Dear Steve

Dear Steve,

I came across your Business Spectator article article Is QE quantitatively irrelevant? today*

You have to be more careful.

I generally agree with Philippe Hales who comments on your article at 

About the rich aunt example: In some system of accounting, the actual values of liabilities and net worth appear with a minus sign but the symbols themselves are presented with a negative sign! So the minus of equity decreases by $1mn. Some commenters have commented on this.

QE is for central bank purchasing government securities (and sometimes mortgage-backed securities) and these are bought directly from both banks and non-banks. In the United States, the ultimate seller is the non-banking sector and the outright purchase of these financial securities does increase the money supply. Only in the case where a bank is the seller, does it not increase monetary aggregates such as M1 etc.

Even if monetary aggregates increase – at least at the time of the purchase, it isn’t a cause for concern because the Monetarist causality from money to prices (of goods and services) doesn’t apply. Now once the security is sold to the central bank, the seller may “rebalance” his portfolio and this will again affect the money supply and even affect equity market prices.

QE is not a repurchase agreement. It is an outright transaction. It is true that the Federal Reserve will ultimately reverse the purchases but that will happen via direct sales and the buyer at that time may be different. The Federal Reserve typically rolls over government securities when they mature and in this case with a large stock of Treasuries and MBSs, it may simply let them mature without rolling them over (instead of selling it to the private sector) when it implements an “exit strategy”.

Also since QE creates reserves – whether the purchase of bonds is from banks or non-banks – banks earn interest on these reserves rather than paying the Federal Reserve some interest.

More importantly you don’t need the Minsky and Godley tables you have to show all these things. Also, people have less time and make fast impressions. Your errors may dissuade them from reading the works of Hyman Minsky and Wynne Godley. You are sort of a face for Post-Keynesianism in the media and the internet. Kindly be more responsible for this role. You are standing on the shoulders of giants and be careful about them. Neoclassical economists will pounce on such things and claim to have debunked the whole of Post-Keynesianism. I have already seen a neoclassical economist (from Cambridge of all places) hint such a thing in a subtle way.

*which also appears at the blog Naked Capitalism.

Leave a Reply

Your email address will not be published. Required fields are marked *