My reaction to the Fed’s 8/10/10 decision

I will be far away from any internet connection on August 10th, when the next Fed policy decision is announced.  (I am assuming that the internet has not yet reached western Wyoming.)  Thus I thought I would give you my reaction to the decision right now, before I left.

After a major policy decision, economists are often asked whether they think it will work or not.  I don’t answer those questions.  Indeed I think my refusal to predict is what is most unusual about my approach to economics.  Not only do I leave the crystal ball stuff to others, I don’t much care whether the action increases NGDP.  I want 12 month forward expected NGDP to grow along a 5% a year growth trajectory.  If actual NGDP fluctuates a bit, it won’t do significant harm as long as NGDP expectations remain well-anchored.

I focus on how policy affects expectations, and we can observe those changes immediately in the asset markets.  If the policy action does not immediately produce a big boost to stock prices, say within 10 minutes, then it will have failed.  Note that I’m not saying it would be likely to fail, I am saying it would have failed; past tense.  

It seems to me that the biggest market responses to Fed announcements tend to happen when the economy is about to enter a recession.  The three biggest that I can recall off the top of my head, January 2001, September 2007, and December 2007, all were at the point where we were teetering on the edge of recession.  As far as I know, macro models can’t explain this pattern, but then macroeconomists have never shown much interest in the stock market.  Instead, they generally like to make jokes about how the stock market forecast 11 of the past 6 recessions.  Of course you’d expect the stock market to over-predict recessions, if it was efficient.  Suppose there were shocks that produced a 50/50 chance of recession.  Those shocks would surely depress stock prices, but would not always be followed by recessions.

I seem to recall that the stock market moved in the 2% to 4% range after the 3 key Fed annoucements that I just mentioned.  Presumably the markets expected those decisions to have an unusually strong impact on the near term course of the economy.  And those market responses were in some ways easier to interpret than Tuesday’s decision.  I also recall that in two or three cases the Fed was deciding between 1/4 and 1/2 point rate cuts.  So you’d also need to observe the ex ante odds of each rate cut in the fed funds futures market, in order to estimate the total market response.  If the odds were 50/50 each way, then the actual market response would have been twice the observed move in the S&P500.

Of course you’d also want to look at other market indicators such as TIPS spreads and commodity prices (especially oil.)  In my view a stock market rise of 2% to 4% would be an indication that the Fed had done something significant, making a double dip recession considerably less likely.  But there may also be a great deal of uncertainty regarding the significance of this decision, as it will probably not be the usual change in the fed funds target, but rather something more unconventional, such as a lower interest rate on reserves, or more QE.  Tim Duy has a good discussion of recent speculation about what the Fed may do.

And remember that help from Obama’s three new appointees won’t arrive until at least late September, and more likely early November.

So here’s my reaction to the decision:

Very bad:    The Fed does nothing significant.  Maybe just a slight change in wording.  The Dow falls several hundred points.

Bad:   The Fed does something minor.  Perhaps it promises to maintain the monetary base at current levels by purchasing T-bonds as the more unconventional assets are gradually sold off.  The Dow falls slightly.   (Actually, people are now so discouraged that this might be viewed as good news.)

Good:   The Fed promises additional QE.  The Dow rises significantly.

Outstanding:    Fed announces both QE and an end to interest on reserves.  The Dow soars by 500 points.

Inception:  Leonardo DiCaprio penetrates three layers into the dreams of Hoenig, Fisher and Plosser.  Inserts 500 posts from  Convinces the three that these are actually their own ideas.  The Fed does QE, ends interest on reserves, and sets an explicit NGDP target, level targeting.  The Dow soars 1000 points.  We get a 1983/84-style recovery.  Obama re-elected and strikes a grand bargain with the GOP to replace the income tax with progressive consumption tax. 

Sorry, I got a bit carried away with my dreams.

BTW, I will be in the Jackson Hole area when the annual Fed conference takes place.  Needless to say, I wasn’t invited.  Should I do a sort of Masque of the Red Death gate crashing?  Dress up like a ghoul with the word “deflation” printed all over my costume?  (Note to the Secret Service:  Just kidding.)

This will probably be my last post for a while.  I also may not be able to respond to comments.  I hope something important happens while I am gone.

PS.  I just noticed that Andy Harless endorsed NGDP targeting.  I agree with his claim that it should appeal to people with diverse ideological views.



99 Responses to “My reaction to the Fed’s 8/10/10 decision”

  1. Gravatar of malavel malavel
    6. August 2010 at 21:12

    As for Andy Harless suggestion: could the Congress promise a large bonus to the Fed leaders if they hit their 2017 target? A bonus that gets smaller the more they fail to hit the 24
    trillion target.

    Scott, shouldn’t you add the markets prediction for the Fed decision? Why would the Dow fall after a ‘Very Bad’ Fed decision if that’s what the market expected?

  2. Gravatar of ssumner ssumner
    7. August 2010 at 04:14

    Malavel, You are right about the expectations issue. I was sort of relying on the Tim Duy post that I linked to, and guessing as to how the Dow might react on the basis of that analysis.

    Regarding the payment of bonuses, I discussed that in an earlier post. But if you are going to do that, why not go all the way and allow the futures market to set policy.

  3. Gravatar of marcus nunes marcus nunes
    7. August 2010 at 07:34

  4. Gravatar of JimP JimP
    7. August 2010 at 09:00

    This may be behind a pay wall. If so you can buy the latest Barron’s and read it.

    “Time to Print Print Print”

    Phelps in the post above is no doubt right on the real side of the economy – but he is of no nominal help – and his list is depressingly long and unlikely to happen.

  5. Gravatar of David Pearson David Pearson
    7. August 2010 at 09:24

    I would argue additional QE will produce less of a LASTING market reaction, simply because the market has been conditioned to believe that QE=ER. Of course, the direct target of QE–presumably 2-10yr Treasury bonds–would benefit from lower yields. Here, again, the equity market has seen yields fall for months without any gain in growth expectations. As you have argued, falling yields are evidence of policy failure, not success. Probably the best indicator we have of that is the now-negative 5yr TIPS real yield.

    Given the above, the Fed will only impact the market if it signals its FUTURE deflation-fighting commitment. In May, 2003, it told us that an “unwelcome substantial fall in inflation” was a risk to be avoided. This gave the market a much stronger sense that there was a “Fed put” protecting equities and credit. No such message has (yet) emanated from today’s Fed.

