Sunday, September 30, 2012

Is QE deflationary?

Warren Mosler has claimed for some time that it is.

His argument is that QE deprives the private sector of interest income. And to buttress his argument here, he cites a Fed paper by Seth Carpenter.

But there is nothing in that paper about the interest income point. Well I couldn’t find it.

Strikes me the flaw in Warren’s argument is that it’s the TREASURY that funds the interest on government debt, and it does so out of taxation. Thus when debt is QEd, there is as Warren rightly points out a reduced level of income flowing to the private sector. But seems to me there is a corresponding reduced flow of money from the private sector to government in the form of the above reduced taxation. I.e. the net effect is nil.

Warren Mosler deserves a Nobel Prize for his contributions to economics, but I think he is wrong on the above point.


P.S. (a few hours later). It seems from this freedom of information exchange of letters,that the Bank of England remits just HALF its profits to the Treasury. That means that when Gilts are QEd, about half the interest disappears into a black hole in the BoE. So the effect of QE is to withdraw monetary base from the private sector.

If that effect outweighs the stimulatory effects of QE, then QE in the U.K. will indeed be deflationary. In contrast, in the U.S., it looks like ALL PROFITS made by the Fed are remitted to the U.S.Treasury.


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