SCOTT SUMNER ON NGDP TARGETING
I can see a scenario in the coming 6-12 months where the Fed will be pressured to take more action. The current hot thing in economic circles is NGDP targeting. This essentially involves the Fed targeting a level of NGDP and implementing monetary policy to attempt to achieve this level. It would essentially involve massive QE with a definitive direction in setting market expectations. I think there is a very real potential that we could see a bit of disinflation in the first half of 2012 as the motor fuel comps become increasingly difficult and put a bit of downside pressure on YoY inflation data. This could be the Fed’s excuse for further monetary easing. My guess is that the idea of NGDP targeting will have been digested by this point and the Fed could implement it. Of course, there’s a lot of moving parts in this thinking, but this idea is gaining a great deal of traction so the Fed needs any excuse to implement it.
I am working on a big piece on NGDP targeting, but I’ve been swamped in recent weeks and just haven’t been able to wrap it up. In the meantime, you might be interested in this excellent interview with the WSJ’s Kelly Evans and Scott Sumner who is widely regarded as the leader of the NGDP targeting movement. If you followed my endless coverage of QE2 you can likely guess what I think about this program….Regardless, reader thoughts are always welcome.
Source: WSJ
This is the guy we’re resting our hopes on? He has no understanding of the way the monetary system works. He says banks will lend reserves, the government has a debt problem and that the lack of regulation is an issue on Wall Street. But his whole fantasy theory doesn’t add up. Banks never lend reserves, the US government doesn’t have a debt problem and more QE will just lead to more speculation!
What a hopeless profession economics has become. This man is clueless!
Well, he’s definitely right on the lack of regulation, and I appreciated his concession that in the real world we need regulation, even though his fantasy is a completely free market economy.
It’s a win-win.
If it works, great. We learn about the importance of expectations, and that can be incorporated into any economic school of thought.
If not, one more huge flaw will be exposed in mainstream economic thinking.
Obviously, there are potential negative consequences to implementing this policy if speculation is truly affecting commodity prices.
The average American doesn’t even know what the Fed is. The idea that they can change expectations across the entire economy is retarded.
You are absolutely right, SS. This is incredibly delusional, and has no chance of becoming Fed policy, IMO. It’s just silly. QE is bad enough, but some vague policy statement that will probably mean more QE2 is just about the dumbest thing I’ve heard this side of the gold standard.
See the Rogue Economist for more. There also some good comments about this at Interfluidity:
I have to agree with SS. Did you see my poll from the other day? A full 95% of readers (highly informed readers) said the Fed’s policies have almost no impact on their spending habits. Do you think Joe Schmo’s expectations are being altered by FOMC decisions? I mean, there is a disconnect between reality and economics here that is almost unbelievable. But we all know Mr. Sumner doesn’t like to focus on reality too much…..
I generally agree with all of you.
Do you think there is anything to be said for Corporate America in taking the lead on this? What if they perceive that the Fed can actually (somehow) achieve what they claim (since we know most don’t understand the economy from an MMT perspective), and they change their hiring and growth plans to be in line with Fed targets? I’d be curious to see a poll of corporations on this.
Companies don’t make hiring decisions based on Fed expectations. They hire more people when their revenues justify the capital expenditure. Can QE increase corporate revenues via increased consumer spending? Well, if you agree with the results from the first poll then you just need to connect the dots.
I am in the process of starting a new firm. Why? Because there is demand for my services outside of my current business. I receive a huge number of emails and phone calls from people asking: “do you do _______” (in addition to my current business). It has nothing to do with Fed policy. I don’t know how many people I will ultimately end up hiring, but I can assure you that that is a decision that will be based ENTIRELY on my revenues in the first 12 months. Ie, end demand. It’s that simple. But guys like Scott Sumner have never been through a process like this. Instead, they sit in offices reading Keynes and Friedman all day cashing a comfortable living….
I’m partially playing devil’s advocate here, but hiring decisions and corporate planning are also based upon where the company predicts the business will go. Obviously, past performance is a big driver, but so are broader macro trends. If company chief economists, like Goldman’s, believe there’s some magic sauce in NGDP targeting and make the recommendation to the CEO that they believe the economy will pick up and this will justify more hiring, then this could have a real effect. The degree to which forward looking predictions will impact corporate level decision making will depend on the size and type of the company, but I do not think their decisions are as simple as the here, past, and now (though perhaps the here and now ultimately dominates). And this would theoretically occur in a snowball fashion. Not all companies would react this way, but some would, and then more, and then more, and then more as the economy picks up.
