Well, it seems that the Fed has finally decided to initiate the much talked about ‘taper’ of the QE program. The proposed taper will wind down asset purchases by $10bn a month. That means that they won’t actually stop or reverse purchases, rather they will just slow the rate at which they make said purchases.
For those who don’t follow the financial news tapering has been talked about on literally a daily basis in the press. And yet it is widely assumed to make no difference to most markets, as can be seen by the stock market rally that accompanied the Fed’s announcement.
There are two things that are particularly odd about all the tapering talk — two things that are tied up with one another. The first is that there is talk at all. If tapering evidently makes rather little difference to the markets and the economy then why do the press and financial analysts talk about it endlessly? The answer to this is rather simple: it is the nature of the press and wider society to talk about people and institutions that are perceived to wield power.
Human beings have a fascination with power, prestige and hierarchy. People basically exist within a system of symbols and these symbols are hierarchically organised — these symbols may be rather obvious, as in the case of the King’s throne and crown, or they may be more subtle, as in the case of Bernanke’s ‘Chairman’ title, but no matter what form they take they always operate in the same fashion.
The people living in such symbolic systems must reinforce them by constantly introducing and reintroducing them in day-to-day discourse; if the King’s subjects stopped talking about the King he would lose his power rather quickly. Authority must be given constant support in and through daily discourse. The Marxist philosopher Louis Althusser claimed that Blaise Pascal once said of religious belief: “Kneel down, move your lips in prayer, and you will believe”. I have never been able to source this quote but regardless of whether Pascal said it or not the logic is perfectly true. It is through the perpetuation of the discourse of power and authority that power and authority are enforced and reinforced.
Our modern day press basically functions in the same way; to a very large extent the press is an institution that reinforces the power dynamics of broader society by constantly introducing and reintroducing the names and titles of those in power. This is why, for example, politicians can basically make stuff up and the press will report it in an acritical way: such statements are not subject to verification because they have a different ‘truth value’ to normal statements in that it is their very utterance from a position of authority that lends them weight.
The second thing that was rather odd about all the tapering talk was the constant reference to the supposed fact that it had never been done before, that we were entering uncharted waters and that it was hard to predict what effect such tapering might have. This was just complete and utter rubbish.
In actual fact, as I noted on FT Alphaville back in April, a far more extreme version of tapering was undertaken by the Japanese central bank (JCB) in early 2006. In this period the central bank didn’t just slow the rate of purchases as the Fed are now doing but instead shrank their balance sheet. And what were the effects? I cannot find any serious effects in the data.
As I noted in that post there was no obvious correlation between QE and inflation or the exchange rate or GDP growth. The shrinking of the JCB’s balance sheet also appears to have had no effect on the stock market which continued to rally until the onset of the financial crisis in late-2007/early-2008.
So, why is no one reporting on this? Surely this should be a worthy news item. Given that barrels upon barrels of ink that are expended daily reflecting on the significance of the taper surely the press should be interested in considering a far more substantial move away from QE. Not really. That would be the equivalent of revealing that the emperor has no clothes.
Imagine if every day Bernanke was asked by the press something like: “Chairman, the Japanese central bank reversed their QE program in 2005-2006 and it appears not to have had very much effect on the economy or the market. Isn’t it reasonable to assume that your far less substantial tapering program will not make any difference?” Bernanke, being a rational person, would have to agree and this would then shut down the whole dog and pony show. The press would have nothing to report on, the power structure would not be reinforced and the tedious chatter that constitutes the markets would crawl to a stop.
It’s not just that power and hierarchy are reliant upon discourse but also that discourse is reliant upon power and hierarchy. Without power and hierarchy people would have to think for themselves — a terrifying prospect. It’s far, far easier for people to fall back on handed down truths — even if these handed down truths are not truths in the factual sense. As a wise man once said: “Welcome to the human race.”
Fixing the Economists 
How do you reconcile that with this assertion that QE made a big difference:
http://goo.gl/nRIWkH
That’s a very poor post. Reading it you would think that the 2008 stimulus programs never happened. You would also conclude that the Eurozone is imposing the same level of austerity as Japan, the US and the UK. Finally, I have no idea why the author is taking Japan’s growth from 2012. Japan’s economic collapse was in 1992, not in 2008.
It’s a very poor post that I presume is written by someone with an agenda. A market monetarist, perhaps?
