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Krugman: We Need $8-10 Trillion Worth of Quantitative Easing

The interesting thing about this clip is that Paul Krugman is probably right: you need trillions of printed dollars to get the stimulative effect the Federal Reserve is looking for. Ambrose Evans Pritchard was talking about taking the Fed’s balance sheet to $5 trillion in June.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

In the video below, Paul Krugman talks about $8 – $10 trillion of Treasury buying. I think the sum needed to provide the stimulus the Fed wants could be higher still. Krugman doesn’t think this will happen.

Earlier today I picked up on a Reuters piece on this issue at Portfolio.com. It says:

"One should not expect too much from further quantitative or credit easing," said Olivier Blanchard, the chief economist of the International Monetary Fund. "It should be done but the implications for the economy will be limited."

Christina Romer, who recently stepped down as a White House economic adviser, said the Fed is in uncharted waters and it is unclear how much further easing will accomplish.

"There’s a lot of questions about quantitative easing and how it works and how communications policies work, but they need to be tried because this is still a crisis," she said.

My take: monetary policy won’t have much oomph here. Fiscal policy is better and more targeted. But, of course, fiscal policy is off the table except for a re-institution of the Bush tax cuts. So, we’ll see some serious money printing instead – probably not $10 trillion, but a lot.

Also see the Gold 24-hour Spot Chart at Kitco. Gold has reached another record near $1377.

As for Krugman’s arguments regarding China, I don’t agree at all.

Update: 19 Oct 2010: PS – This article is NOT an endorsement of quantitative easing. Those of you who have read CW know this. But for those of you who are new here and don’t do subtlety, the reference to the gold price tells you that.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

15 Comments

  1. Carmeloc04 says:

    I think berni and his croonies will destroy the us economy. This will not end well, it never worked before but hey they’ve just got to justify their salaries and help their cohorts at wall street. Frankly i dont believe congress will let the fed to increase q easing in such amount. You can test drugs, devices in laboratories but another thing is to stick to theories and try within a social system. This people should be prosecuted and put into jail they are a disgrace to society. Buying treasuries and securities from banks only fostered bubbles in financial assets despite increased reserves. We are seeing an old same story but trying to monetize treasuries directly from the goverment could have a different impact if private sector was interested in investing in order to diminish the crowding out but thats not the case. Who wants to invest in a 10 year horizon if none know the interest rates derived from free markets? this will be a painful process unfortunately and obama will be a fiasco.

  2. Freitagfan says:

    $8-10 TRILLION? Nobody ever asks Mr. Krugman, what happens if we implement your ideas and they don’t work as well as you think they will?

    • I often disagree with Krugman, but in fairness to him I think the subtext is the point I made: that monetary policy is not as good as fiscal policy here. He seems to be saying that we are now relying on the CB to do what Congress should be doing and the side-effect of this is a dollar decline and other distortions.

      He also says at one point we won’t get 8-10 trillion. Translation: the output gap will remain large.

    • If he understood qe and monetary operations and believed lower long
      term rates were the answer he’d be supporting interest targets for the
      tsy curve, or something like that, and not be concerned over
      quantities.

      qe per se has nothing to do with the dollar move, which has two
      components. One is traders and money managers and trend followers
      piling on thinking qe is money printing that weakens the dollar. The
      other is a flight back to euros after it got over sold during the
      crisis when there was a real risk it could completely vanish and was
      rescued by direct ECB check writing, along with highly deflationary
      terms and conditions imposed by the ECB on euro member nations. The
      euro turned north on the ecb intervention and not on US qe.

      Krugman is also out to lunch on most of the rest of what he was saying as
      well.

      In a message dated 10/14/2010 9:08:35 A.M. Mountain Daylight Time,
      writes:

  3. janchup says:

    Will someone please put him in a very small boat 500 miles from shore in a hurricane?

  4. Richard W says:

    The problem is that the stimulus money (whatever the amount) is being directed to cronies and other non-wealth producing persons, or it simply vanishes, then we give the bill to our children or even those not yet born. We in the USA are by now, corrupt, all of us, from top to bottom. We have all drunk the kool aid. Closing act in progress, get ready to run the credits.

