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“Sense and nonsense in the quantitative easing debates”

Posted by
December 14, 2010
in Blog

“Unemployment is not high because the maturity structure of government debt is too long, thank you, nor from any lack of “liquidity” in a banking system that is sitting on a trillion dollars of cash. It’s time to focus on the real, microeconomic, tax, and regulatory barriers to growth, not a policy that creates a lot of noise but no real effect.

Finally, if it did work, why is the Fed anxious to restore even 2% inflation? Whose definition of “price stability” is this? In every theory of inflation and unemployment, raising expected inflation just gives you stagflation, without any benefit to unemployment. If everyone knows inflation is coming, they raise prices and wages immediately and are not fooled into a little boost of output.

A sudden deflation is bad, because it hurts borrowers, just as a sudden inflation is bad because it wipes out savers. But zero inflation, or even a slow, steady, and widely expected deflation, are in fact much better in the long run. The financial system is much healthier with bundles of cash lying around, at no interest cost (as happens under deflation), than if everyone is engineering clever, but ultimately fragile, cash management schemes.” Read more.

“Sense and nonsense in the quantitative easing debates”
John Cochrane
Vox, December 7, 2010.
H/T to Peter Boettke of George Mason University, who offers a brief comment here.

Image by jscreationzs / FreeDigitalPhotos.net.