Home > Economics > ‘QE is an asset swap’ isn’t an objection to anything

‘QE is an asset swap’ isn’t an objection to anything

November 19, 2011 Leave a comment Go to comments

So, this is a theme we have been hearing a lot from the MMT (Modern Monetary Theorist) crowd and when I heard it over dinner last night from someone who is not in that camp, I felt that now more than ever that this was an argument in need of clear, simple and decisive refutation. When people say quantitative easing is just an ‘asset swap’, they’re claiming that exchanging bonds for money won’t affect prices. It is true that it won’t necessarily cause inflation, but for reasons that having nothing to do with it being an asset swap. Here is my simple reductio example:


1) Conventional monetary policy operations work via swapping reserves for short-term government bonds

2) If the Fed/BOE/ECB decided to increase interest rates to 10% tomorrow and achieved this through conventional policy, there would be serious deflation

3) Therefore, the fact that anything is an ‘asset swap’ is irrelevant


The reason quantitative easing hasn’t been inflationary in Japan or the US or the UK is because of the expectation that as soon as prices  start increasing, the central bank will vacuum up the money again. Temporary injections of money do not affect aggregate demand*^, and it is a necessary ingredient that we must believe the central bank will allow inflation or NGDP growth in order for it to happen.


*Announcements of QE do seem to have had some very modest affects in the US, which is the result of people’s expectations about the Fed’s implicit target changing. You’d at least be more likely to think that Bernanke is determined to prevent deflation

^Thought experiment: imagine the Fed said they will double the money supply tomorrow, and then reduce it to half its current level by 2014. Would you buy a house?

Categories: Economics
  1. November 20, 2011 at 9:36 pm

    Yep. A lot of fiscal policy is an asset swap too. The government swaps a bridge for bonds.

  2. Max
    January 25, 2012 at 10:59 pm

    Government bonds are close substitutes for cash in portfolios. Bridges are not. It takes a lot of bond buying to equal one bridge.

    The fallacy to avoid is thinking that the quantity of base money is all that matters.

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