    Shelter is roughly 40% of CPI. Next month’s existing home inventory will again reach levels (11-12 months) associated with falling house prices. The MBA’s index of mortgage purchase apps is running at 1995 levels, which is a level of housing inactivity as yet unseen in this housing crash. Today, the risk of a “substantial fall in inflation” is not “minor”, as the Fed characterized it in its watershed May, 2003 statement. Instead, the risk is material. The Fed just needs to recognize this fact and state that it will not allow deflation to occur. The market will infer from this that, if deflation worsens, the Fed will do what it takes to stop it–even adopt a formal price target. If instead, the Fed adopts an action (QE) without a commitment, the market is likely to be disappointed.

  6. Gravatar of Benjamin Cole Benjamin Cole
    7. August 2010 at 10:24

    Excellent post. I have sent two e-mails to Fisher, expressing ridicule, derision, and Sumerian views. Maybe not the best tack, but the powerless tend to act flippantly.
    Remember, central bankers looks at zero inflation the way I look at spending the night with Jennifer Lopez: Gee, could it really happen? It would be so exciting!
    As for real love, or real growth? Leave that for later.

  7. Gravatar of JimP JimP
    7. August 2010 at 10:52

    And now they are closing the schools and turning off the street lights.

    In the United States of America – they are turning off the street lights.

  8. Gravatar of JimP JimP
    7. August 2010 at 10:54

    And the 99ers – people whose unemployment benefits have run out – are starving to death. And of course the University of Chicago tells us that we are starving them to death for their own good – because we are so very concerned about them. Of course.

  9. Gravatar of JimP JimP
    7. August 2010 at 11:07

    Of course:

  10. Gravatar of MW MW
    7. August 2010 at 11:54

    Scott: “I want 12 month forward expected NGDP to grow along a 5% a year growth trajectory.”

    Consensus forecasts for real GDP in 2011 and 2012 are 3.1 and 3.2%, respectively. For headline PCE, those numbers are 1.8 and 2%. So forecasters expect roughly 5% NGDP for the next two years. So playing devil’s advocate, what’s the problem?

  11. Gravatar of MW MW
    7. August 2010 at 13:42

    And for the next year, here are GDP / headline PCE / GDP + headline PCE:
    3Q10: 3.3 / 1.7 / 5.0
    4Q10: 2.8 / 1.6 / 4.4
    1Q11: 2.7 / 1.8 / 4.5
    2Q11: 3.2 / 1.7 / 4.9

    Ignoring the PCE/GDP deflator basis, we have an (arithmetic) average of 4.7%. Pretty close to 5% NGDP.

  12. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    7. August 2010 at 14:04

    @MW – Scott wants to return to the previous trend of 5% NGDP growth.

  13. Gravatar of Morgan Warstler Morgan Warstler
    7. August 2010 at 17:59

    My reaction to the 8/10/10:

    Everyone go read Denninger:

    And since Scott’s away, everyone go read Denninger:

  14. Gravatar of Bonnie Bonnie
    7. August 2010 at 23:50

    I think Sumner also mentioned something like he thinks a better policy would be to target NGDP forecast rather than having any given growth rate happen by mere accident. The Fed’s credibility is sort of in the toilet right now after the huge plunge in NGDP in 2008 without attempting to stabilize it. It’s quite possible that because it missed that golden opporunity to stabilize and continued on a contractionary course over the last 18 months it rendered itself impotent to correct it. Easing now will only work if the markets believe it is serious and committed to correcting the error. Eating crow and admitting it made a mistake, as Bernanke did on Monday is a step in the right direction, but his less than charming hesitance to discuss easing and subsequent denials that the Fed is leaning toward any kind of ease leaves a sour taste. It gives the impression that the Fed is being dragged toward easing by the scruff of the neck rather than being fully committed that it is indeed required. From a credibility standpoint, these ideas are always better if they at least seem to come from the Fed rather than some external source beating them over the head until it gives in.

  15. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    8. August 2010 at 01:45

    Here Scott says Fed is not targeting its own forecast:

    Here Scott is talking about a need for catching up after a shock:

  16. Gravatar of marcus nunes marcus nunes
    8. August 2010 at 04:55

    That was a very insightful comment.

  17. Gravatar of Morgan Warstler Morgan Warstler
    8. August 2010 at 07:29

    Perhaps the Fed knows it cannot realistically add rents into the CPI (which are going down, down, down, for good cause), and even considers NGDP in the same way.

  18. Gravatar of Philo Philo
    8. August 2010 at 09:18


    “From a credibility standpoint, these ideas are always better if they at least seem to come from the Fed rather than some external source beating them over the head until it gives in.” So long as this external source is perceived to have the power and the energy to compel the Fed, and the wisdom to do it well, credibility will be maintained.

  19. Gravatar of Bill Woolsey Bill Woolsey
    8. August 2010 at 10:39

    See Scott.

    You can’t say 5% growth, level blah, blah, blah.

    The core CPI expected to rise 2% from its current level where ever it is, is just too ingrained.

    What do you want NGDP to be in third quarter of 2011? What
    growth rate does that imply over the next 12 months?

  20. Gravatar of marcus nunes marcus nunes
    8. August 2010 at 17:00

    Who would that be? If anyone is perceived as capable of compelling the Fed to act in a particular way, bye bye Fed credibility. I think Bonnie is quite right.

  21. Gravatar of Doc Merlin Doc Merlin
    8. August 2010 at 23:36

    Its easy to get the fed to act in certain ways right now.
    Just cut fiscal spending when you want them to increase monetary ease, and increase deficit spending when you want them to decrease monetary ease.

  22. Gravatar of MW MW
    9. August 2010 at 02:07

    @123 – TheMoneyDemandBlog: all I am trying to point out is that if the Fed doesn’t see the need for action, they can point to growth and inflation forecasts, surveys of consumers’ and economists’ inflation expectations, 5y5y TIPS etc.

    On the subject of “catching up after a shock”, perhaps you could point me to the theory that explains why this should happen, and the empirical evidence that shows that it does in practice.

  23. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    9. August 2010 at 04:21

    Re 5y5y TIPS – Keynes said that economists set themselves too easy a task if all they say is that once the storm is passed the sea will be calm again.