I’m trying to rationalize it. I am not saying this is how things will go down.
I think what’s key to understanding this is what these guys propose the Fed actually has in their back pocket to credibly threaten higher GDP. If it’s more QE2, the idea is probably impotent. What if it’s naming a price and being an unlimited buyer? Is it then any more plausible? What if it’s going outside the Fed’s mandate and buying random assets?
Cullen, I agree startups are definitely going to be much more sensitive to the past, here and now. But what about major corps like WalMart and McDonald’s? One could argue the small businesses are more important (a challenge – http://www.newyorker.com/talk/financial/2011/10/31/111031ta_talk_surowiecki), but you don’t need small businesses to drive the car initially.
Still in devil’s advocate mode btw…
I appreciate your attempt to really rationalize all of this. It’s actually very helpful. So let’s go through that thought experiment. Let’s say they buy up all the US govt bonds in existence (this assumes the mere expectations of infinite QE doesn’t cause enough agg demand as Sumner implies). What will likely happen? Investors will be massively displaced as they were in QE2. This will likely cause an increase in demand for corporate debt and other higher risk assets. It might even cause some firms to issue more debt as demand rises. I see one huge flaw here though. The very basis of this operation confuses what money is. It implies that money is different from a financial instrument. As you know, MMTers refer to financial instruments as “money things”, but we don’t claim that cash in hand is all that different from bond in hand. In reality, a financial instrument merely represents a claim on money. So, swapping the two is like giving someone that claim on money today (whether they need it or not). So, when you sell your bonds and get cash your financial position hasn’t changed. You’re just as “rich” as you were before. In fact, you’ve sold something that doesn’t fit into your savings plan. And yes, it is income to savings desires that drive spending – not Fed ops that don’t change net financial assets. So there’s a bigger issue going on here. Because you’re not “richer” you’re not more inclined to spend. In fact, the Fed has reduced an income stream of yours via the reduction of your interest income. So what have they achieved? They’ve gunned commodity prices, but they haven’t created a real transmission mechanism for higher prices via increased spending. End of story in my opinion. This program is the epitome of wishful thinking. I’ll give them credit for one thing though – it’s very outside the box….
Thoughts?
You, Fullwiler, and Mosler have made me very skeptical that any real effects are going to be achieved through QE-like transmission mechanisms.
Without having put too much thought into this, or reading in much detail what Sumner and Rowe have to say, the only way I can rationalize this is to imagine either a world where it’s the expectations that set things in motion, rather than the real effects of QE, or a world where they do Roche type QE (price not quantity).
The first world is world in which some chief economists have sufficient sway on CEOs, they believe in market monetarism, and they don’t wait for the end results of QE before telling their bosses they should hire more.
The second world I am not sure. Isn’t the idea behind Roche QE that it will make me richer than otherwise? The question still remains- are the people to be impacted the most by Roche QE have a sufficient propensity to spend to generate the aggregate demand we need?
wh10–
It seems like the idea is to effect a change in mass psychology which will stimulate the economy through a reverse paradox-of-savings mechanism. The private sector will save less and spend and invest more. Nobody really knows what NGDP means in terms of concrete actions (though we suspect QE would be a big part of it) and if it would be equitable, but that seems to be relatively unimportant to those proposing such a scheme. It seems that proponents of such a scheme feel that anything that will cause a change in mass psychology is worth trying.
Obviously, this could go horribly wrong. Mass psychology experiments based upon unsound foundations, such as trying to convince people that the Fed has the power to change NGDP through unnamed actions, could go into reverse as the truth comes out. What if it works initially but then QE fails to have the expected results (as with QE2). Asset prices go up, but wages, consumer prices, and employment continue to be weak as corporations begin to doubt the ability of the Fed to deliver. Once the psychology turns the other way (against the Fed), as has happened time and again in recent years, the stage would be set for a depression.
