maybe in concert with cutting interest on excess reserves. But that, my readers, is a whole ‘nother column.
In real life, I think we will have to settle for steady prosperity of the kind we work for, of the type promised possible under Market Monetarism.
And we will have to find a way to pay down or limit the national debt, through federal spending cuts.
Now, that is a dull story. One the Fed should like to tell.