    Re catching up – all pre-crisis wage and debt contracts were made on the assumption that the previous NGDP trend will continue. Until all those contracts adjust, we will get subpar real GDP and labor market performance unless we return to the old NGDP trend.

  24. Gravatar of MW MW
    9. August 2010 at 04:49

    Re catch-up: what’s the theoretical rationale for the CB to validate flawed expectations? Why not restore NASDAQ to 4000 or Case Shiller to 200 (etc)?

    And you did not provide any empirical evidence on return to trend, which is, as far as I know, very mixed.

  25. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    9. August 2010 at 05:42

    Nasdaq and Case Shiller is red herring. Dollar is a fiat currency, stocks and housing are real assets. Fed has created expectations of 5% NGDP growth channel aka “Great Moderation”, but now it appears that Fed has fooled the economy.

    Empirical evidence is here:
    NGDP > 5% means mega bubbles and inflation that is too high

    NGDP < 5% means unnecessary crisis because of AD that is too low

  26. Gravatar of MW MW
    9. August 2010 at 05:59

    I do appreciate the discussion. What I am looking for is evidence that the level and prior trend growth rate of NGDP are regained after a recession (ideally taking into financial crises and housing busts). The link you provided does not do that — it simply shows that in agggregate, the rate of nominal growth was roughly stable over a period that only encompasses two recessions (early 1990s and early 2000s). That says nothing of levels nor of the results for the individual countries.

  27. Gravatar of JimP JimP
    9. August 2010 at 06:39

    Reference here to a paper in which Bernanke recommended a price level target to the BOJ, and also recommended honest discussion with the citizens about the goals of monetary policy.

    Krugman calls the failure of the current version of Bernanke to do these very things here “poignant”. I myself would much stronger language than that.

  28. Gravatar of Morgan Warstler Morgan Warstler
    9. August 2010 at 08:13

    Really enjoying Simon Ward:

  29. Gravatar of JimP JimP
    9. August 2010 at 08:16

    More on the Fed debate:

  30. Gravatar of JimP JimP
    9. August 2010 at 08:47

    And if the following from Evans-Pritchard is right – that Bernanke would ease save for fear of dissent from the crazed deflationists – then it all does come down to Obama and his sleep-walking though his own Presidency.

    begin quote
    Do we have any assurance that central banks have learnt their lesson? Clearly not the ECB, judging from Mr Trichet’s ill-judged article for the Financial Times two weeks ago: “Now it is Time for all to Tighten”. Much of what he wrote is correct in as far as it goes. Public debt is out of control. Budget stimulus may start to backfire. We are at risk of a “non-linear” rupture should confidence suddenly snap in sovereign states.
    Yet he also suggested that half the world can copy the fiscal purges of Canada and Scandinavia in the 1990s, all at the same time, without setting off a collective downward spiral. He offered no glimmer of recognition that the fiscal squeeze must be offset by ultra-loose money. True to form, the ECB is now draining liquidity. Three-month Euribor has risen to the highest in over a year.
    John Makin from the American Enterprise Institute described the Trichet argument that collective removal of fiscal thrust can be expansionary as “preposterous and dangerous”. Mr Edwards called it “risible”.
    Berkeley’s arch-Keynesian Brad DeLong could only weep, saddened that everything learned over 70 years had been tossed aside in a total victory for 1931 liquidationism. “How did we lose the argument,” he asked?
    Unfortunately, such obscurantism is taking hold in the US as well. Alabama Senator Richard Shelby has blocked the appointment of MIT professor Peter Diamond to the Fed Board, ostensibly because he is a labour expert rather than a monetary economist but in reality because he is a dove in the ever-more bitter and polarised dispute over QE.
    The Senate has delayed confirmation of all three appointees for the board, who all happen to be doves and allies of Fed chairman Ben Bernanke. The Fed is in limbo until mid-September. So the regional hawks who so much misjudged matters in 2008 have unusual voting weight, and now they have a commodity spike as well to rationalise their Calvinist preferences.
    Whatever Dr Bernanke wants to do this week – and I suspect he is eyeing the $5 trillion button lovingly – he cannot risk dissent from three Fed chiefs: one yes, two maybe, but not three. He faces a populist revolt from the Tea Party movement, with its adherents in Congress and the commentariat.
    end quote

  31. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 10:33

    This is Sumner (long before Hilsenrath or Krugman) on the “self-induced paralysis”.

  32. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 11:43

    Between the second half of 1984 (begining of the Great Moderation) and end 2007, NGDP grew around a stable 5.5% growth path (from 3.9 trillion to 14.3 trillion). It would fall below and rise above this path but always returned to it.
    NGDP at end 2007 was 14.3 trillion. If it had continued to grow around 5.5% per year today it would be 16.3 trillion. Since it is 14.6 trillion, the shortfall is 10.7%.
    Over the last 2 and a half years (08.I-10.II) it has grown at a rate of 3.8%. Instead of rising back to the “trend” it is still distancing itself from it!

  33. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 11:54

    Bill Woolsey has a “level graph”

  34. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 12:04

    William Poole, former president of SL Fed and old monetarist supports Fishers views:

  35. Gravatar of Silas Barta Silas Barta
    9. August 2010 at 12:20

    Question for anyone here: does it matter *what* people spend money on that gets NGDP up to 5% trend? Or is it simply enough for you that they spend money on *something*?

  36. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 12:22

    Tally of important and influent group that say MP should not be expansive (no AD problem):
    Edmund Phelps.(Nobel prize winner, “co-inventor” of natural rate of unemployment)
    William Poole Brown U professor and former SL Fed president)
    Richard Fisher Dallas Fed president(former private banker and Assistant Treasury Secretary during Carter Administration)
    Charles Plosser Philly Fed president(important developer of RBC models)
    Thomas Hoenig. KC Fed president (no kudos)only place he ever worked. Has been there since 1973.

  37. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 12:26

    On anything that counts for GDP

  38. Gravatar of MW MW
    9. August 2010 at 13:17

    @Marcus Nunes – thanks. I’m familiar with the numbers.

    Clearly what is implicit in the view that we “should” regain the old level and trend is that there has been no structural change (or that whatever structural change there has been can be easily reversed with the magic of monpol). That may be true and I am not taking a position — I am asking for evidence, because what I’ve read from the BIS and IMF suggests that the historical experience is mixed. That’s all.