In a best case scenario, a project to change mass psychology puts people back to work and lifts the economy, but deals with none of the underlying problems. Monetarism is thought to work (when it was really all a psychological trick) and we continue to be at the mercy of increasing debt and bubbles…
Agreed, Cullen. The Fed has very little influence over inflation, let alone NGDP!
What about this: http://macromarketmusings.blogspot.com/2011/11/some-evidence-on-importance-of.html
Oh, so the Fed just needs to say 5% NGDP and the market will go there. Gosh, I didn’t economic growth was so easy!
Cullen if you want the Germans and other hard money EU countries to go for ECB targetting interest rates in the PIIGS or eurobonds and fiscal union, throw out the losses that German pension funds face if the PIIGS exit and default by paying debt with new and devalued currencies (lira, drachma, etc) and throw out the tax bill if there’s taxes on Germans to bail out PIIGS bondholders and throw out the inflation bill if there’s inflation targetting.
Maybe the losses are lower to the Germans with fiscal transfers you like, maybe not. If they’re worse with fiscal transfers, it is hard to see why the German voters and small and medium businesses that oppose bailouts would go for that. Even if the big businesses that favor bailouts like them.
The Fed couldn’t target NGDP even if they wanted to. NGDP targeting should be a fiscal operation.
Wait, I thought Bernanke very recently told Congress there wasn’t anything else monetary policy could implement and that fiscal policy was now necessary to boost the economy? I’m sure of it.
Did I dream that? Don’t laugh, I really did have a dream about the Fed the other night, although I have no recollection of the details. Thank goodness.
AHA!
http://thehill.com/homenews/senate/188901-bernanke-to-dems-dont-expect-more-stimulus
And for some comic relief from the same article:
“Operation Twist is designed to flatten the yield curve by buying long-term bonds and selling short-term debt. Since the purchase of long-term debt is financed by sales, it does not inject new flows of money into the economy.
“I think it’s a good idea, but I would have gone further,” Rep. Barney Frank (Mass.), the ranking Democrat on the House Financial Services Committee, said in a statement to The Hill last month.
Republicans, however, warned Bernanke that flooding dollars into the economy could trigger inflation.”
Think these people are all in the same room when they have these conversations? It’s not unlike The Keystone Cops.
Estephanie Pomboy in Bloomberg TV right now… Opening growth in the us has been an inlution based on higher prices. Complacency view that if things in Europe are solved all will be fine here. She does not agree with this view. More after commercial break…
The nominal GDP target seems entirely consistent with Fed’s dual mandate on first blush. There is a problem with this, however. This seems like a way to push a higher inflation target under the table. I will illustrate how a nominal GDP target is likely to be abused by the current set of actors at the Fed.
When was the economy normal? I would pick a 5% unemployment rate and 2% core inflation year in the mid 90s. Then overlay a 4.5% nom GDP rate since then to compute the desired level of Nominal GDP. This is consistent with Romer’s 4.5% per year normal growth in nominal GDP. This exercise clearly shows the level of nominal GDP in 2007 to be solidly above target. This numerical observation is also consistent with the fact that 2007 was the height of credit bubble fueled growth and what happened after. Under a nominal GDP targeting regime, would Fed tighten in 06-07? I ask you what would happen. Bernanke would make some technical excuse not to tighten, Krugman would scream murder and Romer would be MIA. In her op-ed, she undermines the entire logic of the argument she makes by making one simple assumption –
“It would work like this: The Fed would start from some normal year — like 2007″
2007 was a normal year? Really? Professor Romer does herself a huge disservice by making such bogus statements. And therein underlies the entire problem with the current Fed – asymmetric, inconsistent and faulty execution of their own policies and regulatory responsibilities.has landed the country into a world of hurt.
If this were an academic exercise, I would agree with you. Yes, someone has to put some thought into picking a threshold of some sort. But picking 2007 as a normal year seems so obviously wrong to me – unsustainable consumption levels in the US, their own core PCE deflator running over 2% for FOUR consecutive years, record amount of debt, Current Account deficit etc. So logic aside, this choice of normal has clearly points to ulterior motives underlying this otherwise logical argument. The current talk of buying up MBSs again as stimulus when bank balance sheets are looking fragile again – it is too much of a coincidence for me to believe.
