The Verboten Topic? Central Bank Monetizing Of Debt Works? QE: The Rodney Dangerfield Of Macroeconomic Policies

A Benjamin Cole post

The central bank strategy of buying bonds, usually government issue, is known as “quantitative easing.” As practiced, QE appears stimulative, while paying off bondholders with cash, and essentially eliminating national debt. Nowhere has QE—in Europe, Japan, or the United States—resulted in much inflation. But one must scour the Internet in search of a favorable word on behalf of QE.

Oddly Enough

If you burrow deeply enough, you can find a paper written in September 2006 by right-wing iconic scholar John Taylor, who gushed about the positive results of QE, then undertaken by the Bank of Japan to flog some life into their deflation-slow growth economy.

“In the last three years, the Japanese economy has improved greatly compared to the decade-long period of near zero economic growth and deflation that began in the early 1990s. Once again Japanese economic growth is contributing to world economic growth as the expansion in Japan begins to set records for its durability.

What has been responsible for this recovery? The key to the recovery, in my view, has been the quantitative easing of monetary policy….”

Unfortunately, the Bank of Japan backed away from QE, and Japan went right back to the economic freezer. Evidently, the topic of QE thereafter became politicized.

Last Time

Taylor’s soliloquy to the triumph of QE might be the last time any U.S. economist said something nice about central bank monetizing, or paying off, of national debt to stimulate growth. From what I can gather, it is not PC in right-wing circles to like QE, as it is damned as either inert or hyperinflationary or maybe immoral, or in left-wing circles, who want piles of social welfare spending instead.

Moreover, there is a tangle of competing explanations why QE may or may not work, with a favorite dismissal in right-wing circles (since QE did not result in hyperinflation) that “QE is just a swap of bonds for reserves.”

Of course, this dismissal ignores the fact the Treasury bond-owners who sold into QE received cash, and also bank reserves swelled by an amount equivalent to the amount of QE. That is because when the Fed buys bonds, it does so only from the 22 primary dealers. The 22 primary dealers get reserves equal to Fed bond purchases, placed into their commercial bank accounts.


In academia there is little discussion that QE might stimulate consumption directly. That is, bond-sellers can place an immediate claim on goods and services, once they have sold their bonds. Before QE, a bond-seller would have to sell, say, a $100,000 Treasury bond to another private-sector buyer, and that buyer would have to give up $100,000 in cool cash. No new Jaguar in the garage for the bond-buyer. But, post-QE, the seller instead sells to the Fed, no one in the private sector gives up anything.

There is, post QE, $4 trillion in digital and paper cash out in the economy that can place immediate claim on goods, services or assets.

Of course, the Fed website talks obliquely about portfolio rebalancing, that is people who sell bonds move into other assets, pushing up prices. A rally in stock and property prices gets the economy going too. And interest rates (ceteris paribus) fall, and that is good too. But the direct consumption angle is not mentioned.

I also wonder about the positive effects of paying off the national debt with cash.  This topic is evidently verboten, and never discussed. But debt reduction it is going on in Japan, and without inflationary impact.

For decades, U.S. doomsayers have screamed about mounting national debt, and grandchildren in debt bondage to Chinese or Japanese overlords, or Wall Street rentier-barons. I do not like mounting national debt, btw.

But the Fed can print up money, pay off the national debt, and spur the economy. Inflation does nothing, at least so far.

What is it that economists don’t like about QE?

PS Rodney Dangerfield?  An American comedian, and very American at that.  Sadly, since passed away. “I tell you, I get no respect, no respect at all,” was his signature line. I liked his joke, told in the crime-ridden 1980s, “I tell you I get no respect. I go down to the grocers, and some guy holds me up with knife. It still has peanut-butter on it. No respect at all.” And QE gets no respect.

China, Hong Kong and Singapore Sliding—Japan Not So Much. Beckworth and the Fed Export Of Recession

A Benjamin Cole post

China in recent years has kept its slowly rising yuan more or less pegged to the U.S. dollar, while Hong Kong has been explicitly pegged to greenbacks, and Singapore pegged its dollar to a mix of trading currencies, including prominently the greenback.

