Ben Bernanke was a market monetarist (in 2003)

With apologies to Drudge:

Commenters dwb and Jim Glass sent me an amazing piece written by Bernanke in 2003:

The only aspect of Friedman’s 1970 framework that does not fit entirely with the current conventional wisdom is the monetarists’ use of money growth as the primary indicator or measure of the stance of monetary policy. Clearly, monetary policy works in the first instance by affecting the supply of bank reserves and the monetary base. However, in the financially complex world we live in, money growth rates can be substantially affected by a range of factors unrelated to monetary policy per se, including such things as mortgage refinancing activity (in the short run) and the pace of financial innovation (in the long run). Hence, it would not be safe to conclude (for example) that the recent decline in M2 is indicative of a tight-money policy by the Fed.

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. In addition, the value of specific policy indicators can be affected by the nature of the operating regime employed by the central bank, as shown for example in empirical work of mine with Ilian Mihov.

The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”? I will return to this issue shortly.

After reading that my heart started pounding so hard I thought I was going to have a heart attack.  I could hardly wait to find out what Bernanke thought was the right variable.  Surely it couldn’t be NGDP?  Recall all the times I’ve be ridiculed over the last three years for saying money has been incredibly tight since 2008.  Early on even some market monetarists didn’t like that characterization–preferring something less wacky sounding, like “not stimulative enough for on target NGDP growth.”  Almost no one agreed with my claim that money was as tight as it’s been since 1938.  Turns out it was even tighter than that.

Finally I reached the end of the article, where Bernanke returned to the question of how we tell whether money is easy or tight:

Do contemporary monetary policymakers provide the nominal stability recommended by Friedman? The answer to this question is not entirely straightforward. As I discussed earlier, for reasons of financial innovation and institutional change, the rate of money growth does not seem to be an adequate measure of the stance of monetary policy, and hence a stable monetary background for the economy cannot necessarily be identified with stable money growth. Nor are there other instruments of monetary policy whose behavior can be used unambiguously to judge this issue, as I have already noted. In particular, the fact that the Federal Reserve and other central banks actively manipulate their instrument interest rates is not necessarily inconsistent with their providing a stable monetary background, as that manipulation might be necessary to offset shocks that would otherwise endanger nominal stability.

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.  (Emphasis added with pride.)

Yes !!!   Now all that remains is to ascertain the rate of NGDP growth since the second quarter of 2008:  6.1%.

That is not a 6.1% annual growth rate, that’s the total growth in NGDP since 2008:2.  And when was the last time NGDP grew that slowly over a 3 1/2 half year period?  Hint: Herbert Hoover was President at the time.

And then the concluding paragraph:

In summary, one can hardly overstate the influence of Friedman’s monetary framework on contemporary monetary theory and practice. He identified the key empirical facts and he provided us with broad policy recommendations, notably the emphasis on nominal stability, that have served us well. For these contributions, both policymakers and the public owe Milton Friedman an enormous debt.  (Emphasis added)

That’s why Ben Bernanke was my first choice for Fed chairman.  He gets it.  He understands that the job of the monetary policymaker is to focus like a laser on nominal stability.

PS.  Some killjoy may point out that Bernanke mentioned both NGDP and inflation as indicators of the stance of monetary policy.  OK, here’s the total inflation between July 2008 and January 2012:  3.8%

That’s not 3.8% CPI inflation at an annual rate over the past 3 and 1/2 years (which would still be lower that the rate Volcker produced in the mid-1980s) it’s a total increase of the CPI of 3.8% over 3 and 1/2 years, barely 1% per annum!  The Fed’s goal is 2%.

So can everyone now agree that Fed policy has been incredibly tight since 2008?

Interestingly, Bernanke is no longer a market monetarist, at least in public.  He now likes to emphasize at press conferences how extraordinarily accommodative Fed policy has been since 2008.  But that’s not what he really believes.  That’s what a man in his position is forced to say.  For what he really believes reread his powerful testimonial to Milton Friedman from 2008 2003, and especially this part:

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

That’s “only by looking” folks.  That means there is no other way. Money supply won’t work.  Interest rates won’t work.  Only NGDP or inflation can tell you the stance of monetary policy.  Every conservative who’s been complaining that Bernanke’s running an inflationary monetary regime needs to read this post, and verify the accuracy of my NGDP and CPI data.  And then admit they made a tragic mistake.  Now let’s see who’s got the guts to step up to the plate.

PS.  How did this amazing Bernanke piece slip through the cracks for 3 years?

Update:  The conventional wisdom, courtesy of Drudge:


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95 Responses to “Ben Bernanke was a market monetarist (in 2003)”

  1. Gravatar of Leigh Caldwell Leigh Caldwell
    28. February 2012 at 19:17

    If shown this piece today, I predict Bernanke’s response will be:

    “Well that’s all true in normal times, like we were in when I wrote it, but not in a liquidity trap/zero lower bound/depression. Then, monetary policy stops working and fiscal policy is needed.”

    I don’t know why he says things like this, but he seems to. It’s even logically defensible, on a shallow level, if you don’t think too hard. There seems to be a powerful psychological tendency to retreat into “monetary policy works, except when it doesn’t”, even among the few people with the power to properly test that proposition.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. February 2012 at 19:26

    “After reading that my heart started pounding so hard I thought I was going to have a heart attack.”

    Your unusual Scott. The only other person who I know who get’s so excited by monetary policy is myself.

  3. Gravatar of ssumner ssumner
    28. February 2012 at 19:44

    Leigh, Actually it’s very clear that Bernanke was thinking of Japan when he said interest rates were unreliable. About the same time he wrote lots of articles on Japan, and he said over and over that the near-zero rates don’t mean money is easy in Japan. He said they could and should do more to get faster NGDP growth.

    I can’t say he wouldn’t use the excuse that you say, but I am 100% sure he didn’t believe that in 2003, and 99% sure he doesn’t believe it today.

    BTW, I already knew he had done a complete flip flop on Japan. What excites me about this is his claim that NGDP growth and inflation are the “only” way to ascertain the stance of monetary policy. I think it’s fair to say I’m in a tiny minority of people who claim money has been really tight for 3 and 1/2 years. Now I can welcome Bernanke to my club.

    Mark, You and me both. I sometimes think this blog will drive me insane.

  4. Gravatar of dtoh dtoh
    28. February 2012 at 19:46

    Scott,
    This seems to me like non-news. It’s been obvious for a long time that the Fed has not had an expansionary policy and it’s been obvious for a long time that Bernanke knows it.

    The question is WHY?

  5. Gravatar of Ram Ram
    28. February 2012 at 19:47

    In a way, it’s not surprising that contemporary Friedman fans see NGDP as the indicator of choice for interpreting monetary policy. If MV = PY, and V is stable, then stable M implies stable NGDP (= PY), and vice versa. If V is unstable under M targeting, then you need to do MV targeting, i.e., NGDP targeting, to keep the spirit of Friedman alive. Bernanke thought Friedman had it 99% right, so it figures that he paid close attention to NGDP. I wonder how much faster NGDP targeting would’ve entered the public conversation had Friedman been alive when the crisis hit.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. February 2012 at 19:51

    “Mark, You and me both. I sometimes think this blog will drive me insane.”

    Scott,
    I am insane. That’s my secret power. I have no fear.

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. February 2012 at 20:11

    Now mind you, if you report the fact I said as much the authorities will be on my doorstep tomorrow morning. But that tells you more about the sorry state of our country (or you) than it does about me.

  8. Gravatar of Benjamin Cole Benjamin Cole
    28. February 2012 at 20:47

    Go ahead and ridicule me, I don;t care.

    Scott Sumner is the Best Economist and economics blogger.

    And who kidnapped Ben Bernanke and installed a look-a-like wimp in his place?

  9. Gravatar of Morgan Warstler Morgan Warstler
    28. February 2012 at 21:01

    And what was 2003-2004 NGDP?

    How much over 4% was it?

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. February 2012 at 21:02

    Ben Cole,
    I hope you don’t think I was ridiculing you. I totally respect all of the work you have been doing.

  11. Gravatar of Morgan Warstler Morgan Warstler
    28. February 2012 at 21:05

    Benji, I love you too.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. February 2012 at 21:15

    Morgan,
    I’d give you a big wet smooch too if you were in the room, But alas.

  13. Gravatar of Shane Shane
    28. February 2012 at 21:22

    A bit OT, but “market monetarist” seems to me a decisive step back from “quasi-monetarist.” At least the latter is descriptive in that it suggests only a partial focus on the money supply. An emphasis on “markets” doesn’t distinguish those who primarily look at NGDP from other monetarists.

    I can’t really come up with anything better–although I think MVers or MVism might work for tongue-in-cheek purposes–so I say go for broke–just call yourself “monetarists.” Whoever is currently keeping the spirit of an intellectual tradition alive deserves, in my book, the title to that tradition. Isn’t all serious monetarism these days really about the velocity-adjusted supply?

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. February 2012 at 21:30

    Shane has a point,
    Although not necessarily the point he wants to make.

    I want MONETARIST!

    Is that insane? I know I am professed to be insane. But should that matter?

  15. Gravatar of Bonnie Bonnie
    28. February 2012 at 21:32

    @dtoh

    I can’t be positive, but I think this stuff by Marvin Goodfriend might have something to do with “Why.”