“Reading it you would think that the 2008 stimulus programs never happened.”
The US, 11 of the 17 EMU countries, Japan and the UK engaged in net fiscal stimulus:
Click to access 42421337.pdf
But almost all of these programs came to an end in 2010. The lone exception is the US which according to the BEA largely came to a conclusion in 2011Q4. So it’s been nearly two years since fiscal stimulus could have had any meaningful economic effect anywhere.
“You would also conclude that the Eurozone is imposing the same level of austerity as Japan, the US and the UK.”
In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature. According to the October 2013 IMF Fiscal Monitor, between 2009 and 2013 the US, the Euro Area, Japan and the UK have increased their CAPB by 4.3%, 3.4%, (-1.5%) and 6.2% of potential GDP respectively In other words the Euro Area has done roughly half the amount of fiscal austerity as the UK and less than that of the US. Furthermore Japan has done no fiscal austerity at all, but has instead decreased its CAPB annually since 2009. See the bottom of Table 2 on Page 70:
Click to access fm1302.pdf
“Finally, I have no idea why the author is taking Japan’s growth from 2012.”
That’s because Japan had no meaningful QE program until April 2013. In fact Japan’s monetary base increased by more in the six months from March to September 2013 than it did in the five years from March 2008 through March 2013.
Not sure what you mean. The chart is an index to the starting point in each case. Also, “Abenomics” was a huge stimulus launched recently to kick Japan out of stagnation mode, so no need to go back to 1992.
Fiscal stimulus are assumed to induce cyclical upswings. They don’t just disappear. The initial rise in employment generates income to be spent and so on.
I don’t know what to make of this. Yes, the QE program that Abe ordered was the largest by far, but to claim that there was no QE program in place prior to this is bizarre. Between the start of 2001 and the end of 2003 reserves increased sevenfold. Something similar happened between late 2008 and late 2010. Look the figures up. They’re in my Alphaville article.
“Fiscal stimulus are assumed to induce cyclical upswings. They don’t just disappear. The initial rise in employment generates income to be spent and so on.”
Most major models of fiscal simulus (i.e. New Keynesian) assume that any effect disappears the moment the fiscal stimulus ceases.
“Yes, the QE program that Abe ordered was the largest by far, but to claim that there was no QE program in place prior to this is bizarre.”
David Beckworth’s post clearly concerns the period since the Great Recession.
“Between the start of 2001 and the end of 2003 reserves increased sevenfold.”
In my opinion the monetary base (the sum of currency and reserve balances) is a more appropriate measure. All told the monetary base increased from 65.0 trillion yen in March 2001 to 114.1 trillion yen in January 2006 or by 73.7%.
“Something similar happened between late 2008 and late 2010. Look the figures up.”
The BOJ announced outright purchases of Japanese government bonds (JGB) in December 2008 and this was later augmented by an announcement of purchases of commercial paper and asset back commercial paper (ABCP) under the Corporate Finance Instruments (CFI) program in January 2009. CFI was later modified to include corporate bonds in February 2009. Both of these programs concluded at the end of 2009 and supposedly made about 10 trillion yen in unsterilized asset purchases above and beyond what had previously been planned, and yet the monetary base only rose by 4.8 trillion yen over the entire course of 2009.
A third program, the Asset Purchases Program (APP), was announced in early October 2010 with the intention of making outright purchases of JGBs, Treasury discount bills, commercial paper, corporate bonds, exchange traded paper (ETF) and Japanese real estate investment trusts (J-REIT). All told additional purchases of over 70 trillion yen have been announced under APP and yet the monetary base increased only by about 30 trillion yen from October 2010 through February 2013. Thus although the BOJ has been adamant that it has been doing QE, even going so far as to state that it is investing in a variety of private assets, until April 2013 large changes in the monetary base were almost always undetectable.
The only time prior to April 2013 it was evident that QE was actually taking place was between February and April 2011 when the BOJ’s monetary base expanded by 20.9 trillion yen, or by 20.7%, largely in response to the Tohoku earthquake and tsunami, but the monetary base shrank by 8.4 trillion yen over the course of the next two months.
1) I am not a New Keynesian. I’m a Post-Keynesian and we think that stimulus has long-run effects.
2) Your opinion is at odds with the JCB and the Fed. They both use the current account balances. I’m going to stick with this given that this is what the JCB actually targeted.
“I’m a Post-Keynesian and we think that stimulus has long-run effects.”