  39. Gravatar of Silas Barta Silas Barta
    9. August 2010 at 14:09

    @marcus_nunes: So if people blow all their savings things they don’t really want to buy, but is the next best thing to saving the money, and the economy is retooled to produce these goods no one really wants … no problem? Since GDP’s back up?

  40. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 14:33

    @ Silas
    If they bought it, they “want” it!

  41. Gravatar of marcus nunes marcus nunes
    9. August 2010 at 14:44

    I don´t know if I understand what you mean by structural change. The fact is that for the poast 60 years or threabouts, RGDP growth in the US has averaged a bit more than 3%. So lets say that´s “potential”. It has held sway over all different types of business cycles over this period.
    In the late 60s and throughout the 70s, bad economic policy gave rise to a trend in NGDP. That was inflation. “Potential” RGDP remained at 3%+.
    During the Great Moderation, RGDP trend remained at 3% and policy was sensible enough to keep inflation stable so that NGDP grew at 5%+.

    Maybe, we don´t know (yet), “potential” RGDP has fallen below 3%+, in which case the gap would be smaller than 10% for NGDP, but still sizable in any case.

  42. Gravatar of JTapp JTapp
    9. August 2010 at 17:48

    According to the NY Times tonight, your favorite Money & Banking textbook author (Mishkin) says more QE may be “unnecessary.”

  43. Gravatar of Silas Barta Silas Barta
    9. August 2010 at 20:04

    @marcus_nunes: If you tell me you’re going to devalue all my savings to nothing if I don’t spend it, then I’d “want” everything I’d bought, just the same. It still wouldn’t change the fact that you’ve engineered a huge inefficiency.

    Yes, people want different things when you fundamentally change their incentives. Doesn’t mean the change was Pareto-efficient.

  44. Gravatar of marcus nunes marcus nunes
    10. August 2010 at 03:16

    You shouldn´t look at it from this “all or nothing” perspective. It´s more like a “kick in the butt” to get you moving!

  45. Gravatar of marcus nunes marcus nunes
    10. August 2010 at 03:58

    “Anti-Sumnerism” takes hold. Dallas Fed Fisher has set the tone. “It´s all about confidence”.

  46. Gravatar of Silas Barta Silas Barta
    10. August 2010 at 04:15

    @marcus_nunes: So is it okay if I kick you in the butt to get you to do what you’re supposed to be doing? (literally *or* metaphorically)

  47. Gravatar of MW MW
    10. August 2010 at 04:20

    @Marcus Nunes – thanks. I’m familiar with the numbers.

    Again, the evidence on regaining the old trend, and even on maintaining the pre-crisis growth rate, is mixed. I am trying to edumucate myself, hence my request for theory that explains why we should return to the old trend, and empirical evidence that this happens after a recession, and particularly after financial crisis and/or a housing bust.

  48. Gravatar of marcus nunes marcus nunes
    10. August 2010 at 05:16

    The “trend” is determined by the growth model. Think of Germany (or Japan). The war destroyed the capital stock (K) so the level of RGDP(y) fell considerably. After the war the economy was “rebuilt”. It reached a level of y higher than the one that would be given by the previous trend because of higher tecnology (better K). That´s an extreme example, but the evidence for the US over the past 60 years is that “trend” gowth was around 3%+. Maybe it has dipped down, but is not as low as we´ve got at the moment. The longer you stay “depressed” the greater the chance that your “trend” level will come down (hysteresis). That´s why its important to get “things moving”.
    Friedman and others empirically showed that the deeper the fall the stronger the rebound. The “trend” level is an “attractor”.

  49. Gravatar of marcus nunes marcus nunes
    10. August 2010 at 11:35

    “Bad” won the day over at the FOMC. Now, Hoenig dissents on two points. The extended period language and the balance sheet op!

  50. Gravatar of Benjamin Cole Benjamin Cole
    10. August 2010 at 13:50

    Calling all drug lords:

    The United States needs you. Please come to America with your hundreds of billions of dollars of greenbacks, and start spending your money.
    There are lots of pretty girls here, and large McMansions. We promise a major Hollywood studio will issue a re-make of “Scarface,” and HBO will produce a long-running “Scarface” series. The National Musuem will host a “Scareface” art retrospective. We can talk Cadillac into a large chrome grill design. Just come here, please. Our central bankers won’t help us–you can.
    If the United States eocnomy sinks too deeply, you will lose your best market. Helping us is helping yourselves.

  51. Gravatar of Fed Inaction «  Modeled Behavior Fed Inaction «  Modeled Behavior
    10. August 2010 at 14:37

    [...] end, Scott Sumner posted analysis of his reaction to the Fed meeting four days in advance (August 6th), and gave his expectation for each scenario ranging from “Very Bad” to [...]

  52. Gravatar of Benign Neglect | Benign Neglect |
    11. August 2010 at 05:22

    [...] the FOMC press release. The S&P 500 slipped by around 0.5% on Tuesday. By Scott Sumner’s pre-emptive standard for what the Fed needed to accomplish, the crowd’s early reaction was a disappointment. [...]

  53. Gravatar of Is This Progress? Is This Progress?
    11. August 2010 at 10:08

    [...] the FOMC press release. The S&P 500 slipped by around 0.5% on Tuesday. By Scott Sumner’s pre-emptive standard for what the Fed needed to accomplish, the crowd’s early reaction was a disappointment. [...]

  54. Gravatar of jj jj
    11. August 2010 at 10:59

    @MW – As historical evidence for NGDP level targeting, Sumner has brought up the early 80′s recovery, and dollar devaluation during the depression, as examples of how bringing NGDP back to trend restarts the economy.

    For a theoretical basis, consider the proposal that the ‘right’ level of NGDP is whatever everybody expected it to be. Imagine first that the inflation/deflation rate for the next 10 years was known with 100% certainty ahead of time. Secondly pretend that it’s possible to pay positive or negative interest on cash. In this case, it wouldn’t matter a bit to the real economy if the inflation rate was -10%, 0%, or 500%. Inflation or deflation are not inherently bad.