    Here’s a paper on New Neoclassical Synthesis (Goodfriend 2004)
    http://www.richmondfed.org/publications/research/economic_quarterly/2004/summer/pdf/goodfriend.pdf

    And this one: Interest on Reserves and Monetary Policy (Goodfriend – 2005)
    http://www.newyorkfed.org/research/epr/02v08n1/0205good.pdf

  16. Gravatar of Major_Freedom Major_Freedom
    28. February 2012 at 22:28

    NGDP cannot be a predictor. By the time NGDP is increasing, those who track aggregate money supply like me already know where NGDP would be trending.

    Inflation primarily goes into the asset markets and durable consumer goods markets (like housing, cars, and other consumer goods typically financed by loans) first. At this point, NGDP would be stable, barely rising, or even falling (as consumer prices in general fall by more). Once the money filters down into the consumer goods sector, which I am predicting is on its way and is going to be one of the largest, if not the largest, price inflations in the history of the US, Bernanke will then be compelled to slow/stop the printing presses. Once he does THAT, all the malinvestments that have not yet been liquidated from pre-2008, as well as all the new malinvestments that have been created since 2008, particularly in the asset/producer sector, is going to collapse and there will be yet another crash, deeper than even the 2008 crash. All the Keynesians, and all the market monetarists, are going to again be intellectually responsible. The next collapse is going to be the mother of all collapses.

    I hope you’ve built a nice solid bunker for yourself.

  17. Gravatar of Desolation Jones Desolation Jones
    29. February 2012 at 02:01

    Major_Freedom,

    “NGDP cannot be a predictor. By the time NGDP is increasing, those who track aggregate money supply like me already know where NGDP would be trending.”

    If you think the money supply is leading indicator that can predict NGDP, what’s your ballbark estimate of what NGDP will be in the first and second quarter of this year? If you respond with something like “I don’t make exact predictions”, then when do you think NGDP will start trending dramatically higher than 5%?

  18. Gravatar of Desolation Jones Desolation Jones
    29. February 2012 at 02:03

    Major_Freedom, are you predicting double digit yearly NGDP growth?

  19. Gravatar of Brito Brito
    29. February 2012 at 03:17

    It’s not NGDP or inflation. It’s NGDP AND inflation, low NGDP on its own cannot tell you if money is tight, because it doesn’t tell if you if it’s because of low M or low V.

  20. Gravatar of Brito Brito
    29. February 2012 at 03:22

    Major_Freedom

    “Once the money filters down into the consumer goods sector”

    What money? You think the banks are going to suddenly start lending from their excess reserves, despite not doing this at all yet, at an unprecedented rate so as to cause hyperinflation? Not plausible in the slightest.

    “Bernanke will then be compelled to slow/stop the printing presses. Once he does THAT, all the malinvestments that have not yet been liquidated from pre-2008″

    Probably not all that many.

    “as well as all the new malinvestments that have been created since 2008″

    Such as?

    “is going to collapse ”

    Why? Why would raising interest rates on T-bills suddenly cause all other investments to become worthless? Your arguments are not convincing.

  21. Gravatar of Browsing Catharsis – 02.29.12 « Increasing Marginal Utility Browsing Catharsis – 02.29.12 « Increasing Marginal Utility
    29. February 2012 at 05:07

    [...] Ben Bernanke was a market monetarist in 2003. [...]

  22. Gravatar of Bill Woolsey Bill Woolsey
    29. February 2012 at 05:10

    Morgan:

    http://monetaryfreedom-billwoolsey.blogspot.com/search?q=reagan+volcker

  23. Gravatar of bill woolsey bill woolsey
    29. February 2012 at 05:16

    Major Freedom:

    Your biggest mistake is to assume that all monetary policy involves permanent changes in the the growth rate/path of the quantity of money.

    Much monetarist work was along those lines too. More rapid growth in money, we start heading to a new equilibrium. Then there is a change in money growth, we start heading to the new equilibrium.

    However, if firms know that money growth is subject to change based upon some other target, then what would happen if the growth rate were permanent tells us next to nothing about what will happen.

    For example, with inflation targeting, like we have now, rapid increases in money growth are not moving the economy to a new inflation rate. People know that excessive growth in money will be reversed.

    For example, the huge run up in base money over the last 4 years would result in rapid inflation at some point. But because people correctly expect that it will mostly be reversed, then expect low inflation. And we don’t really start heading step by step into the adjustment process that would occur if inflation adjusted to given changes in base money.

  24. Gravatar of bill woolsey bill woolsey
    29. February 2012 at 05:24

    It all looked good– but it was growth rate of NGDP, not growth path.

    I recently read (or saw on TV) some political scientist who has a rule about how elections will turn out. It is a metric of aggregate income growth and war casulties.

    Anyway–growth. Well, that works great if you are very close to equilibrium.

    Maybe it still works if you are far from equilibrium. Things may be bad, but they are getting better.

    But I think the focus on growth rates is an artifact of the use of mathematics in macro. (Log differces.) It works for modest changes. But when you get pushed far away, like now, it breaks down.

    All we have for levels is the “output gap,” which, of course, is used because it is commensorate with the growth rates. 2% output gap, 1% inflation, 1% real growth. Interest rate of 2%.

    Also, maybe people in financial markets are growth rate oriented–how fast does the debt grow–interest rate.

    But today, levels is the way to think about things.

    The level of the quantity of money is too low. The level of nominal GDP is too low. The price level is too low. (Well, maybe.)

    Growth rates are so bad.

  25. Gravatar of John John
    29. February 2012 at 05:41

    I trust that your NGDP and CPI numbers are accurate although I wonder why I heard reports that core was around 2% and headline was around 4%. What I can tell you from my job is that many of the clients I see are very afraid of inflation in the future.

    I see slow nominal and real growth as a product of a broken and over regulated banking system. Bernanke can pump all the money he wants into there and it seems like its just gonna sit there or buy government debt. On the other hand, if private sector lending picks up, Bernanke could face a tough time sucking all the liquidity out of the system. If the price of the T-bonds and other assets the Fed holds falls while banks are reducing their excess reserves, he may not have the assets necessary to bring down inflation through open market operations.

  26. Gravatar of ssumner ssumner
    29. February 2012 at 05:54

    dtoh, It may be non-news to readers of this blog, but outside of TheMoneyIllusion.com 99.99% of pundits, economists, reporters, policymakers think monetary policy has been “easy” since 2008. And that includes people who think it should have been even easier (like say Brad DeLong.) The fact that Bernanke agrees with me seems like a very big deal to me.

    Ram, Not surprising to you, but see my reply to dtoh.

    Mark, Too late, I just got off the phone with “the authorities.”

    Insanity basically means looking at the world in a different way from normal people, doesn’t it?

    Thanks Ben.

    Morgan, Still obsessing over the 4%? You are missing the big picture here. NGDP growth has average about 1.7% since mid-2008.

    Shane, I don’t agree. Traditional monetarists look at M2, market monetarists look at market indicators of expected NGDP growth. That’s a big difference.

    Mark, Meltzer and Swhwartz are both in their 90s. Eventually we’ll be the monetarists. :)

    And then some younger economist will make me obsolete.

    Major Freedom, You are right that NGDP isn’t a predictor–things like TIPS spreads are much better indicators.

    Brito, Yes, but as I showed both NGDP and inflation have been way too low. So Bernanke admits to operating a extremely tight monetary policy during a severe debt crisis.

    Bill, I agree that levels are way better. Regarding elections, Obama is hugely benefiting from the fact that the initial decline mostly occurred under Bush.

  27. Gravatar of ssumner ssumner
    29. February 2012 at 05:58

    John, No, the slow NGDP growth is definitely monetary policy. The banking system doesn’t play an important role in NGDP determination. It’s mostly driven by expectations of future currency growth.

    My data is from the St Louis Fred and represents headline inflation rates. Feel free to double-check.

  28. Gravatar of Becky Hargrove Becky Hargrove
    29. February 2012 at 06:10

    In a place I imagined thirty years ago (Enigami) there is no K-12. Instead, knowledge entrepreneurs compete with one another in communities to teach all who want to learn and/or work with what is taught. The Bernanke paper cited here would be a prime advantage for anyone who wanted to gain the most ‘students’ for their (own unique) economic perspective.

  29. Gravatar of Becky Hargrove Becky Hargrove
    29. February 2012 at 06:16

    Basically that last post was to indicate that I’ve been crazy longer than most of you. So there.

  30. Gravatar of Lars Christensen Lars Christensen
    29. February 2012 at 07:26

    Amazing!

    If he has talked about market pricing as the best indicator of NGDP expectations then it would have been pretty perfect…

    By the way he is talking about Free to Choose. Some very close to my heart: http://marketmonetarist.com/2012/02/28/a-personal-tribute-to-milton-friedman/

  31. Gravatar of Neal Neal
    29. February 2012 at 07:35

    “That’s what a man in his position is forced to say.”

    So much for the independence of the central bank.

  32. Gravatar of JimP JimP
    29. February 2012 at 07:37

    Personally I do not think that people like Kudlow or Cochrane would change what they say even if they read the Bernanke piece. I think that for a certain kind of conservative inflicting pain, or the thought of doing so, is a source of pleasure.

    There are just not enough poor people and not enough rich people. And the poor are not poor enough and the rich are not rich enough.