There is problem with this pegging—the U. S. Federal Reserve has been running a tight money policy since tapering down its successful open-ended quantitative easing (QE) program last year.

Now we see China desperately trying to un-peg its yuan, but awkwardly (fearful of dollar-denominated debts), and the Hong Kong stock market as of August 21 is off 7.47% YOY. Singapore in Q2 reported deflation and recession.

David Beckworth, cartoonist and University of Western Kentucky scholar, has called the above process the export of U.S. monetary policy.


Of course, the relevant central banks—the People’s Bank of China, the Hong Kong Monetary Authority and the Monetary Authority of Singapore—should immediately move to expansionary pro-growth stances until their economies are open full-throttle.

With pegged exchange rates, the policymakers at the three central banks have essentially defaulted on their obligations, and let the Fed dictate monetary policy, leading to a regional weakling economy blue in the face for lack of money. BTW, recent history suggests the Far East does not do recession well.

Indeed, if sanity prevailed, Far East central bankers would hold a confab to make Donald Trump blush, and gaily declare they will gun the money presses until the plates melt.

After all, moderate inflation will be small price to pay to avoid recession, or for robust economic growth, of which the region is fully capable.


Japan, of course, is trying to recover from 20 years of deflationary tight money, starting 1992. The Bank of Japan is now pursuing a steady QE program, perhaps too timidly.

Nevertheless, despite last week’s reverses, the Japan Nikkei 225 is up 12.34% year-to-date and up 26.78% year-over-year. Tourism to Japan leapt nearly 50% YOY in H1, thanks to a yen that depreciated from 80 to 124 or so to the U.S. dollar. Japanese corporate profits have been very healthy. There is so much paper cash sloshing around the Japanese economy ($6000 per resident, dollar equivalent) that official GDP figures, or even employment stats, may be suspect. But certainly the relative success of Japan suggests that persistent QE is a valuable tool in promoting economic revival and growth, and other Far East central banks should quickly adopt the same.


As usual, I support NGDPLT, with the proviso that central banks shoot higher rather than lower, as in 7% or so. To my fellow Market Monetarists, I ask, “Why be so prissy about inflation?”

In 1992 Milton Friedman told the Fed to gun the presses when inflation was at 3%. Fed Chairman Paul Volcker ended his war on inflation in 1981 when the CPI dipped below 5%. Why the present-day fey squeamishness about inflation?

Modern economies appear to suffocate at inflation below 3%.  I suspect it has to do with robust growth creating bottlenecks that are addressed by higher prices; sticky wages; criminalized housing production; and other friction and structural impediments.

The good news is that inflation is not that important. Economies have flourished for decades with moderate inflation—see the United States 1982 to 2007.

I prefer prosperity and some inflation to stagnation in real growth and prices. I will never be a central banker.

What Monetary Policy Can and Cannot Do: Japan Edition

A Mark Sadowski post

Here’s Scott Sumner discussing the Japanese economy as an example of the Great Stagnation.

  1. In the 1st 4 quarters of Abenomics (i.e. 2013), RGDP grew by 2.4%, which we now know was a flat out boom.  Inflation rose into positive territory and the unemployment rate fell from 4.3% to 3.7%.
  2.  From the 4th quarter of 2013 to the 2nd quarter of 2015 the Japanese economy grew by a grand total of 0.1%.  And the unemployment rate continued to fall, from 3.7% to 3.4%. That’s right, over the past 6 quarters the Japanese economy has been growing at above trend.  But that blistering pace can’t go on forever.  The unemployment rate is down to 3.4%, and unless I’m mistaken there is a theoretical “zero lower bound” on unemployment that is even more certain than interest rates. The Japanese economy is like a Galapagos tortoise that has just sprinted 20 meters, and needs a long rest.”

Let’s take a look at the ten quarter moving average of RGDP growth in Japan. All data comes from the Japanese Cabinet Office.  (Pre-1994 data using 68SNA values has been chained to post-1994 data using 93SNA values.)