My position is the following – it is not that the Fed models are all wrong or their current policy framework hopelessly flawed. Models are prone to abuse. And the current set of Fed economists have abused them. When inflation is above their target and growth looks fine, they do not hike rates fast and do so reluctantly and not enough. For example, core PCE price deflator was above their max 2% for four consecutive years. Bernanke and Greenie raised 25bps a clip in a perfectly telegraphed manner that allowed banks and households to load up on too much risk. In doing so, they ignored their own stated objectives and numerical targets on inflation.The Fed’s reaction function is extremely asymmetric because they ignore their own models.
Taylor himself did the exact same analysis you want to see. His analysis indicates that Fed kept rates too low and that contributed heavily to the bubble. In fact, a cross country analysis of OECD countries by The Economist showed that countries which kept their rates too low as per the Taylor Rule prescription had proportionally more appreciation in house prices in the bubble.
I wrote the above comments in reply to the Romer article urging the Fed to move toward NGDP targeting. I have nothing against it, per se. I just think it is another policy rule like the one they have been implicitly following. I just do not have ANY confidence that this Fed will follow its own models.
This is what I posted at interfluidity place on NGDP nonsense:
“What happens when crude oil is over 200$ per barrel? It’s game over, as simply as that, the beginning of the collapse.
You keep playing with fire and you get burnt eventually, and the more money you ‘pore’ into the system and to the finance establishment (don’t fool yourself, this is where the money will end and GS knows it) the stronger commodities will raise wrecking havoc and the economies.
Can you understand money is not wealth? If you shrink the asset classes you can invest in because the central bank owns all of them and you have left is money and you are forced to ‘invest’… where exactly? At the end in physical goods with inelastic demand. Because this does not increase income, neither productivity nor demand per se, in fact, just like stupid QE policies it will shrink margins and effective expendable income of the families, misery index to the sky folks and will end up being inflationary.
I will start to believe in what gold bugs say and wait for hyperinflation if this stupidity continues from politicians, bankers or academics. Get a clue out of your ivory towers please, people can’t stand it anylonger!”
All this supposing the CB’s have an effective way (inflation channel) to do that (pore money into the system). This is pure stupidity squared, and no ‘expectations’ alone won’t do it. Cut taxes, raise spending on productivity things and don’t issue new damn debt securities which are just a subsidy of free income for taking no risk from currency issuers and we may be onto something. Just printing money to finance Wall St. won’t do nothing productive for the economy and society.
Agree. And I think all monetary theorist would better read twice this article and the conclusion:
http://www.scribd.com/doc/71813966/The-21st-Century-Bear-Market
“Barring disastrous intervention on the part of the Federal Government or strong economic stress such as a terrorist attack or great natural disaster, the current secular bear market should end in the next five years. To do so requires a further drop in stock prices, with the extent of those drops dependent on when the current market ends. The sooner the market ends, the lower prices will have to go.
Paradoxically, therefore, the more the government employs methods such as Quantitative Easing to prop up stock and bond prices, the longer this bear market will last. The more economic uncertainty is injected into the system and the more fiscal policy dominates monetary policy, the lower the ending PE Ratio of this market, the deeper the fall in stock prices, and the longer the bear market will last.
For investors, particularly passive investors, the continuing bear market is bad news. If previous patterns hold, bond prices will begin to fall prior to the end of the bear market in stock prices. This means that investors will face a bear market for both stocks and bonds, a set of adverse investing conditions not seen in two generations. As a result, a passive investor has few opportunities other than commodities. It is likely that commodities will continue to outperform stocks and (once the bond bear market begins) bonds as well. This is, of course, just another way of saying inflation is liable to rise.”
“The sooner the market ends, the lower prices will have to go.”
“the more fiscal policy dominates monetary policy, the lower the ending,,,”
I think you mean something like ‘the longer this drags out. the lower prices will go’ and ‘the more monetary policy attempts to achieve fiscal goals, the lower the bottom will be’.
Leverage, and also comments by the Dans and others below: Well and strongly put points, backed by clear reasoning.
I’ve already spent a great deal of time arguing with the NGDP level targeting enthusiasts on many of the blogs that have devoted massive amounts of valuable bandwidth promoting it. So I don’t have much left to say. But here goes anyway.