    This is the mantra of the U of C and of the WSJ. It just never stops. Its incentives. That’s all that counts for them. The present crisis gives them a chance to drive nominal wages down and they really love the thought of doing so. I believe Alan Meltzer is just exactly like that. As is Dick Armey.

    I am not saying that all conservatives are like this. But some have clearly moved the goal posts so they could keep on bashing the Democrats no matter what. I think it is entirely clear that this is true of John Taylor.

    They would no more read this post and change what they are saying than they would fly to the moon.

  33. Gravatar of JimP JimP
    29. February 2012 at 07:46

    I know that Scott thinks this is an intellectual struggle – that economists must become convinced of the truth of NGDP targeting. But I think it is much more of a political struggle. The people who currently own the currency love deflation. They just love it. And they will say whatever they need to say to get more of it.

    Of course a political contest is a contest of ideas. And it certainly is very unfortunate that the most prominent Democratic economist is a fan of more and more spending. That does not make the Democrats much of an alternative.

    And it is of course very strange to realize that NGDP targeting would very strongly benefit those who do currently own the currency. It would benefit them – but they love deflation even more. (At least many do)

  34. Gravatar of Gabe Gabe
    29. February 2012 at 08:15

    “I know that Scott thinks this is an intellectual struggle – that economists must become convinced of the truth of NGDP targeting. But I think it is much more of a political struggle.”

    Jimp is right about this IMHO. Scott continuously attributes only the highest morals to the money pritners and only the most forgiving naive understanding of why they do what they do.

    The fed was created so that booms and busts can be manipulated to the benefit of those with the magical money printing power and any propaganda, excuse, intellectual claptrap made in defense of money printing should be looked upon with the highest cynicism.

    Any problems you have identified in human nature are only magnified when you give obscne government enforced monopoly power to a small group of humans. Read the Lord of the Rings and replace “money printing power” with “the ring to rule them all” and you will have a better understanding of the world economy.

  35. Gravatar of Greg Ransom Greg Ransom
    29. February 2012 at 08:46

    This is the point I made the other day quoting Stephen Williamson, Hayek, and 4 Credit Suisse economists:

    “Clearly, monetary policy works in the first instance by affecting the supply of bank reserves and the monetary base. However, in the financially complex world we live in, money growth rates can be substantially affected by a range of factors unrelated to monetary policy per se, including such things as mortgage refinancing activity (in the short run) and the pace of financial innovation (in the long run). Hence, it would not be safe to conclude (for example) that the recent decline in M2 is indicative of a tight-money policy by the Fed.”

  36. Gravatar of Benjamin Cole Benjamin Cole
    29. February 2012 at 09:09

    Morgan and Mark-

    Thanks, and I enjoy your commentary too, even when I disagree.

    Jim P–Right. It is completely mysterious to me how a John Taylor, who gushed over a Bank of Japan QE program in 2006, now says QE is bad for the USA. Or Don Boudreaux (George Mason), who in 2006 authored many pieces saying the CPI overstated inflation, but now pompously pettifogs about the threats of inflation (when, by his reasoning we must nearly be in deflation).

    Partisan sentiments trumps economics.

    Add on, we face Krugmanite spenders on the left, and reflexive tight-money and gold nuts on the right.

    Like I said, if you can open up a bar somewhere that appeals to Chinese tourists, you might consider that. The USA may suffocate under tight money, ala Japan.

  37. Gravatar of John Thacker John Thacker
    29. February 2012 at 09:18

    JimP and Greg– I can’t really agree with your arguments, because, if you believe what Scott is actually saying, then failing to target NGDP is hurting the rich as well. The rich lose more than anyone else (in pure dollar terms) when economic growth is restricted. Look at the latest inequality numbers– the recession definitely made the income numbers more equal. Post 2008 the percentage of income to the 1% dropped heavily.

    If the people you’re talking about just wanted the rich to get richer, and the rich to get richer faster than the poor, then they’d favor NGDP targeting and economic growth. Inequality has grown when we’ve had economic growth, whether in the 90s or mid 2000s, and shrunk during recessions.

    Partisan sentiments play a role, as does among hoi polloi just a fear of inflation.

  38. Gravatar of StatsGuy StatsGuy
    29. February 2012 at 09:37

    ssumner:

    “But that’s not what he really believes. That’s what a man in his position is forced to say.”

    If that is true, why do we care what he really believes?

    JimP:

    “But I think it is much more of a political struggle. The people who currently own the currency love deflation.”

    Bingo.

  39. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 09:40

    Desolation Jones:

    If you think the money supply is leading indicator that can predict NGDP, what’s your ballbark estimate of what NGDP will be in the first and second quarter of this year? If you respond with something like “I don’t make exact predictions”, then when do you think NGDP will start trending dramatically higher than 5%?

    It is impossible to know some future event that is contingent upon human choice that itself transcends constant causality. So predictions that are time dependent are out of the question. But I can say that because M2 has been increasing at a 10% annualized pace over the last 3 quarters, I predict NGDP is going to go up as long as present monetary trends continue.

    Major_Freedom, are you predicting double digit yearly NGDP growth?

    No.

    Brito:

    “Once the money filters down into the consumer goods sector”

    What money? You think the banks are going to suddenly start lending from their excess reserves, despite not doing this at all yet, at an unprecedented rate so as to cause hyperinflation? Not plausible in the slightest.

    No, I mean the money that has already being loaned out, and spent by the government through debt monetization, which has pyramided into money balances, such that M2 is increasing at 10%. This money is “circulating”, and it is going to wallop consumer prices.

    “Bernanke will then be compelled to slow/stop the printing presses. Once he does THAT, all the malinvestments that have not yet been liquidated from pre-2008″

    Probably not all that many.

    There is a huge quantity, the overwhelming majority. US consumption has for some time, until recently been dependent on constant foreign lending, and the Fed has monetized a LOT of debt and securities. The stock market is now dependent on the Fed. The US debt market is much more dependent on the Fed. It’s more than you realize. You say probably because of hope, not analysis.

    “as well as all the new malinvestments that have been created since 2008″

    Such as?

    I have no idea of what specific examples, because the Fed distorts the economy that makes actual observation of real preferences through marginal pricing impossible. They will be revealed once the Fed reduces its printing to combat rising consumer price inflation.

    “is going to collapse ”

    Why? Why would raising interest rates on T-bills suddenly cause all other investments to become worthless? Your arguments are not convincing.

    I didn’t say the rise in t-bill rates are the causal factor. That would be another effect.

  40. Gravatar of dtoh dtoh
    29. February 2012 at 09:54

    Scott,
    You say, “The banking system doesn’t play an important role in NGDP determination. It’s mostly driven by expectations of future currency growth.”

    I don’t buy this at all. Expectations will only work if there is a credible mechanism by which monetary policy works in the absence of expectations, and the mechanisms are almost entirely through the banks as intermediaries. If the market expects that an increase in base will be sanitized by banks simply holding more reserves, then Fed action (i.e. OMO, asset purchases) to increase the base will have no impact on NGDP.

  41. Gravatar of Desolation Jones Desolation Jones
    29. February 2012 at 09:55

    Major_Freedom, how can you say predict “one of the largest, if not the largest, price inflations in the history of the US” without double digit nominal GDP growth? Double digit nominal GDP is a necessary condition for double digit price inflation.

  42. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 09:55

    Bill Woolsey:

    Your biggest mistake is to assume that all monetary policy involves permanent changes in the the growth rate/path of the quantity of money.

    I didn’t assume that at all. I am going strictly by current and recent past trends.

    Much monetarist work was along those lines too. More rapid growth in money, we start heading to a new equilibrium. Then there is a change in money growth, we start heading to the new equilibrium.

    Yes, this is how I look at things too, although I don’t use the term equilibrium, because the market economy never reaches it, no matter how “stable” the monetary system is. Equilibrium for me is a mental tool only, used only to understand what the market is not, so that I can narrow it down on what it is.

    However, if firms know that money growth is subject to change based upon some other target, then what would happen if the growth rate were permanent tells us next to nothing about what will happen.

    You are ignoring the presence of time lags between policy and “aggregate” analysis. The Fed is always looking through their rear view mirror. They had no clue the market was going to crash, even as late as early September 2008, because they ignored the fact that their pace of M2 inflation slowed down to 1.5% annualized after being in double digits earlier in the year. They were looking at prices and interest rates and employment, and ignoring what was fuelling and then collapsing the boom.

    For example, with inflation targeting, like we have now, rapid increases in money growth are not moving the economy to a new inflation rate. People know that excessive growth in money will be reversed.

    Which people? Certainly not everyone. Only those who are actually thinking about it and looking at the Fed’s balance sheet and monetary aggregates, who even consider these matters, know these things. Most people have no clue how the monetary system even works, let alone plan their economic lives around it.

    For example, the huge run up in base money over the last 4 years would result in rapid inflation at some point.

    It’s already happening. Are you yet another person who is as clueless as Krugman?

    But because people correctly expect that it will mostly be reversed, then expect low inflation.

    Again, which people are you talking about? You’re being far too vague. Many people, many of whom call themselves Keynesians, and market monetarists, were completely oblivious to the fact that the rate of aggregate money growth slowed to a crawl June-September 2008.

    They haven’t learned their lesson. Krugman even has a new book coming out in a few months, called “End the Depression Now!”. He is utterly clueless about the price inflation that has been responsible for the recent rise in employment, stocks, and producer prices, and is going to continue to accelerate consumer prices. He is literally releasing a book saying we’re in a depression just while the economy is within an accelerating “recovery.”