    In this imaginary economy, say it is “known” the inflation rate will be +10%, forever. Then a crazy fed governor comes in and says he’d prefer it to be +1% from now on. A big recession happens, because everybody’s plans are screwed. I bought a house on a +12% mortgage, which was perfectly reasonable when I expected my salary to go up 10%/year. But with my salary going up 1% I’m in trouble.

    So after 1 year we bring back the old fed governor, who restores the 10% rate. This is better, but not good enough because my salary has fallen behind my mortgage by 9%! I need him to bring NGDP back to trend with 1 year of 20% inflation.

    Again, the only ‘right’ level of NGDP for me is the one I planned on. I might make stupid plans based on unreasonable expectations, but there is no benefit in ruining everybody’s plans. If NGDP can be whatever we want it to be, and it can, then the best level of NGDP is what the collective expectation was.

  55. Gravatar of Morgan Warstler Morgan Warstler
    12. August 2010 at 06:31

    Well now boys and girls! The worm begins to turn! And it turns my way…

  56. Gravatar of Sumner Say; Summer (Doesn’t?) Do | The Barstool Economists Sumner Say; Summer (Doesn’t?) Do | The Barstool Economists
    12. August 2010 at 07:27

    [...] Sumner was apparently not going to have access to the internet when the August 10th Fed FOMC announcement was made, so he posted in advance. [...]

  57. Gravatar of david david
    12. August 2010 at 09:08

    Morgan Warstler, I urge you to run out and drop $20 on a used copy of any Macro 101 textbook and read it. You are excessively confident in what are fringe theories of the economy.

  58. Gravatar of Liberal Roman Liberal Roman
    12. August 2010 at 10:34


    The people who think that deflation is not bad because it reduces prices and incentivizes people to buy don’t understand that deflation also means falling wages and falling employment.

    So, yes, nominally prices fall, but in terms of how much people actually have to spend on the reduced price goods, the situation actually gets even worse.

  59. Gravatar of Morgan Warstler Morgan Warstler
    12. August 2010 at 14:04

    @Roman / david,

    NO ONE is talking about deflation. Without rents (falling home prices) the CPI is at 1.9%. That is the whole damn point.

    Prices of Energy and Food, normally not factored is FAR MORE IMPORTANT, and they are headed up quick.

    Both of you are lost… think of falling home prices as the fair and moral way to forgive mortgage payments… accept instead of letting the people stay in a now lower priced home… you foreclose on them, sell the home cheap and let someone else make the payments.

    The effect is the same, EXCEPT in my model, the free money (the stimulus) goes to guys buying the cheap houses, and not to banks.

    The people in those homes don’t own them, the banks do. Re-read that.

    See you still view WRONGLY an overpriced loan on a home, that someone has NO equity in, as some kind of valuable thing for that person, it isn’t, they will never get anything out of the home – not in the next tens years.

    They might make payments, but they are not building equity, they are propping up the banks. And so are you.

  60. Gravatar of Doc Merlin Doc Merlin
    12. August 2010 at 23:04

    @liberal roman:
    “The people who think that deflation is not bad because it reduces prices and incentivizes people to buy don’t understand that deflation also means falling wages and falling employment.”

    No no no no no! Supply side deflation doesn’t mean lower wages and falling employment! Only demand side deflation or supply side inflation mean that! Right now per unit wages are going down (because of productivity increases), but per hour wages have been actually rising!

  61. Gravatar of malavel malavel
    13. August 2010 at 01:58

    Liberal Roman:

    If you get enough deflation to restore equilibrium you wont get any decrease in employment. Likewise, if you get less deflation due to an increase in wage stickiness you will get less employment (as long as the central bank refuses to do its job).

  62. Gravatar of marcus nunes marcus nunes
    13. August 2010 at 03:37

    A measure of the “state of confusion”

  63. Gravatar of marcus nunes marcus nunes
    13. August 2010 at 03:55

    Krugman “stands in” for SS

  64. Gravatar of Morgan Warstler Morgan Warstler
    14. August 2010 at 16:49

    Here wormie, here wormie, wormie… are you gonna turn my way? Yes you are, yes you are.

    Let the insolvent banks fail, put those deflated assets onto the balance sheets of the guys with capital, let them have the prize…. woo them, get them into the mood to invest.

  65. Gravatar of Benjamin Cole Benjamin Cole
    14. August 2010 at 18:56

    Inflation is our friend. Inflation will reflate property values, and make good those bank loans. What the guy is talking about is mark-to-market. Banks got a breather, and do not have to mark-to-market right away. That’s actually a good idea, if we can reflate property markets.

    And you do that by printing money with gusto and QE!!!!!


    Go Fed, blow the doors open–I want to see some real solid inflation, like five percent annually for five years running.

  66. Gravatar of Ben Crain Ben Crain
    14. August 2010 at 19:35

    This is a bit late, but immerhin (that’s German for, roughly, “what the heck, here it is anyway”). Apropos your comment that the internet may not have reached western Wyoming: There are certainly sections, such as out beyond Kelly, where that’s true. But here’s a wonderful site: in Jackson, just beyond the Town Square, going south to north (not the route that leads to Yellowstone), there’s a wonderful little coffee shop (sorry, don’t recall the name) on the left, a couple of blocks or so beyond the town square. They have wi-fi; just sit at one of their (few) tables and hook-up. And their coffee and pastries are outstanding.

  67. Gravatar of Jim Glass Jim Glass
    14. August 2010 at 19:54


    WASHINGTON — Keeping interest rates at record lows is a “dangerous gamble” that could hurt the economy later on by unleashing inflation or new speculative bubbles, a Federal Reserve official said Friday.

    Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, made the comments just days after dissenting with the Fed’s decision to take an unconventional step to strengthen the fragile recovery by buying government debt.

    … he worries that keeping rates too low for too long could create problems later on. For instance, low rates could spur bubbles in the prices of commodities, bonds or other asset prices. Or, they could encourage people and businesses to take on too much debt again and overly leverage themselves, he suggested.

    “If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring,” Hoenig said in a speech in Lincoln, Neb…

    “I believe that zero rates during a period of modest growth are a dangerous gamble,” Hoenig said.

    … he sees “no evidence that deflation is the most serious threat to the recovery today” …

    Low interest rates cannot solve every problem faced by the United States, he argued.

    “In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long,” Hoenig, said. “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.”

