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Wait – QE Might be Deflationary?

Paul Krugman, Brad Delong, David Andolfatto, Noah Smith, Nick Rowe and Steve Williamson are having quite the battle over the idea that QE might be deflationary and won’t cause raging inflation.  Welcome to the party gentleman.  You showed up over 3 years too late.  In August of 2010 I mentioned that QE would likely be more deflationary than inflationary: 


“What is equally interesting (in addition to the fact that QE is not economically stimulative) with regards to this whole debate is that this policy response in time of a balance sheet recession is not actually inflationary at all.  With the government merely swapping assets they are not actually “printing” any new money.  In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits.  This might have made some sense when the credit markets were frozen and bank balance sheets were thought to be largely insolvent, but now that the banks are flush with excess reserves this policy response would in fact be deflationary – not inflationary.  Why would we remove interest bearing assets from the private sector and replace them with deposits when history clearly shows that this will not stimulate borrowing?”

Those of us who understood how QE works at an operational level were never worried about it causing high inflation.  In fact, the threat of deflation or disinflation was always the bigger threat from QE.  You didn’t need an economic “model” to figure this out.  You just needed to understand double entry bookkeeping, some banking basics and a basic framework of the monetary system.  It’s strange that it took so many smart people so long to figure this out….

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