    And we don’t really start heading step by step into the adjustment process that would occur if inflation adjusted to given changes in base money.

    We are right now as you say that.

  43. Gravatar of John Thacker John Thacker
    29. February 2012 at 10:02

    “But I think it is much more of a political struggle. The people who currently own the currency love deflation.”

    Bingo.

    Eh, it would be closer to describing what actually happens with such tight money by saying “the people who currently own the currency hate nominal income inequality, so they’re willing to have a recession if it will reduce income inequality.”

    But I wouldn’t believe that either.

  44. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 10:03

    Desolation Jones:

    Major_Freedom, how can you say predict “one of the largest, if not the largest, price inflations in the history of the US” without double digit nominal GDP growth? Double digit nominal GDP is a necessary condition for double digit price inflation.

    Wait, I never said that this will take place “without” NGDP growth. I’ve always said that NGDP growth is an effect of a prior cause that also affects prices. Prices and NGDP will grow together as effects of the same prior cause. Prices won’t cause NGDP, and NGDP won’t cause prices.

    NGDP does not exist in a vacuum, on its own, apart from transactions. NGDP is the sum total of all transactions. And transactions, all transactions, presuppose prices. NGDP is just the sum total of all the prices for all transactions. Prices are one attribute of the elements (transactions) of NGDP. If NGDP in going up, then that means the sum total of money in all transactions is going up, and depending on real productivity, it means prices will rise, be stable, or fall.

    I am of course assuming that M2 rising at an 10% annualized rate, is far outstripping and is going to continue to far outstrip the ability of producers to produce as much new wealth so as to prevent prices from rising.

  45. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 10:06

    John Thacker:

    Eh, it would be closer to describing what actually happens with such tight money by saying “the people who currently own the currency hate nominal income inequality, so they’re willing to have a recession if it will reduce income inequality.

    Yeah, I too would hate it if I had 2 yachts and a private jet, while the wealthiest people had 50 yachts and 25 private jets. It would be so inhumane and intolerable and evil. Oh no, oh no, please stop.

  46. Gravatar of John Thacker John Thacker
    29. February 2012 at 10:30

    Meanwhile, today’s Bernanke continued his comments saying that monetary policy won’t do more, but we need more fiscal stimulus.

    If he were just doing nothing on monetary policy, then perhaps the “Bernanke is a Republican stooge” argument that I’ve also seen would make sense. But instead he’s calling for fiscal stimulus.

  47. Gravatar of Mike Mike
    29. February 2012 at 10:38

    According to FRED, from 2008:2 to 2012:4 nominal GDP grew by 6.3%, while real GDP grew by only 0.8%, and so I think it is disingenuous to say that inflation was only 3.8% during the period – nearly all of the growth in NGDP was due to inflation.

  48. Gravatar of Benjamin Cole Benjamin Cole
    29. February 2012 at 10:39

    Stocks Slide as Bernanke Speech Disappoints
    CNBC.com – ‎28 minutes ago‎

    Stocks remained under pressure Wednesday as Fed Chairman Ben Bernanke dashed hopes for further monetary stimulus in his testimony to Congress.

    Yes, we are 13 percent under trend GDP and inflation at historic lows. But no monetary stimulus needed. Like the Bank of Japan.

  49. Gravatar of Mike Mike
    29. February 2012 at 10:54

    Sorry, meant to say 2011:4, not 2012:4. The time machine is still a work in progress.

  50. Gravatar of Morgan Warstler Morgan Warstler
    29. February 2012 at 11:06

    Bill,

    GS wants to price in the BS from 2005-2007.

    If you run 4.5% from 2000, over even 4%, that’s what we ought to accept.

    I think I’ve come up with a new way of making my argument.

    2% has been the inflation target of the Fed since 2000, they have just been missing it:

    http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

    When you MM figure out your preferred NGDP Scott & GS agree inflation should be accepted and codified at 2%.

    In fact, everyone has known the Fed BELIEVES the best inflation rate is 2% (woolsey wishes it was 0%), and looking back historically, it is just that no one EXPECTED the Fed to raise rates after the Internet crash in 2000.

    But deviations from the BELIEF, do not mean the belief is gone.

    If you are the Fed, and believed inflation should be 2% (or less) for a long time (opportunistic disinflation), then you would look at 2004-2008 and feel GUILTY.

    You’d think the reason you got into this mess is because you let inflation run over 2%.

    The problem is Scott doesn’t sell NGDP as:

    1. a way of locking in the opportunistic disinflation
    2. ensuring 2004-2008 doesn’t happen again (assuaging the guilt)

    It is funny Scott has the cojones to explain why BOJ could have been saved from deflation by NGDP, but he doesn’t have the same cojones to say it could have saved the Fed from inflation.

    And that’s not internally consistent.

  51. Gravatar of Jeff Jeff
    29. February 2012 at 11:14

    @dtoh

    Exchange rates?

  52. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 11:21

    Mike:

    According to FRED, from 2008:2 to 2012:4 nominal GDP grew by 6.3%, while real GDP grew by only 0.8%, and so I think it is disingenuous to say that inflation was only 3.8% during the period – nearly all of the growth in NGDP was due to inflation.

    Mike gets it.

    I bet Sumner will say that the 0.8% real growth was caused by the 6.8% NGDP growth, and would have been higher had NGDP growth been higher, totally oblivious to the fact that real growth can only be had on a foundation of saving and investment, not “spending.”

    Nominal spending can rise by virtue of inflation financed consumption, and Sumner will incorrectly believe this is the source of growth, when in reality it will reduce productivity because the ratio of consumption to production will have increased. With enough inflation financed consumption, say if NGDP growth of 5% is due ENTIRELY to inflation financed consumption, it could even succeed in shrinking the real economy, if productivity is already so low and fragile.

    I don’t even trust that 0.8% real growth figure.

  53. Gravatar of Morgan Warstler Morgan Warstler
    29. February 2012 at 11:24

    I think it is helpful to read this:

    http://www.cnbc.com/id/46571276

    And continue the thought experiment – if you are Ben AND:

    1. you want Obama to win
    2. you only get one more bite at the apple

    WHEN and WHAT do you do?

  54. Gravatar of ssumner ssumner
    29. February 2012 at 12:13

    Becky, Yes, very much worth reading.

    Lars, Thanks for the link.

    Neal, That’s actually not what I meant, but I see why you said that. I think the Fed is somewhat independent, and could have done more. I meant he was forced to back up his colleagues. Once the Fed decides on something the Chairman must defend it.

    JimP, I have to think that truth will win out. Many of those people have been predicting high inflation, at some point they’ll have to throw in the towel.

    Gabe, I certainly agree their power should be constrained by an explicit rule.

    Greg, Yes, M2 can be very misleading.

    John Thacker, You are exactly right.

    Statsguy, Rich people don’t hold much currency, drug dealers and foreigner currency hoarders hold most US currency. I think Thacker is right.

    It’s a huge deal if Bernanke is saying monetary policy since 2008 has been the tightest since Herbert Hoover was president–I can’t imagine why others don’t see that as big news.

    dtoh, The mechanism is the hot potato effect, it’s what has driven US NGDP growth for 200 years (up to 2008.) It’s a very well understood and uncontroversial mechanism. If you double the currency stock, and people don’t want to hold more currency, then prices and NGDP double.

    Mike, Interestingly, the figures were updated right after I posted this last night. So my 6.1% figure is now slightly off.

    Most conservatives who complain about high inflation hurting consumers use the headline CPI. So that’s what I used. There’s been very little CPI inflation. Now if you want to argue consumers are suffering because of GDP deflator inflation (still well under 2% p.a.), go ahead, but I don’t see anyone looking at that variable. The Fed doesn’t care about the deflator.

    So whether you use NGDP or the CPI, money’s been ultra-tight since mid-2008

    John Thacker, You said;

    “If he were just doing nothing on monetary policy, then perhaps the “Bernanke is a Republican stooge” argument that I’ve also seen would make sense. But instead he’s calling for fiscal stimulus.”

    That’s just sad–the whole economic profession should be up in arms, but most seem as clueless as the Fed.

    Major Freeman, You said;

    I bet Sumner will say that the 0.8% real growth was caused by the 6.8% NGDP growth,”

    I’d guess virtually every macro textbook in America would say the same thing, and yet you act like I have some sort of unusual or novel view.

  55. Gravatar of Mike Mike
    29. February 2012 at 12:54

    Desolation Jones:

    “Double digit nominal GDP is a necessary condition for double digit price inflation.”

    Are you sure about that? Essentially, you are saying that double digit price inflation implies double digit NGDP growth. This might be true if real GDP is assumed to be constant, but we all know that it is not constant. What if, for example, someday the world’s supply of oil runs dry, and we still have not made any measurable progress on alternative fuel sources. Production will then grind to a halt, and we will be left trying to support a post-industrial population with a pre-industrial productive capacity. The limited supply of goods, compared to the unlimited needs of the population, would push prices sky-high. Thus, price inflation far exceeding double digits, but not much in the way of NGDP growth, and a complete collapse of RGDP.

    Hypothetical, of course.