Is this true of all Post Keynesians? I know for example that in Godley and Lavoie’s textbook on Monetary Economics they have an example of a permanent increase in the level of government spending that leads to a permanent increase in the level of real output. But this implies the effects are permanent only because the increase in government spending is permanent.
Do you have something to support this claim. I’m not challenging it, I’m genuinely curious.
“Your opinion is at odds with the JCB and the Fed. They both use the current account balances. I’m going to stick with this given that this is what the JCB actually targeted.”
This may be true of the BOJ, which technically targeted current account balances in its original QE, and is doing the same thing again. But the Fed has never targeted reserve balances. The Fed’s QE consists of ad hoc amounts of security purchases which effectively increase the monetary base by the same amount. They are evidently indifferent to what is the exact split between currency and reserve balances.
1) I’m surprised that G&L’s book would not include the idea of cumulative causation which has been a central tenet of PK economics since at least Kaldor and Myrdal. All the PK economists that I know would make the case, for example, that the recovery of private investment in the US and the UK compared with, say, Ireland and Spain is due in part to the 2008 stimulus packages in the former two countries and in part due to the lack of real austerity in those same countries when compared with Ireland and Spain. Perhaps this is an instance where you shouldn’t take G&L’s models so literally. Indeed, I write all the time on this blog about the limitations of modelling.
2) I meant that the Fed uses this as a measure of the Japanese QE in their writings. See:
http://www.frbsf.org/economic-research/publications/economic-letter/2006/october/did-quantitative-easing-by-the-bank-of-japan-work/
I’ve run Granger causality tests on the original Japanese QE. I focused on the period of time when the BOJ Call Rate was at or below 0.1%. This ran from March 2001 through May 2006.
Japan has two measures of lending counterparts to broad money: 1) “loans and discounts” and 2) “loans and discounted bills”. There is bidirectional Granger causality between the monetary base and lending (both measures) at the 1% significance level.
In addition, the monetary base Granger causes the Nikkei 225 at the 10% significance level and there is bidirectional Granger causality between the monetary base and the sum of deposit money and quasi money at the 5% significance level.
You might find the following two papers of interest:
AN INJECTION OF BASE MONEY AT ZERO INTEREST RATES:
EMPIRICAL EVIDENCE FROM THE JAPANESE EXPERIENCE 2001–2006
Yuzo Honda, Yoshihiro Kuroki, and Minoru Tachibana
March 2007
Abstract:
“Many macroeconomists and policymakers have debated the effectiveness of the quantitative monetary-easing policy (QMEP) that was introduced in Japan in 2001. This paper measures the effect of the QMEP on aggregate output and prices, and examines its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.”
Click to access 0708.pdf
Quantitative easing works: Lessons from the unique experience in Japan 2001-2006
Eric Girardin and Zakaria Moussa
February 2010
Abstract:
“The current financial crisis has now led most major central banks to rely covertly or overtly on quantitative easing. The unique Japanese experience of quantitative easing is the only experience which enables us to judge this therapy’s effectiveness and the timing of the exit strategy. This paper provides a new empirical framework to examine the effectiveness of Japanese monetary policy during the “lost” decade and quantify the effect of quantitative easing on Japan’s activity and prices. We combine advantages of Markov-Switching VAR methodology with those of factor analysis to establish two major findings. First, we show that the decisive change in regime occurred in two steps: it crept out from late 1995 and established itself durably in February 1999. Second, we show for the first time that quantitative easing was able not only to prevent further recession and deflation but also to provide considerable stimulation to both output and prices. If Japanese experience is any guide the quantitative easing policy must be seen as a symptomatic treatment; it must be accompanied with a dramatic restructuring in the financial framework. The exit from quantitative easing must be postponed and decided within a clear program and according to clear numerical objectives.”
Click to access DT-GREQAM-2010-02.pdf
I clearly said “inflation, the exchange rate and GDP growth”. In the Alphaville piece I said that the original QE probably drove the Nikkei.
Anyway, didn’t you just say above that there was no “meaningful” QE before April 2013? Now you’re saying that it drove lending and the Nikkei between 2001 and 2006. I’m confused.
“I’m confused.”
There’s no need to be. David Beckworth’s post is clearly about recent history (that is, since the Great Recession).
I’m confused by what YOU’RE saying. First you claimed that there was no “meaningful” QE until April 2013 and then you claimed that QE had all these effects prior to April 2013. This seems to me incoherent.