M Sadowski_Japan_1

It’s true, RGDP growth has only averaged 0.86% in the last ten quarters, which is nothing remarkable, even when compared to the low bar set by the average performance of the Japanese economy since 1993. (Also, keep in mind that virtually all of that real growth took place in the first four quarters of Abenomics.)

However, let’s look at the GDP implicit price deflator.

M Sadowski_Japan_2

Hmm, the GDP implicit price deflator has averaged 1.42% in the last ten quarters which is the highest rate since 1993Q2. Of course this might be due to the fact that the consumption tax was raised from 5% to 8% in April 2014, except that the consumption tax was also raised from 3% to 5% in April 1997 and that didn’t lead to a sustained increase in GDP implicit price deflator inflation.

There’s one way to settle this. Let’s look at NGDP growth.

M Sadowski_Japan_3

Yep, NGDP growth has averaged 2.27%, which is the highest rate since 1993Q3. That’s clearly not due to the consumption tax increase (that is, unless your model predicts that tax increases will be expansionary).

So it looks like the current round of Japanese QE has led to the greatest sustained increase in NGDP growth and GDP implicit price deflator inflation in 22 years, but it has only had an ephemeral effect on RGDP growth.

Where have I heard something like this before? Here’s Scott Sumner in 2011.

Just to be clear, it is quite possible (likely in my view) that Japan could get another 2% of RGDP by switching to a 3% NGDP target.  But it would be a one-time gain, as their labor market got less rigid.  Unemployment might fall to 2% or 3%, but trend growth shouldn’t change.

That sounds like an astute prediction to me.

Central Banks Play An Old Flyboy Trick

A Benjamin Cole post

In the last few decades, the globe’s major central banks have collected under various exalted “fighting inflation” banners, while seeking independence from democratic control which, we are told, would lead to hyperinflationary holocausts.

To be sure, inflation has receded from double digits in the early 1980s, to zero (long ago in Japan, btw).

Today, one major central bank targets no inflation and explicitly disclaims responsibility for robust economic growth, as in the case of the European Central Bank. Another major central bank, the U.S. Federal Reserve Board, has set a ceiling of 2% on inflation (perhaps really 1.5%), regardless of other outcomes.

Central banks want a simple one-dimensional mission—like old flyboys, more on that later.

The results of central bank tunnel vision are a disaster for Western economic growth and employment, as Japan found out long ago.

We Have One Job Only

Today’s bloodless central banker staffers, divorced from economies (they live on sinecures) and free of democratic control, have chosen to define their performance by an easily accomplished mission: price control. Central banks know they can kill inflation, and rather handily. See Japan, see Europe, and even see the United States. This is a fool’s game: Tighten enough, and inflation dies. Mission success, self-defined.

This reminds me of 1960s U.S. astronauts, those brave media darlings of the pioneering Mercury and Gemini missions. Early on, each mission had a number of experiments for astronauts to perform, and if the tests were not performed, or botched under time pressures, the mission was chided, or even said to “fail” on some points.

The astronauts rebelled. “We will do one test per flight,” they said. Assured success. The flyboys were better at self-preservation and PR than NASA officials. Besides astronauts were old test pilots—they had been through this drill before, with earthbound engineers asking for complicated tests while they piloted temperamental new aircraft. But the flyboys knew they were in the pilot’s seat.

Central bankers, like flyboys, know they are in the pilot’s seat (limited democratic oversight) and have chosen their one mission, that of price control.

Prosperity? That is somebody else’s concern.

Economic Growth

Unfortunately for millions of businesses, citizens and employees, central banks do play a role in demand and prosperity, in modern developed nations. Yes, every modern nation has structural impediments, and every nation should cut back structural impediments.

But central banks should make monetary policy for the facts on the ground, not in utopia. Modern nations have militaries and social welfare, and corrupt tax codes and endless fat in government. They always will.

Recent history strongly suggests a modern economy needs moderate inflation to prosper. See Japan 1992-2012 (deflation, very slow growth), or the U.S. in the boomy 1990s, with average 3% inflation.

