CronoDAS comments on After critical event W happens, they still won't believe you - Less Wrong

37 Post author: Eliezer_Yudkowsky 13 June 2013 09:59PM

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Comment author: Carinthium 13 June 2013 10:25:03PM *  1 point [-]

Presumably the best you can do solution-wise is to try and move policy options through a series of "middle stages" towards either optimal results, or more likely the best result you can realistically get?

EDIT: Also- how DID the economists figure it out anyway? I would have thought that although circumstances can incease or reduce it inflationary effects would be inevitable if you increased the money supply that much.

Comment author: CronoDAS 13 June 2013 11:55:34PM 4 points [-]

EDIT: Also- how DID the economists figure it out anyway? I would have thought that although circumstances can increase or reduce it inflationary effects would be inevitable if you increased the money supply that much.

When interest rates are virtually zero, cash and short-term debt become interchangeable. There's no incentive to lend your cash on a short-term basis, so people (and corporations) start holding cash as a store of value instead of lending it. (After all, you can spend cash - or, more accurately, checking account balances - directly, but you can't spend a short-term bond.) Prices don't go up if all the new money just ends up under Apple Computer's proverbial mattress instead of in the hands of someone who is going to spend it.

See also.

Comment author: PeterDonis 02 March 2014 02:18:30AM *  0 points [-]

Sorry for the late comment but I'm just running across this thread.

Prices don't go up if all the new money just ends up under Apple Computer's proverbial mattress instead of in the hands of someone who is going to spend it.

But as far as I know the mainstream economists like the Fed did not predict that this would happen; they thought quantitative easing would start banks (and others with large cash balances) lending again. If banks had started lending again, by your analysis (which I agree with), we would have seen significant inflation because of the growth in the money supply.

So it looks to me like the only reason the Fed got the inflation prediction right was that they got the lending prediction wrong. I don't think that counts as an instance of "we predicted critical event W".

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