People keep asking me why we need to do more. ”Yes, monetary stimulus was needed back in 2009, but hasn’t the Fed done enough? Don’t we need to return to normal?” Yes, we need to return to normal NGDP growth, and normal interest rates, and you do that with a more expansionary monetary policy.
The concepts of “easy” and “tight” money only have meaning in reference the policy goal. We’ve been falling short of the policy goal since 2008, and we’re still falling short. That means we have tight money. Or perhaps I should say we have tight money unless you want to argue that 200% interest rates during hyperinflation shows that money is “tight” and that zero rates during the 1930s showed that money was “easy.”
What many people don’t grasp is that there is no such thing as “not using monetary policy.” A commenter recently noted that most progressives don’t favor using monetary policy because they see it as favoring the rich. I think that’s right, but it actually shows muddled thinking on two different levels. Progressives care a lot about inequality. If they thought monetary policy was worsening inequality then they should care a lot about monetary policy. But it’s even worse; many progressives seem to think there’s such a thing as “not doing monetary policy.” Yes I suppose there is but only in the sense that there’s such a thing as not steering the ship, just letting the steering wheel float around at random. But even that’s a policy decision, isn’t it?
And right now the ship is heading in the wrong direction, and needs more stimulus:
The era of easy money is shaping up to keep going into 2014.
The Bank of Canada’s dropping of language about the need for future interest-rate increases and today’s decisions by central banks in Norway, Sweden and the Philippines to leave their rates on hold unite them with counterparts in reinforcing rather than retracting loose monetary policy. The Federal Reserve delayed a pullback in asset purchases, while emerging markets from Hungary to Chile cut borrowing costs in the past two months.
“We are at the cusp of another round of global monetary easing,” said Joachim Fels, co-chief global economist at Morgan Stanley in London.
Policy makers are reacting to another cooling of global growth, led this time by weakening in developing nations while inflation and job growth remain stagnant in much of the industrial world.
Let’s suppose that after allowing nominal GDP to fall 9% below trend between mid-2008 in mid-2009, the Fed had started a new and lower trend line with 5% growth. That would’ve been an unconscionably contractionary monetary policy by any reasonable standard. That would’ve meant no trend reversion at all. And yet I believe that if they had done this unconscionably contractionary monetary policy beginning in mid-2009 the recession would now be over and the unemployment rate would have fallen to below 6%. Nominal hourly wages have done their job. Think about the fact that monetary policy has been much more contractionary than the unconscionably contractionary policy I just sketched out, and it’s getting increasingly contractionary as NGDP growth continues to slow.
So when will I stop asking for “MOAR”? When it’s no longer needed. But so far people like me and Lars Svensson have been consistently right and my critics, even inflation hawks that say the Fed should ignore unemployment and focus like a laser on 2% inflation, have been consistently wrong. Officials within the Fed and Riksbank and ECB have also been consistently wrong. I see no reason to change my views as long as events continue confirming the validity of the market monetarist approach to policy.
BTW, one of the central banks that needs to do much more is the BOJ. They are not going to hit their 2% inflation target in a sustained way (beyond sales tax distorted figures) without further yen depreciation. On the plus side, inflation is a lousy target anyway.
PS. My unemployment claim is based on NGDP in 2013 being about 4% higher, RGDP being about 3% higher, and unemployment being about 1.5% lower, or 5.7%.
PPS. Off topic, but I just noticed that Paul Krugman provides one more good example of why the monetary base is the most useful definition of “money.” When people talk about “dollars” going overseas, it’s really only the base that matters:
And even if the dollar loses some of its dominance, why should we get bent out of shape? There is no evidence that America is able to borrow dramatically more cheaply because of the dollar’s role (and anyway more foreign borrowing is not necessarily a good thing.) You often hear claims that we’ve only been able to run persistent trade deficits because of the special role of the dollar; this is just false, since other countries like Britain and Australia have been able to do the same thing.
What is true is that the large holdings of US currency outside the United States — largely in the form of $100 bills, held for obvious reasons — represent, in effect, a roughly $500 billion zero-interest loan to America. That’s nice, but even in normal times it’s only worth around $20 billion a year, or roughly 0.15 percent of GDP. And anyway, the euro has done well on that front too. If you like, South American drug lords hold dollars, Russian beeznessmen hold euros, and in both cases it’s a trivial subsidy to rich, huge economies.
The bottom line is that while saying “the international role of the dollar” sounds very sophisticated and important, the more you know about all this the less you care. This is simply not a big deal.