  56. Gravatar of Mike Mike
    29. February 2012 at 13:07

    Agreed, Scott. Both the CPI and GDP deflator have their strengths and weaknesses – I personally prefer the deflator – but both fell short of the 2% target. And I, too, found it interesting that the FRED data was updated this morning, and had assumed that this update accounted for our 20bps discrepancy. Funny timing, to say the least.

  57. Gravatar of ssumner ssumner
    29. February 2012 at 14:35

    Morgan, Is the right answer QE3?

    Mike, For a second I wondered if my math was bad.

    BTW, Maybe this is a stretch, but when someone who clearly favors the dual mandate mentions both NGDP and inflation, I have to think he actually believes that NGDP is the best indicator. Inflation is a much more commonly mentioned variable, and if he thought that was the indicator he would have left it at that. But Bernanke realizes that during supply shocks it’s not a good monetary indicator.

  58. Gravatar of PrometheeFeu PrometheeFeu
    29. February 2012 at 15:03

    @ssumner:
    You wrote:
    “John, No, the slow NGDP growth is definitely monetary policy. The banking system doesn’t play an important role in NGDP determination. It’s mostly driven by expectations of future currency growth.”

    Can you clarify what you mean by that? Is this another “the central bank always moves last” argument? Because as written, that doesn’t sound right at all. NGDP=MV and well, the banking sector has a lot of influence over both M and V. If they hold all the cash the Fed prints as reserves, M won’t move.

  59. Gravatar of Dtoh Dtoh
    29. February 2012 at 18:30

    Scott,
    “The mechanism is the hot potato effect, it’s what has driven US NGDP growth for 200 years (up to 2008.) It’s a very well understood and uncontroversial mechanism. If you double the currency stock, and people don’t want to hold more currency, then prices and NGDP double”

    Yes, but a) it’s not the only mechanism and b) the hot potato effect doesn’t happen in a vacuum. It requires the banks to create or purchase assets (including new loans). It’s not like the Fed is buying TBills from the public and paying for them in cash. Unless the banks replace the assets bought by the Fed in OMO nothing happens ….all you get is an expansion of the base with no impact on NGDP.

  60. Gravatar of Morgan Warstler Morgan Warstler
    29. February 2012 at 18:46

    Scott, it isn’t hard to give a real answer!

    If you could only do one thing before now and Nov 2012:

    when and what?

    QE3, ok….

    WHEN, what date would you do it to get the best bump for Obama?

  61. Gravatar of Charlie Charlie
    29. February 2012 at 19:05

    Scott,

    Do you ever wonder if it was a big mistake extending Bernanke’s tenure as Fed Chairman? Here me out. I am not saying he is not our ally, but wouldn’t he be very powerful as a former Fed Chairman, turned academic. If he is our ally, stepping down would have allowed him to speak freely about what more the Fed could be doing.

    Could we have gotten a good replacement? Obviously that matters.

  62. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. February 2012 at 20:49

    Benjamin Cole,
    You might disagree with me but I never disagree with you.

  63. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. February 2012 at 20:54

    P.S. The right answer is to bring the NGDP level back to its previous trend. But then I suppose I’m preaching to the choir.

  64. Gravatar of Bill Woolsey Bill Woolsey
    1. March 2012 at 04:02

    If there is an excess supply of currency, it is almost immediately deposited in banks and becomes excess reseves. There is no need for the banks to make more “loans,” they can purchase existing bonds, including government bonds. But if they just hold on to the reserves, then the excess supply of currency disappears, and the demand for reserves increased, and there is no excess supply of the monetary base.

    If th banks do buy bonds (or make loans, if they want,) then whoever sells the bonds to the bank has newly created money. The excess supply of currency has turned into an increase in the quantity of money. If households and firms just want to hold the money (say, in place of the bonds they sold to the banks,) then the demand for money has risen and velocity has fallen. Nothing happens. But if they don’t want to hold all the extra money, then they spend it on something. More spending. If at least some of it is spend on currency produced goods, that is more nominal GDP.

    Central banks don’t purchase bonds with hand-to-hand currency. They make wire payments. However, if they buy the bonds from households or firms, this directly increases the money the households or firms have in checkable deposits. At the same time, it increases reserve balances held by banks. If the banks just hold the reserves, and don’t use it to buy bonds (or make loans) then the only increase in the quantity of money is the initial one.

    Central banks (particularly the Fed) actually purchase from a handful of dealers. However, these dealers aren’t just selling off the bonds they hold for investment purposes. They are dealers. They buy bonds from households and firms (and banks) to sell to the Fed. That the dealers are middlement is not important for the most part. While the dealers get more money in their checkable accounts and their banks, (which may be divisions of the same business) get more money in reserve balances, this just replenishes the money and reserves that were spent to buy the bonds from the firms, housholds, or other banks that they purchased the bonds from to sell to the Fed. The money and reserves end up in the deposits of those who sold the bonds to the dealers who sold themn to the Fed.

    I am sure that most understand this, but I read absurd accounts that suggest that the Fed is giving reserves to the banks who might just hold onto them and so that prevents any increase in the quantity of money. That is wrong.

    If the banks choose to use excess reserves to buy bonds(or make loans), then the quantity of money increases much more than the amount of securities purchased by the central banks. But even if the banks just hold reserves, the quantity of money usually increases. Only if the final seller of the bonds was a bank (not acting as a dealer) does the quantity of money remain unchanged.

    And all that means is that the central bank needs to buy more.

    For Sumner’s story to work, the central bank must purchase enough securities so that reserves and money increase so much, that people want to hold more currency. While in simple money and banking analysis, there is sometimes assued a ratio between currency and other money, but that doesn’t make much sense. This is especially true if you believe, like sumner, that currency is held by tax evaders, drug dealers, and poor people who don’t use banks. Then what happens is that the excess supply of money generates more NGDP, and all of those people end up with more nominal income and/or sales, and so they demand for currency.

    Imagining that it works by having the drug dealers get more curerency and they spend it, but it comes right back to them, so they spend it, like a hot potatoe, and the ecomomy takes off as the drug dealers buy suvs, and the car companies, not having any use for currency, buy more drugs, and so on.. Think about it. It is not a sensible market process.

    If the Fed said that it will make open market purchases until the amount of currency people want to hold is twice as high, then they would be taking action to double nominal GDP. And the reason is that nominal GDP must be twice as high for people to be willing to hold that much currency.

    The “hot potato effect” _is_ banks expanding credit using excess reserves, for the most part, but “expanding credit” doesn’t mean make commercial, consumer, or real estate loans. It can mean that, but buying existing govenrment bonds counts too.

    When they buy more government bonds, that isn’t more total lending. It is a change in who is lending. And it is very possible that the way money expansion increases spending on output is that those who were lending spend more on capital goods or consumer goods. It is wrong to think of the process as generating more lending, so more borrowing, so more spending. It can happen that way, but it doesn’t have to happen that way.

  65. Gravatar of Bill Woolsey Bill Woolsey
    1. March 2012 at 04:15

    Major Freedom:

    In the long run, real output increases with the productive capacity of the economy. The productive capacity of the economy is generally increasing because there are more people willing to work, more capital goods produced, and improved technology. The labor and capital can produce more and better products.

    Increases in “real” saving, impact this by allowing the creation of more capital goods. Rather than produce consumer goods now, current labor and capital (using current technology) can produce additional capital. That process requires that particular businesses buy the capital goods, which is investment.

    This is must one source of growth. Even if the total amount of capital goods remained the same, with more people being willing to work, the productive capacity grows. Even if the total amount of capital goods remains the same, improved technology allows for more and better products. It is true, however, that this usual invovles and often requires replacing existing capital goods. But this happens all the time. Most capital goods produced are replacing old ones that are wearing out. Net investment is a small fraction of gross investment.

    So, even if there is no “real” saving, the economy would grow. Everyone consumes all of their income, and firms use depreciation to buy capital goods. They just replace the ones that wear out. If population is growing, the capital goods would be different–ones that require more labor. (more hand mowers, fewer lawn tractors.) None of that is good for the standard of living, but fortunately, capital goods appropriate for producing record players can still be replaced with capital goods that ipods. It is possible that with no “real” saving, there could be not only growing productive capacity, but it would grow faster than the population and workforce.

    Still, real saving is important, especially to the degree it allows the amount of capital goods to keep up with a growing population and work force. And going beyond that is surely helpful too.

    You should digest those basic truths about economic growth and not exaggerate the role of “real savings” in allowing growth.

  66. Gravatar of OGT OGT
    1. March 2012 at 05:31

    Meanwhile, the fed continues to pursue opportunistic disinflation. It’s not only not a level regime it’s not even a steady rate.

    From Tim Duy (with charts):

    Consider that in 2006 and 2007, the average five and ten year inflation expectations were 2.38% and 2.41%, respectively. Since 2010, the averages are 1.80% and 2.14%. A reasonably sharp 58bp decline at the five year horizon, and a smaller 27bp decline at the ten year horizon. So, at first blush, if the Fed is trying to raise inflation expectations to the pre-recession rates, they have not been particularly successful, especially in the near term.

