Third, the statement seems to be at odds with a recent article by President Bullard of St. Louis suggesting that a continuation of the Fed’s current stance on short-term interest rates could result in deflation (see “Seven Faces of ‘The Peril’”, July 28, 2010). The first sentence of the abstract reads: “In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, deflationary outcome within the next several years.”The original report from Bullard can be found here. Guess who is thanked in the footer of page 1? Narayana Kocherlakota (as well as David Andolfatto, regular blog commentator on Worthwhile Canadian Initiative and TheMoneyIllusion).
So what's going on? The paper is making the same argument for which Kocherlakota has been pilloried over the last two weeks. But the paradoxes in that paper are layered with yet more contradictions:
- Hatzius quotes the FOMC minutes which say that there is little risk of deflation - and yet Bullard, who is on the committee, is arguing that the Fed's low interest rate policy may itself cause deflation.
- Hatzius, like Krugman, is disagreeing with the FOMC's view and agreeing with Bullard that there is a risk of deflation but their prescription is the opposite of Bullard's - keep interest rates low.
- Bullard comes to the same bizarre conclusion as Kocherlakota - low interest rates cause deflation - but then deduces from this a sensible corollary - we should continue quantitative easing!
- Bullard came up with all this before Kocherlakota - in fact for all we know, Kocherlakota got his speech from reading Bullard - but Kocherlakota got all the blame.
- While everyone thinks Kocherlakota is very hawkish, Bullard is described as a dove.
But the chain of logic here has so many inversions that I think I'm in a Borges novel.
p.s. this paper was already spotted by Money Demand last week.