Last year many economists argued that the economy needed more quantitative easing which would drive down real interest rates (whether by driving down long maturity nominal rates or by driving up expected inflation). The counter argument is that quantitative easing is not effective if there is a liquidity trap.

Well we now have QE2 (since early November 2010) and real interest rates actually increased (very slightly). The 8 year real interest rate (TIPS rate on notes due January 15 2019 increased. I think that this is the real rate which was most likely to decline when the Fed bought 7 year (ordinary nominal) Treasury notes.


That didn’t do anything for the recovery and it is a response to an open market operation many times larger than the largest pre-Bernanke open market operation (I mean as a percent of high powered money outstanding — one has to be specific since Bernanke had earlier more than doubled Fed liabilities).