    The interesting question, however, is does the Fed want to return inflation expectations to the pre-recession rates?

    http://economistsview.typepad.com/timduy/2012/02/opportunistic-disinflation.html

  67. Gravatar of DanC DanC
    1. March 2012 at 06:01

    great post

    should be printed in WSJ and Economist for a broader audience

  68. Gravatar of DanC DanC
    1. March 2012 at 06:15

    How do you tell if NGDP is depressed by monetary policy Vs structural problems ( Perhaps related to public policy )

  69. Gravatar of Morgan Warstler Morgan Warstler
    1. March 2012 at 06:30

    OGT,

    Yes, but Scott KNEW they were doing it, he just failed to EXPECT it!

    http://economistsview.typepad.com/timduy/2012/02/opportunistic-disinflation.html

    Don’t feel bad Scott!

    “The Fed was facing something higher than 2% inflation prior to the recession. Now they are looking at 2% inflation, which is also now the official target. It seems to me they might have used the recession to bring down the path of prices and along with it inflation expectations – something that might surprise the Fed’s critics from both sides of the aisle.”

    According to Duy, no one else expected it either!

    It’s funny the way when you mis-understand the motives of BOJ or the Fed, you spend your time pretending your expectations were actually correct.

    You can say the BOJ and Fed made a mistake, but you cannot say this wasn’t expected.

  70. Gravatar of Steve Steve
    1. March 2012 at 06:35

    This is the kind of trash the Bloomberg, CNBC and WSJ peddlers are constantly pushing:

    http://www.bloomberg.com/news/2012-03-01/bernanke-can-t-blame-sins-on-milton-friedman-commentary-by-amity-shlaes.html

    Ben and Milton are together. Ben is asking Milton a question: “Shall there be action, Master, or depression?” Ben is like Obi-Wan Kenobi to Milton’s Yoda. At first, Milton doesn’t answer. Finally, Milton speaks. “Depression let it be. Deflation it must be.”

    This dialogue between Ben S. Bernanke, the Federal Reserve chairman, and Milton Friedman, the great economics professor, never happened. It’s a fantasy. But you can bet a gold dollar that some version of the question, with or without the “Star Wars” motif, rolls over and over again at night in the minds of those who obsess about the economy.

    Perhaps the Fed chairman is abusing his old connection to the monetary master, Friedman, as a cover for a policy that Friedman might not endorse. That policy is doing anything Bernanke feels like — dumping money in the economy, or simply scaremongering — with the defense that doing so is honoring Friedman’s desire to avoid that deflation, that recession or that Depression.

  71. Gravatar of Frederic Mari Frederic Mari
    1. March 2012 at 07:23

    Okay – Upfront disclosure: I am new to Market Monetarism. So sorry if I make stupid comments/ask stupid questions.

    Now… I don’t get it? Target NGDP? Without worrying about the tiny difference between inflation and growth? What if my inflation is 10% and my GDP growth -5%? If I get it correctly, your NGDP is roughly at your chosen 5% (I guess that’s implicit anyhow as CBs target 2% inflation and 3% is the assumed ‘trend’ real GDP growth).

    But 3% real GDP growth + 2% inflation might be a fairly benign environment while a +10% inflation and -5% real GDP growth is a stagflation of unpleasant proportion.

    So, to a degree, like Major_Freedom, if differently, I am asking – You recommend monetizing government debt/the buying of bank securities even more aggressively than done so far. Are you not worried about bubbles popping up everywhere (gold, stocks, commodities etc) and indeed about unleashing serious inflation if that money finally finds its way into the real economy?

    I mean, how are your recommendations different from what happened with the Weimar Republic? They too started printing money to fight a post-WWI, post-Ruhr occupation deflation…

  72. Gravatar of TheMoneyIllusion » Bernanke believes Fed policy since mid-2008 has been the tightest since the 1930s TheMoneyIllusion » Bernanke believes Fed policy since mid-2008 has been the tightest since the 1930s
    1. March 2012 at 07:28

    [...] we have the most conventional of conventional wisdom endorsing market monetarism.  Here’s Ben Bernanke himself: Ultimately, it appears, one can check to see if an economy has a stable monetary background only [...]

  73. Gravatar of JimP JimP
    1. March 2012 at 07:49

    And now the horrid Amity Shlaes is at it again.

    Claiming that Friedman would have disliked present monetary policy as too aggressive and not bound by a rule.

    Amity – let me ask you something. Do you think that Friedman’s rule was to keep the currency supply stable no matter what else was happening? If so you betray your profound ignorance of him and you should go home and shut up.

    http://www.bloomberg.com/news/2012-03-01/bernanke-can-t-blame-sins-on-milton-friedman-commentary-by-amity-shlaes.html

  74. Gravatar of JimP JimP
    1. March 2012 at 08:03

    John Thacker

    I do agree that it is very strange to see people like Kudlow – stock market people basically – bash the Fed and absolutely demand an end to money creation. And Romney has promised to fire Bernanke if he is elected President. And replace him with what? Ron Paul and the gold standard and depression I guess.

    Would that benefit President Romney? Hardly.

    This odd dynamic of rich people opposing a rising stock market can be seen very clearly if you have the stomach to watch a Kudlow show. And Scott wrote about this in an early post – that the very same sock market people who were very powerfully benefited by Roosevelt’s early aggressive monetary policy were shouting the loudest about inflation.

    Kudlow flits back and forth – sometimes in the same sentence. Isn’t it wonderful that the stock market is rising, and the Fed had nothing to do with it. And what we need is “king dollar” and an end to “the Bernank”. He is a vulgar man and also an idiot.

    But he is also consistent in the following way. He wants the dollar value of his stock market investments to rise and the same time that he wants the purchasing power of (his) dollars to rise.

    And if, forced to choose between them, he will take king dollar and a falling stock market over the terrifying thought of an aggressive Fed.

  75. Gravatar of Morgan Warstler Morgan Warstler
    1. March 2012 at 08:16

    “But he is also consistent in the following way. He wants the dollar value of his stock market investments to rise and the same time that he wants the purchasing power of (his) dollars to rise.”

    Perfectly consistent.

    Achieved very easily, by ending government as we know it.

    JimP, the point is that KING DOLLAR forces the govt. to do the things they do not want to do.

    Scott thinks that is passing socialist laws.

    I think that is passing free market laws.

    And that is our bet.

    If I lose, I’ll adopt Scott’s views.

    If Scott loses, he’ll adopt mine (and dedicate his book to me).

  76. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 14:05

    ssumner:

    “I bet Sumner will say that the 0.8% real growth was caused by the 6.8% NGDP growth,”

    I’d guess virtually every macro textbook in America would say the same thing, and yet you act like I have some sort of unusual or novel view.

    You mean every Keynesian macro textbook.

    From the perspective of those who understand what actually drives economic growth, yes, that view is “unusual.”

    You aren’t even considering the possibility that virtually all macro textbooks are wrong! Why not? You’re tenured. You don’t have to go with the flow any more.

    In the 19th century, before the 1870s, virtually every economics textbook that said the value of goods is determined by the quantity of labor required to produce them, were wrong.

    Are you saying the mainstream macro beliefs of economists today, in 2012, are correct, for the first time in history?

  77. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 14:22

    Bill Woolsey:

    In the long run, real output increases with the productive capacity of the economy. The productive capacity of the economy is generally increasing because there are more people willing to work, more capital goods produced, and improved technology. The labor and capital can produce more and better products.

    Yes, capital goods that are a result of prior saving and investment, are themselves a source for future economic growth apart from additional savings out of income.

    Increases in “real” saving, impact this by allowing the creation of more capital goods. Rather than produce consumer goods now, current labor and capital (using current technology) can produce additional capital. That process requires that particular businesses buy the capital goods, which is investment.

    Yes.

    This is must one source of growth. Even if the total amount of capital goods remained the same, with more people being willing to work, the productive capacity grows. Even if the total amount of capital goods remains the same, improved technology allows for more and better products. It is true, however, that this usual invovles and often requires replacing existing capital goods. But this happens all the time. Most capital goods produced are replacing old ones that are wearing out. Net investment is a small fraction of gross investment.

    If the supply of capital remains the same, then the law of diminishing returns would eventually make the productivity of an additional worker drop to zero. This is the case even if technology grows. At some point, there is only so much you can do with a given supply of real capital. Technology allows capital to grow, and the growth of capital in turn enables an increase in technology.

    Yes, net investment is a small fraction of total investment. It is total investment that I am considering as real savings.

    If we suppose that the supply of money and spending were held constant, then all gains would be made by way of increased productivity and falling prices. Investment out of net income would eventually come to an end, as at some point, people would be happy with their accumulated savings and will prefer to live off their income. Further economic progress would take place on the basis of increased production and falling prices of capital goods, as each year’s depreciation quotas can succeed in not only replacing used up capital goods, but more than replace them.

    So, even if there is no “real” saving, the economy would grow. Everyone consumes all of their income, and firms use depreciation to buy capital goods. They just replace the ones that wear out. If population is growing, the capital goods would be different–ones that require more labor. (more hand mowers, fewer lawn tractors.) None of that is good for the standard of living, but fortunately, capital goods appropriate for producing record players can still be replaced with capital goods that ipods. It is possible that with no “real” saving, there could be not only growing productive capacity, but it would grow faster than the population and workforce.

    I think you misunderstood what I meant my real savings. I don’t mean savings out of net income. I was actually referring to gross investment. That’s where the growth actually takes place. When I say real saving, I mean that investment which is financed out of gross revenues.

    Still, real saving is important, especially to the degree it allows the amount of capital goods to keep up with a growing population and work force. And going beyond that is surely helpful too.