Central banks should not be allowed to pull an old flyboy trick. They need to take responsibility for economic growth as well as keeping inflation moderate.

Yes, a complicated mission, but necessary.

Thinking About The Bank of Japan—A Success Story?

A Benjamin Cole post

The Bank of Japan has been pursuing a moderately robust QE policy for the last year, as a resolute BoJ Governor Haruhiko Kuroda pursues a 2% inflation rate on the islands. For the twenty years preceding 2012, Japan experienced minor deflation, and a real GDP growth rate well under 1%.

With Kuroda in charge at the BoJ, the Japanese yen has recently fallen from about 80 to the U.S. dollar to 124 or so.

This news came in last week—tourism is up 46% YOY in Japan, first half of 2015. 46%! For the first time since the 1970, more tourists are visiting Japan than Japanese visiting offshore. Tell the Japanese tourism industry that QE does not work.

Meanwhile, the Nikkei 225, a broad gauge of the Japanese stock market, is up 36% YOY, as of this writing. (It is one of the oddities of the age that many free-marketeers, who habitually pointed to stock markets in years past as the acid test for economic performance and prospects, now define any stock market increase as a “bubble.”)

Real economic growth in Japan as measured in Q1 was still weak, at a 1% annual rate or so, and inflation (minus food and energy) up at 0.7% annual rate in May.

Yes, Japan is now better off than Singapore, with its present deflationary contraction. Still, if anything, Kuroda (perhaps limited by other BoJ board members) has been too timid.

The Bank of Japan should probably increase the size of its QE program.

Maybe they can double the Japanese tourism industry. Because, you know, QE doesn’t work.

Thinking About Martin Feldstein Again

A Benjamin Cole post

Market Monetarists have already done a superb job explaining why NGDPLT is the best tool for a central bank, especially if measuring real GDP is guesswork—the latter point Martin Feldstein made recently in The Wall Street Journal.

Feldstein’s extraordinarily oblique point was that the CPI or other indexes overstate inflation, something he could not say out loud, so un-PC is such a sentiment. But his conclusion is much more palatable to certain classes, and that is that middle-class America is better off than ever, even if they don’t know it, as wage stagnation is a mirage.

University of Chicago scholar John Cochrane leaped on the Feldstein bandwagon to posit that maybe the CPI overstates inflation by 3%, essentially meaning Fat City for Mr. and Mrs. America. This is a reprise of Bush-era sentiments of economist and right-winger Don Boudreaux of George Mason University.

Is The Fed Suffocating The Economy?

That Cochrane likes the Fed now is not much of a surprise; he has argued that deflation is the economic cure-all, notwithstanding the 20-year long debacle with falling prices that is Japan.

Cochrane says that Feldstein’s premise today means in the United States “we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates. That is about the ideal monetary policy.”

Cochrane then exults, “We live the (Milton) Friedman optimal quantity of money.”

But others may wish to ponder if the Fed, by accomplishing less than 2.0% inflation as measured on the PCE, is actually obtaining minor deflation, and thus Japan-like results.

As widely noted, economic growth in the United States since the Fed ostensibly set its 2% PCE IT (which many suspect works out to 1.5% in practice) has been…well, Japan-like.

In 2015, the first half GDP may exhibit some real economic growth, but may not with any bad luck. Industrial production has been falling through most of the year. And the previous seven years have been anemic. If this is the Friedman optimum….*


If after seven years in the United States, and 20 years in Japan, the Friedman optimum does not work in real life, then we can dispense with deflation as reasonable monetary goal. It just does not work in the here and now.

On the contrary, I wonder how long the United States could be in boom times before we saw old-fashioned demand-pull inflation. The 1990s was pretty boomy, and inflation remained moderate. Maybe there is another lesson there, too.

As I always say, the Fed should print more money.


*Friedman may have opined about a theoretical optimum. But in practice he advised Japan to pursue QE hard and heavy, and three times criticized the Fed for being too tight; in the Great Depression; in 1957; and in 1992. Did Friedman ever advocate a real-world policy of deflation?

The IMF Tells the Bank Of Japan To Hit The Gas? What About The U.S. Federal Reserve?

