The Paul Krugman Thread


Good ding-dong about keynesianism on Newsnight right now. Hurd and livingstone taking opposite sides in a Tghatcher retrospective.


If QE is inflationary, what has been the inflation rate in japan since 2001?. QE appears to be highly inefficient if inflation is the stated design.


Ah Imper, that’s the economist in you talking. Eight out of ten economists think that only seven were asked for their opinion. Let the businessman out - what’s the recent evidence - QE makes no difference to inflation. By depressing future interest rates, QE as currently practiced, is by design deflationary (future interest rates = future inflation rates, I believe that’s the business point that Daniel is making). The future indicators of inflation are saying that inflation will be very low. That’s because they’ve been bought down to that level by QE.

Of course, if the Central Banks had any balls, they’d be buying trash, quietly burning it and saying ‘what recession’? Interest rates could stay higher, so there’d be a return in lending money above the risk-free rate (i.e. at the moment, the advantage to lending over not lending is near nothing, so the banks with cash are holding on to it; what’s the point in risking lending? With interbank rates at 5%, the difference between lending and not lending becomes expensive…).


I manage a global macro hedge fund.

But good luck with… the degree.


That makes sense! It’s doesn’t however help reduce debt, but I guess the banks are busy making money of bonds they bought with mega yields with QE, no future in that though with consequent reduced rates. Are European banks balance sheets the KPI?

BOE has paused easing, so FTSE should fall and gilts rise? Japan is another mess altogether, are the CB’s taking turns?


Clearly I’m stupid.
Theres me thinking that inflation rates and interest rates were almost diametrically opposed; interest rates raised to lower inflation (1980s) and dropped to get it moving again (2000s).

Wait 'til the world figures this one out we might have our very own Pin noble prize!

Boy is my face red :blush:

…interest rates and inflation move in lockstep everyone…Just wait til the 1980s gets wind of this… wow!


For literature?


Dunno man, dunno.

I feel as though we’ve gone off a cliff here… The pin is normally a place of conversation, learning and compromise.
But I just dont understand your and Yogis assertions.

I may have to reassess my understanding, and my ability to understand these issues.
(thats no bad thing, incidentally, and one of the reasons I frequent this parish)


That wins the prize for putdown of the week :smiley:

Having said that, this is a great thread and anything that brings clarity to the cloudy world of economics is great, I have always been one to depend on the dart throwing monkeys so this is all great to me.



Can you lend me some money? :smiley:


You know that those dart throwing monkeys statistically beat the experts the majority of the time. Also known as the the Stochastic Simians Theory of Economics.


Clearly you are (not because you don’t understand, but because you dismiss without an attempt at understanding; you are too close minded to think that what you thought you knew was wrong).

If future interest rates are low, then the expectation is that future inflation rates will be low. That’s how it works. Where do you think future inflation rates are reckoned? Do you think there’s a big slider where they and interest rates work from?

Still, keep that mind closed, you never know what might creep into it… :unamused:


Isn’t QE supposed to be inflation-neutral over the complete cycle of its use?

So it induces inflation in the present (good in the deflationary environment it is supposed to counter) whilst storing up deflation to be deployed in the future when the QE is unwound.

i.e. it blows air into the balloon with the expectation that it can be sucked out again in future.

…which assumes that (a) the balloon is not leaky, (b) the balloon is topologically closed (i.e. unconnected to a series of other balloons which may or may not be leaky), and © the balloon exists inside a steady-state atmosphere.

Perhaps the world economy is some sort of multi-dimensional balloon animal sitting in an unstable atmosphere.


Japan is special, and has already been addressed. But ignoring that, if QE is structurually deflationary, why has Japan been using it to boost inflation for parts of the last decade?

Also, while QE may be highly inefficient (if not downright useless, admittedly), that doesn’t change the fact that QE is structurally inflationary/inflationary by design - which was the original point.

Structurally, and by design it does. Empirically, like most economic ‘theories’, the evidence is…mixed to say the least and seems to be very dependent on external factors.