“First you claimed that there was no “meaningful” QE until April 2013 and then you claimed that QE had all these effects prior to April 2013.”
I’m claiming there was no meaningful QE since the Great Recession until April 2013.
Mark,
if I agreed that monetary policy has some effect would you agree to some expansionary fiscal policy in return?
Philippe,
I’ve never been opposed to fiscal stimulus.
oh right. I thought you had the same view on fiscal policy as Sumner.
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Philip, a while back when you were busy destroying the economic theories of Peter Schiff you told me you didn’t particularly like this version of the sectoral balances equation:
S = I + (G – T) + (X – M)
why was that exactly? I never really asked you at the time. What is it about this equation you don’t particularly like?
Cheers,
Philippe.
I can’t remember the context but the above is sometimes used to suggest that savings drives investment and a few other hoary myths.
Economists use ‘=’ as a sneaky logical inference.
ok, but if interpreted properly you have no problem with it?
So, you agree that:
private saving = private investment + (government deficit) + (current account surplus) ?
As an identity it must be true.
Here’s a graph of RGDP of Japan, the U.S., Germany and the U.K. indexed to 100 in 2007Q1:
The BOJ reduced the monetary base by 24.4% from January to November 2006 and economic weakness followed within months. Japan was one of the first major economies to have negative RGDP growth when it fell in 2007Q3. RGDP fell 4.7% at an annual rate in 2008Q2, and 4.0% at an annual rate in 2008Q3, causing Japan to suffer serious consecutive quarterly declines in RGDP before the U.S. did the same. RGDP proceeded to fall 12.4% at an annual rate in 2008Q4 and 15.1% at an annual rate in 2009Q1. All told RGDP fell 9.2% from peak to trough.
In short, Japanese RGDP fell sooner, faster and further than every other major country this recession. It’s hard not to connect the dots between this result and the BOJ’s sudden and sharp withdrawal of QE, given one literally followed upon the other within months.
You’re assuming a year lag after the withdrawal of QE. The drawing down of the balance sheet was complete by Q3 2006. So, in your story it took a year for this to show up in the GDP figures? That seems unlikely.
If the reduction in the JCB balance sheet was the cause of the dip we should have seen the dip in Q1 2007. It seems much more likely to me that there was another cause operating here.
A quick glance at the Japanese national accounts on my hard drive indicates that the Q3 2007 fall in GDP resulted from a fall in housing investment. It seems to me likely that this was due to the fall in housing investment that we were seeing across the world at that time — in Ireland, Spain, the US and so forth.
The decline in residential investment accounts for 80% of the decline in real GDP in 2007Q3 but by itself cannot explain the entire decline in real GDP. Moreover, while the declines in residential investment in Ireland and Spain largely coincided with the beginning of the Great Recession this was not the case with the US. Real residential investment in the US peaked in 2005Q3 and by 2007Q3 (two years later) it had already fallen by 27.5%:
http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=6&904=2005&905=2007&906=q
I find the idea that a decline in residential investment in one continent causes declines on another far more dubious than a 6-month to 2 year lag in monetary policy which is in fact accepted wisdom.
1) 80%? That’s rather a lot. I don’t think that I need to supplement my argument. I think you’ve just bolstered it.
2)
Are you implying that the fall in residential investment across the different continents in the run-up to the 2008 financial crisis was a coincidence?
Residential investment is strongly procyclical. Of course it fell during the Japanese and Euro Area recessions. The anomaly is the US where it fell for more than two years before the recession.
In short it’s less a concidence than a tautology.
I don’t think that you’re following the conversation very closely. It didn’t fall IN the recession… it CAUSED the recession! And it seems to have CAUSED a whole lot of recessions across the world — from Dublin to Tokyo.
Now, I don’t find this weird at all. But you do. And I’m not sure why. It’s pretty much consensus that bursting housing bubbles all over the world were the cause of the 2008 recession and the slump that followed.
Just because a lot of people believe something doesn’t make it true.
Recessions aren’t caused by a single sector of the economy that is no more than 6% of GDP, especially when a majority of the decline in that sector occured in the two years preceding the recession.
Are you being serious?
Alright… If you want to believe that stuff that’s fine. I’m not sure that many people will take you seriously but whatever.
Take this somewhere else though. I’m not on here to babysit.