I’m inclined to think that the effects of the Fed moving to an NGDP level target would be on the whole completely neutral, or even somewhat bad. But who knows? There could be some positive effect, for the reasons wh10 suggests. Maybe the announcement of the target would have a positive effect on at least a few large, key players who believe in the powers of the Fed, and who allow their expectations to be guided by Fed pronouncements.
Still, I see NGDP as the economics equivalent of a fad diet. The best that can be said for it is that maybe like other fad diets, the mere act of doing something new shakes up a little bit of mild, temporary enthusiasm.
I will note that several of the key proponents of NGDP targeting have told inconsistent and shifty stories about what exactly they expect the target to accomplish, and how they expect it to work. Sometimes its about expectations of growth; sometimes its about expectations of inflation; sometimes its about actual inflation; and sometimes its the old monetarist stuff about quantitative impacts on the “money supply”.
Since interest rates are the only thing the Fed has a proven record of successfully targeting, I have asked the market monetarists several times if the goal is to loosen credit in some way by creating enough inflation to allow the Fed to fight through the zero bound by engineering negative real rates. But some of the more prominent ones have sometimes told me that I am confusing credit with money, and that the idea is to employ quantitative means directly, unrelated to rates and credit. I take this to mean that they still believe that if you plop more money into bank reserve balances, you will thereby create a temporary monetary stimulus because you have boosted the supply of money. They see no difference between an actual, fiscal side helicopter drop that spends money into the real economy, and a paper airplane drop of reserve balances into Fed accounts.
The reason I’m so opposed to this fad is that a lot of very prominent pundits have spent a lot of very valuable time flogging something whose impact is likely to be negligible at best, when they could be throwing the full force of their words and efforts into pressuring governments to do something really significant. The NGDP level targeting fad is another wild goose that tempts cautious and conservative people into chasing a pure central bank fix to what is fundamentally a set of profound problems in the real economy which can only be addressed through aggressive fiscal action. Every ounce of human energy that is wasted on keeping the dying monetarist paradigm alive, and adding yet another epicycle to failed monetarist models of the role of the central bank, is a waste of limited human intellectual resources.
The whole intellectual tendency of the neoliberal era is to spread and promote the superstition that the only legitimate and effective role for government in macroeconomic policy is through the central bank, and to neutralize those who want an activist public presence in the real economy. The neoliberal zombie needs to be killed.
Dan K,
From one Dan to another, let me say that I agree with you 100% (see my comments above in reply to wh10). You have nailed it here, and elsewhere in the blogosphere. I was so heartened to read your comments (at Interfluidity, I believe). Please keep up the good work.
Thanks for the boost, Dan. I need it, because staying on the NGDP case is tiring.
Dan & Dan,
I think this is one of the important parts here. They actually don’t know what money is. They think a checking account is materially different from a savings account. One is a claim on the future and one is a claim usable in the present. So the key to the debate might just be a shifting of preferences. Does it alter economic growth if you force someone into an asset that gives them a claim on money right now? I would argue no because people save based on their savings desires relative to income. Forcing them out of their savings does not make them richer. So it shouldn’t alter their desire to spend.
Thoughts?
Cullen,
Some of the MMers appeal at this point to the monetarist concept of the “desire to hold” money. If I understand them correctly, they believe there is a big difference between money, on the one hand, and non-monetary financial assets (promises of future money), on the other hand. Their view is that when you force people to hold more money than they desire to hold, by swapping out some of their non-monetary financial assets for money, the new money becomes a “hot potato” which they are eager to spend. This, I think, is Nick Rowe’s view.
I find this terribly confusing, but maybe I don’t understand it. First of all, asset purchases by the Fed are voluntary transactions, right? So how can you “force” someone to hold more money than they want to have in the first place? What do you do? Steal their bonds and shove money into their pockets? If they sell their bonds for some money, then clearly they preferred getting the money to having the bond. If they want to spend this money right away, that must be because they already had a desire for more liquidity. It’s not because the money is a “hot potato” that they have a strange desire to get rid of.
Now if there were such a demand for more liquidity, and if that was the source of our stagnation, wouldn’t the initial rounds of QE have had a more profound effect? Why would reserve balances have grown and grown? Are the monetarists just using the loanable funds picture, and saying that we haven’t pushed on the string enough by supplying all the loanable funds that are needed? Are they saying the Fed should just give banks more reserves, rather than swap the reserves for some other asset?
