A guest post by Benjamin Cole
If you ever farted loudly on a crowded elevator, then you know the reaction of most economists to the idea that national debts should be monetized through central bank quantitative easing (QE), aka “printing money.”
Until recently, monetizing national debts was the most foul of topics, usually dismissed with words like “debauchery,” “debasement,” or “depravity.” Red-light district street winos had more moral fiber than to print money to pay national debts.
But now conservative University of Chicago economist John Cochrane has flatulence in the lift too. In his blog, The Grumpy Economist, has Cochrane’s suggested that the United States government pay off its entire debt through QE.
The elevator doors have also just admitted Martin Wolf, Financial Times econo-pundit extraordinaire, with his new book The Shifts and The Shocks. In this tome, Wolf says national governments should run permanent fiscal deficits, financed by permanent money printing, or QE.
It’s getting crowded in here!
Surely, this is one of the most remarkable developments in the history of modern economic thought. Who ever thought “serious economists” (pardon the oxymoron) would breezily toss off the idea of regularly monetizing national debts?
And whoever thought that serious economists—and me!—might be right?
The Japan Story
Japan applied a modest QE program 2002-2006, one that won gushy praise from John Taylor, the Stanford scholar, arch-conservative and inventor and defender of the “The Taylor Rule.” In 2006 Taylor wrote, “The key to the [Japanese] recovery has been…the quantitative easing of monetary policy,” in a paper entitled Lessons from the Recovery from the ‘Lost Decade’ in Japan: The Case of the Great Intervention and Money Injection.
Of course, Japan’s QE was just what Milton Friedman told the Bank of Japan to do, in his seminal 1998 essay for the Hoover Institution, Reviving Japan.
The modest 2002-2006 Japan QE program was associated with a relief from that nation’s post-1992 deflation-perma-gloom. Nor did the 2002-2006 BoJ QE result in much inflation.
Given what happened after 2006, it seems a case could be made that Japan should have never stopped QE—that the Cochrane-Wolf idea of permanent QE is worthy. Now, of course, the BoJ is trying QE again, and at least Japanese stock and property markets like it.
The U.S. Story
As readers of this space probably know, in the U. S. blogosphere there is an ongoing war (usually of attrition, rather than elucidation) over whether QE rescued the U.S. economy, or whether QE did nothing, or whether the U.S. economic recovery has been retarded by insufficient federal deficits.
My take is that the Market Monetarists have won this blog-war, and that the U.S. economy has grown because of QE and a normal tendency to recover. Bigger QE would have been better, with a clear statement from the Fed that the boost in the money supply would be permanent. In short, the Fed dithered and lacked resolve—much like the BoJ’s timid 2002-2006 QE program.
The even-worse, headache-inducing European econo-scene is due to the European Central Bank’s incredibly ill-timed concerns about inflation, and lack of expansionist resolve, and lack of aggressive QE.
So, what if Wolf and Cochrane (and me!) are right?
What if QE is a useful tool to pay off national debts, and stimulate the economy? Then what are we to make of the Federal Reserve, as led by the FOMC and Chief Janet Yellen, moving now to quash QE?
My best guess is that the Fed, FOMC and Yellen are making a huge mistake, with terrible consequences for the economy and the national budget and taxpayers. The risks, my friends, are not in extending QE but in ending QE.
The risk of halting QE is Japanitis, and the island nation has yet to demonstrate it can escape perma-gloom. We can hope the BoJ’s current QE program works—but they now have to overcome decades of recession psychology. Who wants to invest in a perma-recession and deflation?
Blinded By A Phantom?
Yet FOMC members remain resolute in their fixation on inflation.
If FOMC members can’t find inflation with a microscope, then they use a telescope and scan the horizons for the slightest clue. And if inflation-scaremongering is not convincing—you know the Cleveland Fed Index of 10-Year Inflation Expectations is now below 2 percent—then there is always the rear view mirror, and the ever-handy horror stories of Weimar Republic.
But the question Yellen should raise to the FOMC at their next (secret, closed-door) meeting is this: “Are we so sure we will not just have to reverse course, like the BoJ, and go back to QE within a few years? While, in the meantime, millions of citizens pay the price in less employment and profits?”
Who is going to get on the elevator next?