An Interesting Wager…

I really liked this post by my MR colleague Mike Sankoski (see here).  He talked about the 3 reasons MR matters.  In short, we take a balanced view on things.  We start from a pure understanding of the way the monetary system works.  Unlike most economists who develop a view of the world they want, we view the world for what it is and build out.  The economics profession does exactly the opposite.  Most economists start with policy and work backwards.  Austrians start with a gold standard (or small government) frameowork and make their model fit the current world.  Keynesians (mostly) start with counter-cyclical spending and find a way to always make this model fit the current environment.  Monetarists start with monetary policy and make this model fit the current environment.  It’s all backwards!

MR views economics using what I call a Da Vinci approach.  If you’re familiar with Leonardo Da Vinci’s anatomical work you know that he didn’t impact the medical profession in the same way a modern surgeon does.  He didn’t actually fix people.  He deconstructed them in an effort to figure out how they work.  That’s all MR has done.  Through our various papers on the Contingent Institutional Approach, S=I, and Understanding the Modern Monetary System, we’ve deconstructed the system and described how it works.  And based on this understanding we’ve concluded that many different policy approaches can work, but that they must be understood within the dynamical economic environment in which we live.

Anyhow, Mike references a bet that Brad Delong is arranging with Stephanie Kelton and possibly Michael Woodford.  delong says:

“As of January 1, 2016, enough time will have passed for us to be able to judge whether the Federal Reserve’s policy shift to the Evans rule plus an open-ended $1 trillion a year of balance sheet has been a success or not.

Stephanie Kelton is almost certain it will not be a success. I think it might well work. Mike Woodford is almost certain that it will work. It seems to me that there is an opportunity here for me to lock in a profit of some sort here…

The first stage of this is crafting a bet that Stephanie Kelton would accept for what states of the economy on January 1, 2016 would qualify as success for the Fed, and what states of the economy would qualify as failure. She does expect a better economy in three years–She expects private sector deleveraging to continue at its slow pace And as a result the forces making for balance sheet recession to ebb. Success would, for her, have to count as stronger than expected improvement in the economy given this positive underlying trend.

How should I phrase the bet? And then what bet should I offer Mike Woodford when I run into him by accident in San Diego?”

Now that’s an interesting wager.  I am not sure whose side I would be most inclined to take here.  Frankly, I’d rather just play odds maker and collect the fees.  Given the harsh reality about 8 years of uninterrupted economic growth – which is what a continuing recovery in 2016 requires (see here), I am inclined to give Woodford the longest odds.

Which horse in this race do you like?

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Kelton will be right. We’ll go into a recession at some point in the next 4 years and we’ll probably look back at today and wonder how we’ve gotten nowhere.

  • Geoff

    If the unemployment rate continues to decline next year, and approach 6.5%, the Fed might actually start tightening under the so-called Evans Rule. In which case, the bet might be moot :)

  • Cowpoke

    Since we deal in sectorial balances and the private sector is mirred in a balance sheet recession and the Govt looking to tighted it’s belt isn’t this bet more about those sectors fiscal action instead of FED policy?

  • Mr. P

    How about using the ‘Misery Index’ as the way of keeping score? Will it be higher on January, 2016 than it is today?

    Given the current Fed policy, I say it will be worse and go with Kelton…..

  • Hoffa

    My bet is that the monetarists and the Fed claim credit for everything good that happens to the economy until 2016 and beyond. Just like they claimed Volckers hopeless experiment with targeting the money sypply in the early eighties was good for the economy in the following decades.

  • Johnny Evers

    What would the standard of certainty be that current policy is succesful or not?
    The economy could grow because of the policy.
    The economy could sink because of the policy.
    The economy could sink *despite* the policy.
    The economy could grow despite the policy.

    I’m reminded of the stimulus — even though it did not do what was advertised, its proponents then went back and revamped the definition of success. Something like that could happen here — we could be mired in a recession and listen to Ben Barnanke state that all would have been well if he could have bought more Treasury bonds.

    I also think you have to question the assumption that current Fed policy is designed to do what Bernanke claims. He says he is trying to trigger growth. But maybe he really just trying to monetize debt so the government can fund itself? Maybe he is really trying to rescue failing banks?

  • krb

    I agree with JE….Bernanke has already changed his public explanations for QE 3-4 times…..with moving goal posts it will be impossible for him to get the policy wrong…….where can I get such a job???!!!

    The idea of a bet and forcing clear parameters to measure success or failure is a GREAT idea. Public policy makers have hid behind the unprovable claim for decades…..”well, it would have worked if we had just done more of it”. I don’t understand why two simple questions never get asked at time of policy implementation and then reviewed later…….”What specific conditions and in what time frame should we look for in order to declare this policy has been successful?”……and, “What specific conditions and in what time frame should we look for, for you to be willing to concede your policy has failed?”

    This threesome’s “bet” is a huge step in the right direction! krb