Second, although it may be roughly true that for any particular level of expected monetary income over some upcoming period of relatively short duration, the person or entity getting the income has a preference ranking that defines their ideal level of spending vs. saving during the period, that doesn’t mean that getting more money than you expected runs into some stubborn psychological cap you have on the desire to hold money. More money is always better than less money; acquiring more money always dominates over acquiring less money. If you get more money than expected, you don’t say, “Damn, this is more money than I wanted to hold! I must get rid of this extra money!”
Third, ultimately we’re still just talking about banks’ reserve balances. As MMTers continually argue, with research to back the claims up, banks are not reserve constrained in their lending. It seems wrong to imagine that banks are chomping at the bit to make more loans, if only they could trade some of their bonds for reserve balances! Aggregate reserve balance levels are already extremely high, right? And even if they weren’t, if banks had lots of great loan opportunities, they would be making the loans and then acquiring the needed additional reserves through the Fed funds market or the discount window.
I asked Scott Sumner about this once in a comment, and he said I was confusing credit with money, and the point (if I recall correctly) was not to boost lending but to increase the quantity of money to boost spending in some way. But I’m not sure what kind of “spending” of bank reserves they could be talking about. Sometimes they say the Fed should buy other kinds of assets with the money, but I’m not sure I understand what they mean. (I guess they could mean that the Fed should run its own in-house fiscal program without Congress. But is such a thing legal?) They just seem to be relying on some simple monetarist box diagram where there is one box that says “central bank” and another box that says “the economy”, and the idea is that if the central bank injects money into circulation in the economy, in any way, the velocity of money will increase. But they don’t seem to like to think about actual mechanisms, channels and payment systems at a level of detail that would explain how this is supposed to happen.
The clearest idea, I thought, in the whole NGDP debate was the idea that if you can increase inflation expectations in any way, and keep interest rates low, a lot of people will start to spend their money faster rather than save it as it loses value via inflation. But the new trend in the debate is to deny the meaningfulness or value of the concept of inflation. So that seems to undermine the inflation expectations channel as they key to understanding the debate.
So I remain stumped.
Dan,
I think you’ve got it. This is one of several flaws in their thinking, but I think it might be the most crucial. Financial assets merely represent a claim on money. They help investors achieve some specific target. In this regard, financial assets fill an important role in the aggregate portfolio. After all, if they didn’t they would have never been sold in the first place. I think there’s reasonable evidence showing that bonds are a near cash equivalent. For instance, the MM’s are big on saying that demand for money was too tight during the Q4 08 crisis. But can they explain why bonds surged? If bonds are not money then why did bond prices experience a historic rally in Q4 08? If money demand was so high we should have seen bonds AND stocks fall in price. Instead, banks couldn’t get enough bonds. Do the math on that. It’s sheer common sense.
There’s a certain level of common sense lacking in these discussions that is staggering in my opinion. These NGDPers don’t seem to understand that swapping bonds with cash doesn’t alter someone’s net financial position and therefore doesn’t alter their savings to income desires. This is why buying back bonds doesn’t boost aggregate demand and can, in my opinion, insert some uncertainty that is actually harmful.
Anyhow, I am working on a much more detailed piece on this which I hope to finish soon. Thanks for your thoughts.
I’m looking forward to it, Cullen. I need a rest! I’ll be happy when I can just link to your piece.
i like your argument here.
no question in my mind that expectations change (see QE2 and commodity nuts), so the key is to get the right expectations to change. i think expanded operation twist combined with a promise to keep rates at 0% till at least 2014 will slightly boost loan creation, while the idiot commodity nuts will only be focused on the fact that the fed balance sheet didn’t grow materially.
but still have modest hope for monetary policy
meanwhile the commodity nuts ignore the real story why oil/gold demand increases, which is the easy money machine in china.
What if a presidential candidate proposed an NGDP target for fiscal policy? Would it work? Would voters get behind him / her?
Clearly, it would work. If the federal governments boosts the deficit, the private sector will have more net financial assets and aggregate demand will increase. Of course, distribution matters (as with monetary policy), but is easier to target with fiscal policy, at the expense of having to consciously make difficult decisions, rather than just leaving them to the market.