A Benjamin Cole post

The International Monetary Fund on May 22 badgered the Bank of Japan to adopt a more-aggressive growth stance, even though the island nation posted Q1 real GDP growth of 2.4%, and an annual inflation rate of 2.3%—along with an unemployment rate of 3.4%.

Moreover, under the leadership of Governor Haruhiko Kuroda, the BoJ is buying about $83 billion in bonds a month, a quantitative easing program equal in size to that of the U.S. Federal Reserves’ Q3 at its peak—except that Japan has an economy one-half the size of the United States.

Nevertheless, the IMF warned the “BOJ needs to stand ready for further easing, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2% inflation target.”

Fair enough. Maybe the BoJ needs to really pour it on.

Um. What About the Fed?

So, the United States’ posted Q1 real GDP dead in the water, and many are forecasting Q2 not much better. The core PCE deflator is now running at 1.3% YOY, with headline deflation, and the Fed has not reached its 2% inflation target for seven years, except once, and that fleetingly. The U.S. producer price index has been in deflation for several months. The U.S. unemployment rate is 5.4%, and a squishy figure at that.

Yet Fed Chair Janet Yellen never misses a chance to rhapsodize about raising interest rates, and on May 21 warned that Fed cannot wait too long before tightening the monetary noose or it will “risk overheating the economy.”

BTW, also from the Fed: “Industrial production decreased 0.3% in April for its fifth consecutive monthly loss.” Capacity utilization is at 78.2%, below the long-term average.


Yellen has new definition of “overheat,” and that is any room temperature warm enough to melt ice cream. And the IMF…well, what can you say. They appear seriously confused.

Fiscal deficits continue to be the best advice!

A recent example from Simon Wren-Lewis:

 …I would much prefer additional public investment, for which there is a strong microeconomic as well as macroeconomic case. [1] Michael Spence [2] is one of a huge list of eminent economists, which includes Ken Rogoff, who think additional public investment across the OECD would be beneficial.

We should continue to urge governments to recognise this, but we also have to accept the awkward fact that they are not listening. In political terms, the need to reduce deficits trumps pretty well anything else. (Perhaps things are turning in the US, but until the Republicans start losing power I’m not counting chickens.) One of the many depressing things about the Conservative election victory in the UK is that it looks like deficit obsession is an economic strategy that can win, as long as the austerity is front loaded, which is why Osborne fully intends to do it all over again.

Why, then, did Japan not grow for the last quarter century despite doing all sorts of public investments (even building an airport over water) and running persistently very high public deficits?

Appealing to the opinion of “eminent economists” is not evidence. In 1981 a list of 364 British economists, many of them “eminent” signed a letter saying that the Howe budget would “destroy” Britain. It certainly didn´t, quite the opposite happened!

What did happen in Japan to offset any fiscal stimulus was a very tight monetary policy (don´t confuse that with high interest rates). In fact, interest rates were essentially zero. Just look at what happened to nominal spending (NGDP) after 1990. No growth and even sometimes contraction.

SWL Advice

After something has been dormant for so long it´s hard to make it move up, despite the best efforts being made by Abe and Kuroda!

The Tale Of Two Central Banks

A Benjamin Cole post

  • Haruhiko Kuroda, Governor of the Bank of Japan, on May 22 said he will maintain his bank’s QE package of about $83 billion a month—but said he will do more if necessary, if Japan’s inflation rate does not consistently hit the BoJ’s 2% target by 2016. Japan just reported Q1 real GDP growth at 2.4% YOY and headline inflation of 2.3%. The Nippon unemployment rate is 3.4%.
  • Janet Yellen, Chairman of the Federal Reserve Board, on May 22 insisted the Fed is on track to raise interest rates this year. The U.S. real GDP came in just about flat in Q1, and H1 may be flat, or close to it. The headline CPI is…negative 0.2% in April YOY. The U.S. unemployment rate is 5.4%

Add on: Kuroda’s $83 billion a month of QE is bigger than the Fed’s QE at its peak, and yet Japan’s economy is about one-half the size of the U.S. economy.


