Quantitative easing doesn't cause inflation or deflation

Federal Reserve Bank Chairman Ben Bernanke.
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Stephen Williamson, an economist at the St. Louis Fed, has conjured up quite a storm of controversy with his claim that quantitative easing could be deflationary.

Williamson's formulation of his point is long and not easy to follow.

But it can be simplified like this: when the Fed engages in quantitative easing it acquires securities held by investors in exchange for dollars. Investors will only accept those dollars, according to Williamson, if they believe the dollars will rise in value. Which is to say, the operation of QE seems to imply deflation.

There has been a lot of hair pulling, teeth gnashing and fulmination over this line of argument. It's bothered every sort of economist imaginable, from Keynesians like Paul Krugman to Austrians like Bob Murphy, to market monetarists like Scott Sumner. (This post by Noah Smith is a good starting place if you really want to jump down the monetary policy rabbit hole.)

A lot of the discussion, unfortunately, is not very enlightening because so little attention is paid to the operational mechanics of QE.

There's just too much digital blackboard economics going on, fighting over models and such, and not enough real world observation. (One exception to this: FT Alphaville's Izzy Kaminska post on safe asset shortages.) When you pay attention to the real world, the situation is much simpler.

QE isn't inflationary or deflationary.