  68. Gravatar of Morgan Warstler Morgan Warstler
    15. August 2010 at 13:58

    Won’t happen Benji. It’s time for the liquidation. Liquidate labor, liquidate banks, liquidate housing. This time, we’re going to do it right. The assets REMAIN, they just are held by smarter people.

  69. Gravatar of marcus nunes marcus nunes
    16. August 2010 at 05:57

    Morgan Warstler will love it. SS will have fun trouncing it!

  70. Gravatar of MW MW
    16. August 2010 at 06:44

    @ Marcus Nunes and JJ — thanks.

    @ JJ — I wasn’t asking for arguments in favor of NGDP targeting, I was asking evidence on whether the old ‘trend’ (i.e. level and growth rate) are regained after a recession involving financial crisis and/or housing bust. Again, the evidence on this that I have seen is mixed.

  71. Gravatar of jj jj
    16. August 2010 at 07:07

    @MW – gotcha. SS isn’t saying the old trend is always regained, just that it should be. FDR’s dollar devaluation during the depression is an example of going back to the old trend, and SS says that lead to economic recovery.

  72. Gravatar of JimP JimP
    16. August 2010 at 09:09

    Larry Kotlikoff – ever the optimist. But He does agree with Scott. Print now and then cut spending longer term.

  73. Gravatar of JimP JimP
    16. August 2010 at 09:35

    And here we have the true end of the world loonies – in case you want to read them.

    All financial market “excesses” have to be corrected – right back to the beginning of the industrial revolution.

    Have a nice life.

  74. Gravatar of JimP JimP
    16. August 2010 at 13:19

    Lets take the Fed back from the deflationists.

  75. Gravatar of marcus nunes marcus nunes
    17. August 2010 at 03:05

    Tim Duy is very pessimistic (even on the success of level targeting)

  76. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2010 at 12:27

    Another guy comes over tot he Morgan side! I smell Ezra changing his mind.

    “To my mind, the best thing to do is help the homeowners who are losing their homes. The basic story there is to give them the right to rent their places for some period of time.”

  77. Gravatar of StuartH StuartH
    17. August 2010 at 13:10

    @Morgan I read the Dean Baker interview and frankly I don’t see how his version of a ‘fix’ for the housing mess translate to your version. He appears to be (IMO) talking a very different approach with this renter statement.

  78. Gravatar of pct pct
    17. August 2010 at 13:15

    @Morgan Warstler 15. August 2010 at 13:58
    Are you knowingly quoting Andrew Mellon or is it just a coincidence?

  79. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2010 at 19:19

    knowingly. Hoover should have listened. Instead he made like Obama.

  80. Gravatar of marcus nunes marcus nunes
    18. August 2010 at 07:02

    Krugman is pushed to defend MP by a radical on FP

  81. Gravatar of Jim Glass Jim Glass
    18. August 2010 at 09:11

    A Fed bank president — Narayana Kocherlakota, Minneapolis –argues that interest rates kept too low lead to deflation (not inflation, like I’d always heard) so the Fed has to be ready and alert to raise them from today’s low level…


    … It is conventional for central banks to attribute deflationary outcomes to temporary shortfalls in aggregate demand. Given that interpretation, central banks then respond to deflation by easing monetary policy in order to generate extra demand.

    Unfortunately, this conventional response leads to problems if followed for too long. The fed funds rate is roughly the sum of two components: the real, net-of-inflation, return on safe short-term investments and anticipated inflation. Monetary policy does affect the real return on safe investments over short periods of time. But over the long run, money is, as we economists like to say, neutral. This means that no matter what the inflation rate is and no matter what the FOMC does, the real return on safe short-term investments averages about 1-2 percent over the long run.

    Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative.

    Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.

    To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.

    The good news is that it is certainly possible to eliminate this eventuality through smart policy choices. Right now, the real safe return on short-term investments is negative because of various headwinds in the real economy. Again, using our simple arithmetic, this negative real return combined with the near-zero fed funds rate means that inflation must be positive. Eventually, the real economy will improve sufficiently that the real return to safe short-term investments will normalize at its more typical positive level. The FOMC has to be ready to increase its target rate soon thereafter….

  82. Gravatar of marcus nunes marcus nunes
    18. August 2010 at 09:14

    It was only a “24 hr virus”. Here he reverts to form!

  83. Gravatar of David Beckworth David Beckworth
    18. August 2010 at 12:54

    In case you guys are looking for something new to chew on  here is my latest post.

  84. Gravatar of JimP JimP
    18. August 2010 at 13:39

    And here is what the deflationists – the liquidationists – want.

    Wage reduction by straight force.

  85. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2010 at 14:37

    Again, we can solve this crisis simply by mandating 5% productivity gains for the next 5 years.

    Sumner says he’s fine with this, but without the crisis we WILL NOT fix Public Employees permanently. AFTER they take the full hit, if somehow my ideas haven’t fixed the problem, we can always do Scott’s thing.

    Here is comes boys, the worm turns my way.

  86. Gravatar of david david
    20. August 2010 at 04:57

    Morgan Warstler, it’s statements like this:

    Pay public employees too much money, and you don’t have enough cash left over to run the economy at full capacity.

    which suggest that you do not understand economics. Is overpaying public employees bad? Yes, surely. But is there some heretofore unknown cash pool for which public employees and private-sector employees compete? (!)

  87. Gravatar of Morgan Warstler Morgan Warstler
    20. August 2010 at 11:56

    and then, david…

    Yes there is a cash pool that they compete from it is called PRIVATE SECTOR TAXES, as in if we are paying the public employees too much money – I put the figure accurately at near $400B per year Federal, State, and Local – that is $400B we don’t keep in our pockets, go invest with, go shop with, etc.

    Do you imagine that they money is simply blinked into existence?

    Finally, I’m cozy with my economics there bub… my larger theory (that many “economists” of the DeKrugman crowd skip over) is that the gloriously positive cruel and brutal forces of downward pressure on prices that provides all the productivity gains and growth MUST be applied to the public sector or you suffer economic crisis.

    That’s the theory, and the numbers look pretty compelling.

    We’re talking $4T+ overpaid since 1980 plus interest. Which is 2/3 of the original principal on total National Debt.

    That’s just looking at what public employees have made on average over private sector in raw earnings. YES YES I know – people like to pretend the jobs are apples to oranges…

    Which is why my Productivity Gains argument is so crushing, because it doesn’t argue about skills need for government work, it simply points out that WE’D HAVE THE SAME SAVINGS if government had gained all the productivity savings the private sector had historically.

