Suppose I lend you $1,000, at 0% interest. But I warn you that as soon as you spend that $1,000, or lend it to someone else to spend, I will immediately make you repay the loan, or else raise the interest rate high enough to make you regret spending it or lending it. You will not spend that $1,000. You will keep it somewhere safe. What I actually do (giving you the $1,000 at 0% interest) doesn't matter. It's what you expect about what I would do (make you repay the $1,000 if you spend it) that matters.
The people from the concrete steppes don't get this. Me giving you $1,000 is a concrete action. It's real; they can see it. You expecting me to do something if you were to do something that you won't in fact do is not something concrete. It's not even an expectation about what will happen. It's an expectation about something that won't happen. It's an expecation about a counterfactual conditional. There's nothing more airy fairy than that! But that airy fairy expectation about a counterfactual conditional has real consequences.
The people from the concrete steppes see central banks print lots of money. That's a real concrete step, and real concrete steps have real concrete consequences. Printing lots of money causes lots of inflation. And the fact that lots of inflation hasn't happened yet simply means it's a lagged effect. Lags between causes and effects are real concrete things. Mechanical things have lags. Effects always follow after the causes. Sometimes soon after, but sometimes long after. Effects never come before causes.
If printing lots of money did cause people to spend it and cause inflation, then central banks would immediately put the printing presses into reverse. They would buy back the money they had printed, and burn it, to stop people spending it and causing inflation. And people expect they would do this. And no individual will spend unless he expects other individuals to spend. So nobody spends. It's a credit deadlock, created by counterfactual conditional expectations about what central banks would do if people did something that they won't do, because of those expectations.
Paul Krugman calls them "inflation derps", because they keep on ignoring the empirical evidence that falsifies their predictions of high inflation. OK. But they are also people from the concrete steppes. They cannot see the thing that is causing their predictions to fail, because that thing is not a concrete thing. And lags between cause and effect are concrete things. It's the lack of confidence fairy that is falsifying their predictions. A commitment by the central bank not to do what people expect it to do, to change those counterfactual conditional expectations, would change things. Something like an NGDP level path target. "Yes, we will let you spend that $1,000 we lent you at 0% interest."
Worthwhile Canadian Initiative 
@Nick:
I wonder if a useful question for now would be “what would it take to cause hyperinflation?” ‘Inflation derps’ seem to be saying that hyperinflation is just around the corner, but that is very much not what mainstream economists are saying.
We have a number of recent examples of situations where hyperinflation happens, but I haven’t seen much from ‘non-derps’ about the minimal set of actions a CB would need to take to cause hyperinflation, especially form a ZLB-ish starting point.
I expect that mainstream economics would put that minimal set of actions well beyond the current Fed, BoC, and ECB policies (noting that those three aren’t the same anyway), but that’s just a layperson’s hunch.
@Fflloyyd:
Well if wealth and income were not so (increasingly) concentrated, marginal propensity to consume by the less wealthy could do a lot of the spending work for us. Absent that, government could step in as the proxy spender for that larger mass of spenders. (Or, just give more money to those high-MPC spenders and let them do it). Properly spent, that money could also have the salutary effect of reducing wealth/income concentration, so increasing the velocity of wealth.
If the Fed were less anxious about the bogeyman wage inflation as a terrifying harbinger of goods/services inflation, they would allow (actually, encourage) the resulting upward spiral, only stepping on it when actual goods/services inflation became worrisome. They might also raise the bar for what “worrisome” means.
@Roth:
Marginal propensity to consume is a partial equilibrium analysis. If I decide to save $100 by buying stock or bonds, then that means that someone else — a prior holder, or the debt/stock issuer — has $100 now that they have to do something with.
They could save it, but then the process repeats. It’s only when the money is “saved” via cash, bank reserves, or sold to the CB (in a monetary contraction) that the currency actually leaves circulation.
What if the developed nations simply have an inability to increase inflation with normal Fed tools? To have inflation you need more demand than supply but the West has had falling populations in the 25 – 50 year bracket. So the issue is not Fed or fiscal policy but too little growth in families. In all reality, all developed nations are doing their version of Turning Japanese.
How does central bank spends money on expected government outlays change expectations?
If the bridge was going to be built anyway who cares?
Unless actual plans for spending are changed, what difference does it make what the interest rate is? Or how much money there is? the central bank buying mortgages increases the demand for mortgages and the supply of mortgages. If the central bank buys government debt without the result being an increase in supply what difference does it make to ngdp?
@ Majromax
Not so if you you’re looking at Velocity of Wealth.
http://research.stlouisfed.org/fred2/graph/?g=OfY
Now you could claim that higher velocity of wealth causes there to be less wealth hence the same amount of spending, but it seems the effect of higher spending on wealth would be the opposite: more production, so more surplus from production, more profit, more hiring, etc. Y is higher than in the counterfactual. The see-saw levitates.
A little late here, but I’ve read the comments and still have a question.
I understand the mistake of the concrete steppists – if the CB is credible in fighting inflation above its (say 2%) target, then one shouldn’t make spending/investing/pricing decisions predicated on >2% inflation. Regardless of how much credit is available, spending won’t accelerate to the point that inflation exceeds 2%.
All fine. But where I have trouble is the implication that printing money has no effect at all on spending.
“If printing lots of money did cause people to spend it and cause inflation, then central banks would immediately put the printing presses into reverse. They would buy back the money they had printed, and burn it, to stop people spending it and causing inflation. And people expect they would do this. And no individual will spend unless he expects other individuals to spend. So nobody spends. It’s a credit deadlock, created by counterfactual conditional expectations about what central banks would do if people did something that they won’t do, because of those expectations.”
If inflation is running below target, I don’t see the “nobody spends” deadlock occurring. The individual sees two possible outcomes: nobody spends, and credit stays cheap, and everybody spends to the point that inflation gets back to target before the CB reverses course. Seems in either situation it’s rational to borrow and spend, no?
Also if the CB is lending to you for term (taking duration onto its balance sheet), it may be rational to borrow for term and spend, even if you think the CB will be increasing rates soon in response to the spending.
So the reason prices are not rising is that people expect the Fed to put printing presses in reverse as soon as they start rising.
This makes a lot of sense. Thanks a lot for clarifying that. However I have a few questions:
1) is this a falsifiable theory? What would it take for you to stop believing that is the true reason?
2) If this explanation is true, it is not clear to me why there has ever been inflation in the past. Why was that?
3) What about the claim that, if we count stock prices, inflation did rise? (OTOH, commodity prices are down, so I am not sure on net there was inflation in assets).
Sorry if this has already been asked: ok, printing money while threatening people from spending it will not cause inflation. But why should we expect it to help exit the depression? I.e. I get why it won’t cause inflation, but why should it have any positive effect at all? Thanks
@Maurizio:
I see. But then, if it avoids deflation, it is wrong to say it does not create inflation. It does create inflation relative to the counterfactual (i.e. relative to what would have been if the policy had not been enacted).
I think a lot of misunderstanding is caused by this. QE did create inflation relative to the counterfactual, but not relative to the previous price level.
if the mortgages really go under, this expansion of the monetary base will be permanent.
Very insightful.
So we can say that the market currently thinks that the mortgages will not go under. Right? (because it treated the monetary expansion as not permanent).
And if the mortgages do go under, the market will suddenly realize it was wrong, and we will have a sudden burst of inflation?
I wonder what is the likelihood that they will go under.
Majromax, thank you for your helpfulness š