So a candidate would need the guts to say I’m going to lower taxes for the 99%, or I’m going increase health care benefits for everyone, improve our roads, trains, and air infrastructure, etc. That does sound appealing to me.
1. It’s real and would work if tried.
2. It meets the mood of the country. OWS is just the tip of the iceberg. People are unhappy with the status quo, and with good reason. People are ready for something different…
QM people are not serious. They have been talking about NGDP targeting for 2 years, and as MMT people have shown them, still have no idea how the Fed and how banks work. The transmission mechanisms they hope for are simply not there. They have trouble distinguishing fiscal from monetary policy but somehow “know” that monetary is the way to go.
Now there is this:
http://canucksanonymous.blogspot.com/2011/11/problems-with-ngdp-targeting-in-theory.html
they didn’t bother to check the math to see that even if they did have a mechanism, the result would have high variance in both components. Both RGDP and inflation are highy variable under NGDP targeting. The QMs’ response was trying not to answer the question, as usual.
They look like hacks, trying to attract publicity, but knot bothering to check if what they say makes any sense.
And yet now they have Krugman, Romer and DeLong (I think) on their side.
Yes, Mario. NGDP targeting was rejected a few decades ago as the New Consensus and inflation targeting were building, at least by most within the mainstream–though there were a few big names on the side of NGDP targets (my recollection is this was generally targeting NGDP growth, not level, though I would agree with Sumner here that level is the appropriate target if you’re going to do it). There’s quite a bit of literature on this. Interesting, as Dan points out, how many are jumping on board now, perhaps simply because nothing else has worked (and I think that was Krugman’s rationale, in fact).
Nice discussion…but this is more or less simple. Unlimited QE is an asset swap. The only way that targeting NGDP could come off is if the inflation component of nominal GDP rises while real GDP stagnates — similar to what we have seen. Now I would argue that QE is not inflationary because it does not add money to the economy; the only inflation is transitory commodity inflation created by speculating though changes portfolio preferences *using leverage*. Commodity inflation creates its own destruction by reducing real DPI. The only other possible transmission mechanism is creating yet another transitory and destabilizing increase in private debt — from an already overindebted position.
This all smacks of trying to financially engineer a recovery up against a weak private sector balance sheet and remaining Ponzi financial system.
Credit writedowns, increased federal deficits (infrastructure spending and payroll tax elimination), and winding down insolvent financial institutions would be a better place to start.
The federal government prints money when its spends, it destroys money when it taxes (and removes interest income through QE). The Fed does nothing but change the price of money/credit–not the quantity. If the private sector needs more money, then the federal government must “spend it into existence.” That is the system we have today.
I’m reminded of Reagan’s old saying, “I always throw my golf club in the direction I’m going”. Since everyone thinks seigniorage is inflationary anyway, let’s embrace the crazy. Deficit reduction? That’s small ball, real Americans demand DEBT reduction!
)
What if in conjunction with the Fed targeting NGDP, Tsy adopts a desterilizing policy? It could use jumbo coin seigniorage to buy back T-bonds as soon as they hit the Fed’s account. At the end of the day, when NGDP doesn’t move the needle and we get around to firewalling the engines with fiscal policy, the national debt will be several trillion dollars lower than it is now.
brilliant.
We’ll call it Operation Mind F*ck.
The only viable solution is “jt26 salary targeting”. Get the Fed to pin my salary at Jamie Dimon’s until the unemployment rate drops to 5%. What policy rule could be simpler?
Ok seriously, the best target rule is to expand credit inverse-proportionally based on the # of seminars and late night infomercials on how to make a fortune in real estate with no money down. Or the number of emails and tweets with the phrase “house hunting this weekend”. Really, I think these would be a lot better policy rules.
“Ok seriously, the best target rule is to expand credit inverse-proportionally based on the # of seminars and late night infomercials on how to make a fortune in real estate with no money down”
I’ve often thought of Warren Mosler as the real-life Tom Vu.
http://www.mymoneyblog.com/bikini-girls-waterfalls-90s-real-estate-guru-tom-vu.html
Thanks for that great trip down memory lane (esp. the second vid)! Tom and the bikinis was good for great laughs back in those days; we had a good time joking around with our fake vietnamese accents.