    Another way to examine it is quit rates, and I’d predict that if round after round we dropped public employee compensation until their quit rates matched the private sector, they’d be working very near the same amount of days (they don’t now), for slightly LESS than private sector, because historically lazy people are drawn to government work – now that part is just pure conjecture, but I’ve got many years dealing with government employees under my belt. An article on the subject:

    Lastly, which is a nice proof in itself: I point out that the amount we’re overpaying right now this year, is very near the lost wage of the unemployed at Full Employment.

    The point being: Yes, if you pay one servant more money than you need to, you have less money to pay someone else – and you lose the grow bringing power of brutally glorious productivity gains.

    Growth comes from productivity gains alone. If in any sector of the economy, you do not chase these gains with vigilance, you lose growth.

  88. Gravatar of Jim Glass Jim Glass
    20. August 2010 at 13:56

    Is overpaying public employees bad? Yes, surely. But is there some heretofore unknown cash pool for which public employees and private-sector employees compete? (!)

    Well, yeah. Say: “deadweight cost of taxes“.

  89. Gravatar of david david
    21. August 2010 at 05:56

    Which is not the same as speaking of having “cash left over” or whatever nonsense, and you know that. The deadweight cost of taxes is tiny; the cost of government is primarily in the inefficient use of resources taken, not in the work now undone.

    It gets even worse when you think about how the federal budget is actually structured; the vast majority of it is military and welfare transfers, so as far as public-sector compensation goes, we’re talking fractions of a fraction here.

    (And then there’s the point that public-sector employees are typically more educated than private-sector employees, which requires some adjustment… etc.)

  90. Gravatar of Morgan Warstler Morgan Warstler
    21. August 2010 at 07:46

    david, I cover ALL of that.

    You are wrong, Public Employees are $1.6T per year – and thats without a full counting on Pensions.

    You lop off $400B of that – which is EASY, and suddenly Bush never ran a deficit, and neither did Clinton. And my greater point is, and my DEEPEST belief (after all I’m not an economist), that the $100B in new annual private sector spending on services and technology – not printed money – not subsidies, actually saving money year over year – replacing outmoded government, and we have a very different history since the Internet crash.

    Again, I’m not saying we need another “boom” – but the privatization and productivity of government, is BIGGER than alternative energy in the near term…. more importantly, it will do wonders on our psychic opinions of government.

    Look the bottom 25% of public employees in each job category are expendable… assume any kind of normal distribution, and they likely carry less than 10% of the work weight.

    Public employees get 10% more time off than we do – just fixing that one thing and suddenly the remaining 75% have more than covered the loss of 25%.

    $400B is EASY. Over ten years we’re talking $4T (plus interest savings on debt) AND the $1T in new private economy, and again that’s without the real technology gains.

  91. Gravatar of Philo Philo
    22. August 2010 at 10:15

    OK, Sumner, it’s been twelve days; that’s your limit. Get back to work!

  92. Gravatar of scott sumner scott sumner
    22. August 2010 at 11:00

    Back from vacation . . .

    Marcus, Depressing from a co-inventor of the natural rate hypothesis. No evidence of insufficient AD? If not deflation, then disinflation perhaps?

    I may do a post on that article.

    JimP, Thanks. It is good to see Barron’s recommending stimulus.

    David Pearson, Those are good points. QE needs to be combined with a commitment to persevere until AD recovers.

    Thanks Benjamin.

    JimP, I have no problem with those who argue that extended benefits may raise unemployment. But I do have a problem with them if they also oppose monetary stimulus. That is like saying no jobs, and no help for those w/o jobs.

    MW, I believe that the markets expect about 1% inflation. But the level vs growth rate distinction is the more important answer. As subsequent commenters pointed out, I favor a predetermined growth trajectory, which means above 5% growth when you have temporarily fallen below trend.

    Morgan, How do tax cuts relate to the Fed?

    Bonnie, Very good point. A few weeks ago I did a post quoting Fed officials in 1937. In the minutes of the November 1937 meeting they all but admitted that they weren’t doing the right thing (easing) because it would have made their previous decision look bad.

    123, Thanks for addressing MW’s question.

    Morgan, I thought rents were a part of the CPI?

    Bill, Yes, I can see how it could have been misinterpreted.

    Philo and Marcus, The outside influence should be Congress, who should instruct the Fed to hit a specific nominal target. Congress doesn’t have to set the target, they could instruct the Fed to set an explicit target.

    Doc Merlin, That is one of the reasons why I am so skeptical of fiscal stimulus.

    MW, You asked:

    “On the subject of “catching up after a shock”, perhaps you could point me to the theory that explains why this should happen, and the empirical evidence that shows that it does in practice.”

    Woodford has a recent paper that makes this point. And someone named Ben Bernanke made the argument in 2003; unfortunately it was for Japan, not the US.

    Here is the intuition. Suppose you have a severe recession like 1982 or 2009. Then w/o a catchup in NGDP, the only way you can get a rapid recovery is through deflation. But with sticky wages that is very unlikely to occur. In addition, level targeting makes NGDP fall by less in the first place, as expectations of a catchup phase boost AD during the recession.

    You asked:

    “What I am looking for is evidence that the level and prior trend growth rate of NGDP are regained after a recession (ideally taking into financial crises and housing busts). The link you provided does not do that — it simply shows that in agggregate, the rate of nominal growth was roughly stable over a period that only encompasses two recessions (early 1990s and early 2000s). That says nothing of levels nor of the results for the individual countries.”

    I can’t provide proof, but in 1983-84 we had an 11% growth rate in NGDP over the first 6 quarters of recovery, and 7.7% real growth. It looks like NGDP will grow by about 4% annual rate in the first 6 quarters of recovery this time. Could this explain why the recovery in real output is so much slower this time? I can’t prove it, but I think it is a factor.

    more to come . . .

  93. Gravatar of scott sumner scott sumner
    22. August 2010 at 11:56

    Morgan, I don’t get that Simon Ward argument. Why would velocity be expected to trend higher with rates stuck at 0%.

    JimP, Yes, Evans-Pritchard is generally very good.

    Marcus, Yes, and Krugman is even closer to another post that I did in May.

