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?