    In fact, the only reason why there is saving out of net income at all is because the quantity of money and volume of spending keeps increasing. In order for people to maintain a given proportion between accumulated savings and income, they have to keep nominally saving more out of their net income, which itself keeps nominally growing. If people went ahead and just consumed out of their nominal incomes, then their accumulated savings ratio would keep decreasing. In order to preserve desired ratios in the face of inflation, people must save out of net income. As seen above however, if inflation stopped, then all saving would be gross saving, and saving out of net income would on average be zero (young people who might save out of net income will tend to cancel the consuming out of capital of the older generations).

    You should digest those basic truths about economic growth and not exaggerate the role of “real savings” in allowing growth.

    I think you should digest what the meaning of real saving is. It’s not saving out of net income. It is the saving that takes place apart from the Federal Reserve System bringing about investment not backed by prior saving. It is this saving that I call real saving.

  78. Gravatar of acwanka acwanka
    1. March 2012 at 16:15

    It looks to me like the CPI reference date July 2008 in this post was hand-picked to make the point. Why not use December 2007, or December 2008 CPI levels?
    CPI levels (and change from there to 12/2011), from Robert Shiller’s online data
    12/2007: 210.0 (+7.5%); 07/2008: 220.0 (+2.6%), 12/2008: 210.2 (+7.4%); 12/2011: 225.7 (+0%)

    This is more than 2% inflation annually in the last 3 years, and slightly under in the last 4 years, and slightly over in the last 5 years.

    It is not justified to say that the Fed is tight based on CPI inflation. We are not in the Great Depression.

  79. Gravatar of ssumner ssumner
    1. March 2012 at 17:33

    Prometheefeu,

    1 When interest rates are not at zero banks hold very little base money.

    2. Interest rates will rise above zero in the long run.

    This means currency growth will drive the price level in the long run.

    Future expected NGDP growth drives current NGDP growth.

    Dtoh, You said;

    “Yes, but a) it’s not the only mechanism and b) the hot potato effect doesn’t happen in a vacuum. It requires the banks to create or purchase assets (including new loans). It’s not like the Fed is buying TBills from the public and paying for them in cash.”

    Actually it is pretty much like that. I’m too lazy to do the research, but I’d guess that prior to 2008 there were 300 straight months when most of the new base money issued by the Fed went right into currency held by the public. And the Fed often buys securities from non-banks. Why do you think that banks are necessary for the monetary policy process?

    Morgan, No, not QE3, I’d set an explicit NGDP target.

    Charlie, You might be right.

    Bill, Obviously it’s better described as “the expected hot potato effect”. But then 100 commenters from the “Concrete Steppes” will ask me specifically what makes prices get higher. So the expectation of the hot potato effect must be the expectation of something that will actually happen.

    I really don’t know why many people find this so complicated. When there’s a big crop of apples it’s the hot potato effect that makes apple prices fall. When there’s a big crop of currency the hot potato effect makes the value of currency (its purchasing power) fall. I can’t imagine why so many people find supply and demand to be some sort of novel, implausible idea.

    OGT, Yes, Matt Yglesias and I have also done some opportunistic disinflation posts.

    DanC, Thanks. Structural problems don’t have any direct impact on NGDP, although I suppose one could argue they somehow throw monetary policy off course.

    Morgan, But they didn’t need a deep recession to bring inflation down from 2.4% to 2.0%.

    Steve and JimP, Yes, that’s kind of silly.

    Frederic, You said;

    “I mean, how are your recommendations different from what happened with the Weimar Republic?”

    They increased NGDP over 1,000,000,000,000% over three years, I favor a 15% increase in NGDP over three years.

    Regarding your hypothetical of 10% inflation and negative 5% RGDP growth, yes, that could occur if an asteriod destroyed much of the US. But no other monetary policy would produce anything better in that case. Would you favor even higher inflation? Or would you favor even a deeper recession? If neither, then you are a market monetarist.

    Major Freeman, The mainstream Keynesian economists (and the monetarists and Austrians I’d add) are not wrong in believing that in the short run nominal shocks have real effects.

    acwanka, It was “hand-picked” because that’s when monetary policy got really tight. But if you think I cherry-picked, then tell me any other 3 1/2 year period since 1933 when NGDP growth was so low. If you are right, it ought to be possible to hand pick other 3 1/2 year periods like this. But you can’t. I couldn’t even find anything close.

    I only found one period with equally low inflation, during the mid-1950s.

    I’m comparing two periods of high oil prices. You are comparing a period where oil prices were really low (end of 2008) with one where they are really high (now). Who’s cherry-picking?

    In any case, NGDP is far better than inflation. The government says the price of housing is up 7.5% in the last 5 years, while the Case-Shiller index says it’s down 32%. Which do you believe? Most of my critics are also the people who tell me how important the housing crash was to the recession. Well if you believe the government CPI data there was no housing crash! And if you don’t, then the CPI wildly overstates actual inflation.

  80. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 21:42

    ssumner:

    Major Freeman, The mainstream Keynesian economists (and the monetarists and Austrians I’d add) are not wrong in believing that in the short run nominal shocks have real effects.

    No, you still don’t get it. It’s the change in real factors that produces the nominal shocks.

    People do not just capriciously stop spending money for no reason, or any reason apart from real factors.

    You see a positive correlation between “nominal” shocks and “real” factors, but your theory being used to interpret it is all wrong. Correlation for the millionth time does not equal causation.

    You have to ask the question that you are never asking, which is: WHY did so many people in so many different locations in so diverse business activity, all of a sudden reduce their nominal spending?

    That’s the question market monetarists are not asking, because it will lead them invariably to a “real”, “recalculation” story.

  81. Gravatar of Ben Bernanke was a market monetarist (in 2003) « Economics Info Ben Bernanke was a market monetarist (in 2003) « Economics Info
    2. March 2012 at 01:02

    [...] Source [...]

  82. Gravatar of Frederic Mari Frederic Mari
    2. March 2012 at 03:33

    Thanks, Scott, for replying. It’s not that common so it’s appreciated.

    With regards to Weimar – I am sure they started small too. After all, they just wanted to walk away from a post-WWI & Ruhr occupied-led depression.

    With regards to a 10% inflation & -5% real growth – I don’t think it’d really take a natural catastrophe of the dimensions you suggest. Yes, it’s not common and even the crisis in the 70s-80s weren’t that bad. But tweak the numbers a bit: Say, 12-15% inflation (we did have that, late 70s, early 80s) and 0 to -2% RGDP (AFAICT, those were the numbers back then as well). It still sucked ass & I am not convinced we should aim for a repeat.

  83. Gravatar of Dtoh Dtoh
    2. March 2012 at 03:38

    Bill Woolsey:
    A couple of nits.

    1) Even if the final seller is a bank who is acting as a principal by selling bonds out of it’s own portfolio to the Fed, it still increases the supply of money… at least MB.

    2) I understand the other mechanism whereby banks may increase their lending or businesses or households who have sold the bonds now have increased checkable deposits, which they may lend, spend on capital goods, convert into cash, etc.

    3) I think the issue is that firms and households can simply sit on the money, which is not at all improbable if they are simply converting TBill holdings into checkable or time deposits. Similarly the banks can sit on the excess receives particularly when the Fed decides that banking stability requires paying IOER.

    4) In addition large scale OMO often face political opposition.

    5) Given all of the above, the point I’ve made to Scott is not that OMO doesn’t work but that it doesn’t work as well as one would like and that a more effective tool to achieve level targeting of NGDP would be to give the Fed the ability to directly control the level of bank lending ( or more specifically the amounts of assets they hold) by setting minimum and maximum asset/equity ratios because this mitigates the problem of a decrease in velocity since money created from new loans is more likely to be spent than money from the proceeds of TBill sales. At the same time it gets you over the political hurdles, because it’s no longer an issue of the Fed printing money, but rather one of the Fed forcing banks to “stop hoarding cash.”

  84. Gravatar of On Bernanke paying “lip service” to nominal stability | Historinhas On Bernanke paying “lip service” to nominal stability | Historinhas
    2. March 2012 at 05:56

    [...] to Friedman on the “Legacy of Free to Choose”. Scott Sumner has covered that one very nicely (here and here) but there can never be too much emphasis: Ultimately, it appears, one can check to see if [...]

  85. Gravatar of Dtoh Dtoh
    2. March 2012 at 06:09

    Scott:
    “Actually it is pretty much like that. I’m too lazy to do the research, but I’d guess that prior to 2008 there were 300 straight months when most of the new base money issued by the Fed went right into currency held by the public.”

    AKA – “The lifeboats worked great until we tried to lower them into the water” argument.

    “And the Fed often buys securities from non-banks.”
    To be precise only from primary dealers some of whom may not have banking licenses.

    “Why do you think that banks are necessary for the monetary policy process?”
    I don’t think that at all. The Fed could easily buy assets from or make loans directly to the non-banking sector. The problem is that the Fed does use the banks as intermediaries and to increase the leverage of their OMO. The problem is that in good times, it is a very rigid lever, but in bad times there’s a lot of give and a lot of people don’t want the Fed using the lever.

    Scott, you have to ask yourself if the Fed tools are so great, how well are they working right now?

    And….before you blame it on bad policy, remind me from a practical perspective what the difference is between not wanting to and not being able to lower the lifeboats.

  86. Gravatar of ssumner ssumner
    2. March 2012 at 18:10

    Major, What real factor caused the Zimbabwe hyperinflation?