Yes, I have played a little fast and loose with the above numbers. Headline inflation is not core inflation—although the inflation-hysterics trumpet headline inflation after every oil-price spike.

The proper Fed inflation gauge is the PCE chain-type index, which is up 0.3% in April YOY.

In you want PCE core, it is up 1.3% in April YOY.

The truth remains that PCE core is well below the Fed’s 2% official inflation target.

The Feeble Feckless Fed

The Fed remains utterly cowed by the prospect of inflation even approaching its 2% IT, despite the fact the U.S. economy is far less inflation-prone than in the 1970s, or despite the fact that 3% inflation for a few years would merely offset the sub-2% seen 2008.


Of course, as Marcus Nunes tirelessly points out, a NGDPLT is much better than an IT, not least for the abject cowardice an IT seems to impart to the Fed.

We will see how the U.S. and Japan economies play out in the next couple of years.

My money is on Haruhiko Kuroda. Oh, did I mention the Nikkei 225 is up 45% YOY?

The Japan Story

A Benjamin Cole post

If you don’t like quantitative easing, then consider this: The Nikkei 225, a broad measure of Japan’s stock market, is up 45.9% in the last 52 weeks.

On May 20, official Japan reported that Q1 GDP was up 2.4% YOY.

This is good news for Japan, a nation nearly moribund from 1992 through 2012, when so encrusted in deflation it managed but scant growth of 1 percent annually. In that pair of lost decades, the Japan stock market lost about 80% of its nominal value, as did property values. The nation became deeply indebted, as it tried fiscal stimulus to revive. The yen soared in value against the U.S. dollar.

The twenty years after 1992 were a debacle for Japan, a long real-world experiment that savages the folly that deflation and a strong currency are economic cure-alls.

Congratulations are in order to the current Bank of Japan, led by the courageous Governor Haruhiko Kuroda, who has shown resolve, so unlike the indecisive, feeble troupe who gaggle together at the Federal Open Market Committee, the lugubrious policy-making board of the U.S. Federal Reserve.

In contrast to the stop-and-go FOMC, BoJ’er Kuroda has been buying $80 billion in bonds a month since 2013, and has said he would do more if necessary to hit his 2% inflation target.

And yes, ordinary Japanese are benefitting too: “Wage growth is now positive, ending years of wage deflation,” Christopher Mahon, of Baring Asset Management recently told Barron’s. Mahon says buy Japan.

If I have criticism for the BoJ, it is that they should have a nominal GDP target, not an IT—more on that later.

QE in the U.S.

When finally the Fed did try to right kind of QE—QE3, which was open ended, results dependent—QE worked in the United States too. After peek-a-boo with QE 1 and QE2, the Fed in September of 2012 said it would buy $40 billion a month, and later upped that to $85 billion a month, until conditions improved. That policy roughly worked (although note that BoJ is buying $80 billion of bonds a month in an economy half the size of the U.S. economy).

Yet unlike the BoJ stalwarts, the FOMC folded up their QE tents when inflation was still below target, ending QE3 in October, 2014. Thus, the FOMC sent a signal to Wall Street and markets everywhere: seeking robust economic growth is not worth risking inflation even close to 2%.

Since the Fed quit QE, the DJIA has drifted sideways for fleeting gains, while the first half 2015 may be flat in terms of GDP growth, with just a little bad luck.

The U.S. is in the same “stall speed” that defined Japan for two decades.

And For What?

The Fed is obsessed with a nominal index of prices, the PCE deflator.

But as Martin Feldstein pointed out recently in the The Wall Street Journal, government indices of inflation are imprecise, and may read a few percent high. The Fed may have the nation in Japan-style deflation now.

Feldstein then lectured that government policies should be growth-oriented, more so than today.

Amen—I hope the Fed is listening. And watching. Watching Japan, that is.

And the IT? Well, Marcus Nunes is right, as he recently blogged: The Fed should actually target nominal GDP. But if they would even have the resolve to hit the IT they have, or preferably one a bit higher, that would be an improvement.