  5. I8djdanv873 says:

    that dude needs to go to jail for treason!

  6. Thebes says:

    “Quantitative easing” is just a euphemism for throwing money from helicopters until we hit hyper-inflation and inflate our way out of the mess. Sorry, you lose.

    • Actually, a helicopter drop is a lot more effective than quantitative easing. Quantitative easing is the Fed buying existing financial assets with printed money. While the Fed is increasing the monetary base, they are not actually increasing net financial assets. This is an asset swap of the Fed’s money for bonds. Unless the demand for credit increases, that extra money sits in vaults and no new financial assets are created. In fact, we have just destroyed tens of billions in interest income by paying cash for interest-bearing assets.

      In a helicopter drop, people get the money directly, and, thus, they are liable to spend some of it. While both involve money printing, the former (QE) is banker friendly, the latter is more geared to consumption.

  7. Scottbrushfire says:

    The really interesting thing is that you don’t know what you’re talking about. Paul Krugman, is not only not right…he’s dead wrong. PRINTING MORE MONEY is wrong. Mises illustrated this decades ago. You need to pick up a real economics book and read. Hayek, Mises, Rothbard, Bohm-Bawerk…take your pick…Krugman can’t hold a candle to them.

    • What are you talking about? Did I say we SHOULD print a gazillion dollars? No. For that matter even Krugman never said we SHOULD print a gazillion dollars. What he DID say is that QE2 will fail.

    • You need to listen and read more closely. Printing money will not boost credit demand. It will increase asset price inflation. And it will act to distort the industrial organization of the economy, lengthening and deepening the depression. It will not alleviate the problems of too much private sector debt and too much unemployment. This is EXACTLY what Mises would say by the way. And I have read my Mises. I have read my Rothbard. Consult the site’s reading list, buddy.

    • One more comment: it should be crystal clear to anyone who has been reading this blog or who noticed my reference to the price of gold in this same article knows that I see quantitative easing undermining trust in the US dollar.

      Marshall says QE per se has nothing to do with the dollar move and that it is all speculative sellers after the Euro was oversold.I say the Fed is conducting fiscal policy by buying up Treasury debt and this has undermined confidence in the US dollar as a store of value.

      You look at South Korea, which is switching out US dollar reserves for gold or China and Russia which are settling bilateral trade in local currency rather than dollars. What you see is weakness and flight from the US dollar. QE has everything to do with this. And the more the Fed acts like its going to flood the US banking system with dollars, the more trust in the dollar will be lost and the more the dollar will fall vis-a-vis gold and hard assets.

      • Scottbrushfire says:

        Edward, well we do agree on a few issues here. If you have read Mises, you’re at least playing in the same league…even if not for the Austrian team.

        First time I’ve visited your site…so do forgive…but you are a bit defensive.

        And no doubt, QE of any kind is the beginning of the end of the dollar. “There is no means of avoiding the final collapse of a boom brought about by credit expansion.” Mises.

        Rats for us.

        • @scotttheisen I should add that it is trust in a currency which is most important. When people start dodging taxes or looking for other ways to settle trade, that’s when the problems begin. The reason gold is soaring is because this process has begun. Will it continue when this inflationary experiment goes bust into a debt deflation? That’s the question we are all asking ourselves. I am not convinced you would see a crack-up boom any more than you did in the 1930s.

          Marshall, you want to get in here and tell me why this has nothing to do with the dollar?
          http://www.ft.com/cms/s/0/ff6a5034-dac8-11df-a5bb-00144feabdc0.html

          “South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering buying gold to diversify its dollar-heavy portfolio, the country’s central bank said, adding it would be cautious in making any final decision.

          Even a small realignment of South Korea’s reserves would have a powerfully bullish effect on the gold market. With just 14 tonnes of gold – or 0.2 per cent of its $290bn reserves – Seoul is one of the smallest holders of gold among large economies. The world average is 10 per cent, according to the World Gold Council, while countries such as the US, Germany and France hold well over 50 per cent of their reserves in gold.”