    Frederic, I’m afraid you misunderstand what this is all about. You can’t just pick numbers out of the air and assume monetary policy caused it, or could prevent it. Monetary policy has no influence on the way NGDP is partitioned between prices and real output. As far as I know all economists agree on that. So I think you need to rethink your example. If there is 10% inflation and negative 5% RGDP growth, then there is no alternative monetary policy that can produce an obviously better result. Nor would that lousy result be in any way caused by monetary policy. You are mixing up real factors and demand side factors.

    I will concede it wouldn’t take an asteroid strike. But I still say it’s be awful unlikely under a 5% NGDP targeting regime. If you have a 15% NGDP targeting regime it could very well occur, via a policy mistake.

    As far as the German hyperinflation, yes anything is possible down the road. A decade earlier Germany was on the gold standard, and I’m sure no one expected a hyperinflation, but it happened.

    Dtoh, I’m afraid ERs at the bank aren’t lifeboats, they are lead weights sinking the economy. So I don’t see your analogy.

    In any case, I wasn’t making a policy argument at all.

    You said;

    “Scott, you have to ask yourself if the Fed tools are so great, how well are they working right now?
    And….before you blame it on bad policy, remind me from a practical perspective what the difference is between not wanting to and not being able to lower the lifeboats.”

    I don’t favor interest rate targeting, so I’m confused by your comment here. Do you think I favor the Fed’s current choice of policy tools?

    The Fed seems to think things are working fine, and that no extra stimulus is needed, so the problem obviously is not a lack of tools. Put me in charge of the Fed and I’d create more rapid NGDP growth so fast your head would spin. They have the right tools, they simply choose to use the wrong ones, or not use them at all.

  87. Gravatar of Frederic Mari Frederic Mari
    3. March 2012 at 00:37

    Scott,

    That’s fair enough. But I was under the impression that part of your recommendation for NGDP targeting was to make it obvious that the Central Bank was in control and that piloting the economy (inasmuch as it is possible) wasn’t the sole or even the recommended province of fiscal policy and government spending policies.

    I mean, if monetary policy has no influence on the split between prices and real output then what is the point?

    I had not thought about it like that (and I thank you for your countless efforts on the blogosphere that finally put me in touch with your ideas) but NGDP targeting does not strike me as a massive change from what we have now, especially if you target 5% a year, given we have an explicit target of 2% inflation and “trend” growth is understood to be somewhere around 3%…

    In this crisis of ours, what is the point of you pointing that money is ‘tight’ contrary to what most people believe, if it is not to advocate further ‘QE’-like actions? And if you advocate more aggressive QE, you do have to take into account/answer to the classic complains about QE – that it is generating inflation but in all the wrong places: commodities, stock markets etc and, eventually, it is not obvious that the Fed could really dry all that liquidity if the CPI numbers start heating up… And, of course, monetisation of government debt has its own issues on top..

    So, yes, I’ll admit it: I am not sure I am quite getting it.

    Do you have a blog post where you summarise the overall intent of your ideas (beyond the technical)? Just so that you don’t have to repeat yourself endlessly to newbies like me?

    Best,
    Frederic

  88. Gravatar of ssumner ssumner
    3. March 2012 at 17:40

    Frederic. The point is this:

    The standard model in econ says the Fed can’t affect the long run real GDP growth rate, only the volatility. To make real GDP less volatile, you make NGDP less volatile. But for any given NGDP, you have no control over the split. Rather the assumption is that what matters is the volatility of NGDP, not it’s level.

    You said:

    “In this crisis of ours, what is the point of you pointing that money is ‘tight’ contrary to what most people believe, if it is not to advocate further ‘QE’-like actions?”

    I can’t blame you for being confused, because this subject is full of paradoxes. Here’s an example. Some of the biggest episodes of monetization of the debt occurred during periods of ultra-low NGDP growth, and sometimes outright deflation. Examples, the US in the 1930s, Japan in the 1990s, the US in 2009. I.e. tight money.

    While I’m willing to try QE3, I’d much prefer a higher NGDP growth target, which might allow the Fed to actually reduce the monetary base and still raise NGDP (via higher velocity.)

    I’d suggest starting with my National Affairs article–it’s accessible to most people. You can google it or there’s a link in the right column of this blog under “defense of NGDP targeting.” The link right below that lists some of my key posts that explain my key arguments. Thanks for your interest. Sorry I don’t have time for more complete answers.

  89. Gravatar of Major_Freedom Major_Freedom
    4. March 2012 at 18:02

    ssumner:

    Major, What real factor caused the Zimbabwe hyperinflation?

    The real factors that led to a prior drop in aggregate demand, which the Zimbabwe central bank then reacted to by massive inflation, which then led to hyperinflation.

    The very same real factors that led to a reduction in nominal spending in the US in 2008, which the Fed then reacted to by inflating much more than it did prior, which has now resulted in another false recovery built on inflation.

    The real factors are the capital misallocations.

    Credit expansion and artificially low interest rates distort the real economy, and sets it up for a deflationary bust later on, which central banks can then react to by either no action, or further inflation and lower interest rates. Zimbabwe opted for the massive inflation route.

    Zimbabwe also had a policy of a fixed exchange rate to the US dollar. But Zimbabwe inflated the Zimbabwe dollar far beyond what it could redeem, and that led to foreign exchange shortages, as well as a black market in foreign exchange where the Zimbabwe to US dollar exchange rate was 5 times the “official” rate. Rather than stop inflating and growing their way to a higher exchange rate, they opted to inflate instead.

  90. Gravatar of ssumner ssumner
    5. March 2012 at 05:38

    Major, AS dropped in Zimbabwe, not AD.

  91. Gravatar of Major_Freedom Major_Freedom
    5. March 2012 at 05:54

    ssumner:

    Major, AS dropped in Zimbabwe, not AD.

    BOTH fell, prior to Zimbabwe reacting by hyperinflation.

  92. Gravatar of TheMoneyIllusion » The Atlantic breaks the “unassailable rule” of journalism (and gives market monetarism a big boost.) TheMoneyIllusion » The Atlantic breaks the “unassailable rule” of journalism (and gives market monetarism a big boost.)
    8. March 2012 at 13:07

    [...] argument that I bolded seems vaguely familiar—where have we seen that [...]

  93. Gravatar of David Eagle David Eagle
    13. March 2012 at 16:11

    After Scott referred me to this blog post and to Ben Bernanke’s 2003 speech, I read Bernanke’s speech very thoroughly. I think it was an exceptionally good speech. I learned a lot about what both Friedman and Bernanke said that I did not know before. I highly recommend that others read the speech as well (http://federalreserve.gov/boarddocs/speeches/2003/20031024/default.htm). Mostly, I agree with both Friedman and Bernanke. However, the one point where my views differ from Bernanke’s view is at the point of the paper that Scott quoted Bernanke and concluded that Bernanke supports NGDP targeting. I interpret what Bernanke said differently than Scott did.

    Before I explain my interpretation of what Bernanke said, I do acknowledge a slight Schizophrenia in Bernanke’s writing. Instead of “monetary stability” Bernanke said he preferred to use the term “nominal stability” (In his speech, Bernanke said, “However, on the benefits of monetary stability, or as I would prefer to say, nominal stability, Friedman was not wrong”). Scott and I both agree that the true indicator of monetary policy is what is going on with nominal GDP. Bernanke’s desire to talk about “nominal stability” seems to be consistent with the way Scott and I think.

    However, the quote that Scott used to indicate that Bernanke viewed NGDP “as the proper indicator of the stance of monetary policy” to me does not indicate that to be the case. Bernanke said, “Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.” If Bernanke had said nominal GDP by itself, then I would agree with Scott. However, Bernanke said “and inflation.” I then read what Bernanke said right after that statement. His focus was on inflation, not nominal GDP. In the remainder of that paragraph, Bernanke only discussed inflation and inflation targeting. The next paragraph focused on the benefits of inflation stability. The paragraph following that one focuses again on inflation stability.

    Hence even though Bernanke did include nominal GDP among the potential indicators of stable monetary policy, he really has focused on the inflation indicator both in his speech and his actions as chair of the Federal Reserve Board. That, to me, is where Bernanke’s monetary policy went astray.

    Please note that I believe that nominal GDP should be the only indicator of stable monetary policy, a belief that I think Scott shares. The difference between Bernanke’s views and Scott’s and my views is Bernanke includes inflation as an indicator of monetary policy and then focuses on inflation rather than nominal GDP.

    I have discussed my interpretation of Bernanke’s speech with Scott. Scott and I agreed to disagree about our interpretations of Bernanke’s speech.

  94. Gravatar of TheMoneyIllusion » More evidence that Bernanke regards NGDP as the correct monetary policy indicator TheMoneyIllusion » More evidence that Bernanke regards NGDP as the correct monetary policy indicator
    15. March 2012 at 09:56

    [...] to dig up old Bernanke articles that sounded almost exactly like TheMoneyIllusion.  Recently I did a post pointing out that Bernanke shares my skepticism of traditional monetary indicators.  Here I quoted [...]

  95. Gravatar of Unlearning Economics Unlearning Economics
    10. August 2013 at 07:28

    [...] believe that those who conduct monetary policy simply don’t ‘get it‘, or are just constrained by petty politics. I’d instead suggest that policymakers just realise they’ve come up [...]

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