Then neither you nor Daniel understand the difference between deflation and disinflation, which is especially worrying in the case of a ‘major euro hedge fund manager’ or whatever his title was.
Also, neither of you seem to understand that QE is a short-term tool only.

I have never seen any evidence that the market indicators of long term inflation/interest have been particularly accurate but regardless: Real interest rate = nominal rate less inflation. As such, the long term nominal interest rate tells you nothing unless you know what the inflation rate will be (hint: we don’t, it’s just an expectation). You can state that QE decreases long term interest rates (because even when it doesn’t work as intended, it still generally does that) but jumping from that to ‘decreasing long term inflation’ is logically wrong.

Well, that explains a lot about the past few years if that’s the quality of knowledge hedge funds employ :wink:

@Eschatologist: Theoretically, you’re correct as long as the QE is sterilised. However, to the best of my knowledge, neither the credit easing in the US nor the UK has been sterilsed -> therefore, not inflation neutral (as all things being equal, an increase in money supply = an increase in inflation, and this has been shown to be empirically true).

A quote from a speech by Charles Bean seems apt:

Lastly, I suggest anyone interested to read this relatively recent IMF working paper on QE/Credit Easing. It’s very short (13 pages), but well written and pretty informative:
It’s also pretty categorical that QE is designed to be inflationary, has had some limited success in staving off deflation, but that it’s effects on inflation are hard to judge - again largely due to Japan being a special case.

Now, hopefully that’s enough to stave off a Global Euro Macro Market Hedge Fund Manager with more time than sense - although I suppose with a title like that, we should probably just take his word for it.


No, no, no… I’m not having this.

In the first instance DPs assertion was that QE was deflationary because interest income was lost when banks divested themselves of interest bearing assets like gov bonds. This left them with piles of non-interest bearing cash which is somehow deflationary for the whole economy.

Then you marched in and announced that “future interest rates = future inflation rates”.
Which is, as they say, not even wrong.
Then, “If future interest rates are low, then the expectation is that future inflation rates will be low.” - Youve got it arse-about-face here.
Future interest rates have been driven lower to provide security for those holding others debts: it prevents a firesale by providing a ceiling on interest payments. This was to help the banks. It also drives down returns on financial investments tied to rates encouraging investment elsewhere (cf property).
It drives the price up and the return down across a number of areas, not just within money and financial markets.
Generally, when I see policy that drives price up, I call it inflationary.
But hey, youre from Tullamore so maybe things work different down there. :wink:

None of this guarantees that future inflation will be low. In fact, if those reserves held by banks in lieu of bonds were unleashed on the public, inflation would rocket. Thats why its not being given out and funnily enough why we call it a ‘Credit crunch’.
As it is the money is dribbling out at a managed rate to slow deflation, not increase it.


Yes, with you there.

That’s not how bonds work. Bonds are inversely inflation sensitive - the price goes down when inflation expectations rise. That the price is rising indicates that inflation expectations are falling. Now this is largely because CBs are buying the long end. They’ve corrupted the inflation expectations mechanism. They’ve made QE deflationary, in the longer term, while it prevents deflation in the short term.

Or maybe you could stop blowing old wind out your arse and use your head instead.

Nothing can do that. All that we can say is about current rates of inflation and current future inflation expectations. And expectations are rarely right…


Perhaps the best that I can say about your post is that, ironically, you will (without quite knowing it) also disprove that other theory beloved of economic academics such as yourself: the efficient market hypothesis.

I met a client recently who asked if we could continue making money in this environment and I said that we would as long as people who don’t truly understand money, debt and interest rates continued to participate in the market. Your attitude confirms that the conveyor belt remains constructive.

Good luck with your exams, I certainly hope you pass with flying colours.


Yes, just let me print some up first though :wink:.


I’m certain that I don’t need to point out to that hedge funds have been performing poorly over the last few years?

Wrong is wrong , regardless of how condescending you wish to be and as said previously, your lack of basic knowledge and arrogant attitude may help to explain the above image quite well.

Good day :wink:


:unamused: from an economics undergrad.
Wind your neck in and you might risk learning something (that isn’t in your textbooks).

Let’s all get back on topic.