    Poole’s piece is very depressing.

    Silas, I’d rather let the market allocate expenditures by sector. The Fed’s job is to control aggregates, not micromanage.

    You asked:

    “@marcus_nunes: So if people blow all their savings things they don’t really want to buy, but is the next best thing to saving the money, and the economy is retooled to produce these goods no one really wants … no problem? Since GDP’s back up?”

    No one is forcing consumers to spend on consumer goods. If they save more, then the extra AD would go into the investment sector. The point is to get people and banks to hoard less cash. You are confusing consumption with aggregate expenditure.

    JTapp, Yes, I plan a new post on his new edition, which has a bizarre attempt to reconcile his current views with what he wrote in the 8th edition.

    Marcus. I agree about the “trend attractor” issue.

    Benjamin, Yes, it was very disappointing. I guess the market had already pretty much priced in that result.

    jj, Good example.

    Morgan, The market expects about 1% inflation. I am not opposed to allowing a fall in the relative price of housing. NGDP is a far more reliable indicator than the CPI.

    Marcus, Thanks, good to see Krugman taking over for me. I will comment–there are some very revealing admissions in Krugman’s article.

    more to come . . .

  94. Gravatar of scott sumner scott sumner
    22. August 2010 at 12:52

    Ben Crain, I have no laptop, relying instead on the 15 minute limit on hotel computers. In Yellowstone the hotels have no computers.

    Marcus and JimP, Stop, you are depressing me too much! Seriously, all these links are invaluable.

    JimP, Thanks for the Kotlikoff piece. I wish I could have contributed to that topic.

    Morgan, I agree with StuartH.

    Marcus, What amazes me about the piece is that he basically associates the case for relying totally on monetary stimulus with me. Have we reached to point where an obscure prof at Bentley is now the name to cite when you are referring to claims that monetary policy drives NGDP? Five years ago that was the standard new Keynesian view.

    Jim Glass, I think his numbers are correct, but he confuses cause and effect, and also assumes a highly implausible level of money neutrality.

    Marcus, Yes, and as if F&F don’t have enough problems already. Krugman is really reaching for straws here.

    David, Thanks. I strongly recommend your blog to all readers of my blog.

    JimP, That shows why wage reduction is not the way out of deflation. In theory it would work if everyone agreed to an immediate 10% nominal wage cut, but in practice wages are sticky and deflation just leads to unemployment. Monetary stimulus is the only practical solution.

    Morgan, There are two issues:

    1. Are public employees overpaid in normal times?
    2. Are their wages more sticky?

    I think the answer to the second question is probably yes. This is why we need a higher NGDP, which will restore the normal ratio between public and private wages. Then you can worry about flaws in the public sector, which I agree are very real.

    Philo, I’m back, but with so many comments to reply to, when will I have time to post?

  95. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2010 at 18:49

    “Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near.”

    That’s the NYT coming around finally mentioning my points!

    Scott that’s $350B. man that number comes up a lot these days.

    Overall, you are wrong to care about sticky wages, and sure, they are sticky:

    1. It isn’t a stick wages issue. We’re not talking about 22M+ public employees making 25% less money, we’re talking about FIRING 5.5M public employees. The remaining 65-75% make the same amount – some of them make more.

    2. These things are like a rubber band. It might take a moment to break them (the unions and union wages), but when they do, they will snap all the way down. See past 40 years. Productivity gains are ADDICTIVE. You set the same VC crowd who feasted on the Internet bubble on privatizing and outsourcing government, and the public employees will not stand a chance. Internet guys control the Internet… the dialogs herein, the language of youth, the politics – public employees will lose once the entrepreneurs get a taste of blood. Education too. What we did to music, is gong to happen there.

    3. Finally, NGDP doesn’t guarantee the unions will eat a turd sandwich, in fact, it very much assures they will not – they will live to fight another day – no crisis, no demand for productivity gains. We need the wedge. HAVE FAITH SCOTT. This is our time. Let these dominoes fall. How can you look at the KKK or whole episodes of Mad Men or anything else from the past, and NOT ALSO accept that our societies attitude about lower taxes and smaller government have risen up as truths. We’re better people, and economics is a moral argument.

    FDR today would lose. Hoover was Obama. Let’s really let Mellon have a shot. Don’t we OWE it to ourselves? I mean really, don’t we DESERVE it – we can’t just talk and talk and talk about Austrian theory.

    If we go balls to the wall, and it works – the institutional left is DONE. It’ll be Friedman +2, Hayek +1, and Keynes 0 – and DeKrugman will lose his mind.

    How can we let this moment go?

  96. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2010 at 19:42

    On V: The thing that’s interesting is that it increased. Right?

    That and:

    “The current economic situation looks like the first few years of economic recovery following the 1990-91 U.S. recession, which were also characterized by weak broad-money growth and a contraction in bank lending. The M2 money supply (a measure of broad money) expanded by only 1.4% per annum through 1994 from 1992, but the velocity of money (the frequency with which a unit of money circulates) turned higher, allowing real GDP growth to average 3.7% per year nonetheless.”

    Since we really NEED Velocity…

    I believe, we’d get some strong V from privatizing government, lots of small businesses run thin, virtual services companies have no real inventory, and there’s a lot of small IP services in the chain.

    Just looking at very highest V in 50 years – it was the tech boom.

    Then the next sustained boost of V, was the housing boom – not as fast and furious as tech, but still it sped things up – to that end, my goal of liquidating foreclosed homes could also drive V, because these places are coming into the market at deep discounts – it makes for fast action.

    Lastly maybe it is the apocalypse:

    “The crucial passage comes in Chapter 17 entitled “Velocity”. Each big inflation — whether the early 1920s in Germany, or the Korean and Vietnam wars in the US — starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.”

  97. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2010 at 22:29

    One more data point on wage stickiness:

    “Today, the automotive industry work force is 30 percent smaller than prerecession, as evidenced in the July jobs report.”

    30% cuts in a highly unionized sticky wage environment.

    And people are more romantic about the auto industry. We can do this int he near term. Wholesale reductions in public employee headcount, through outsourcing, privatization, and automation / customer self-service.

  98. Gravatar of scott sumner scott sumner
    23. August 2010 at 16:02

    Morgan, I am all for higher interest rates, if achieved through faster NGDP growth.

    I don’t find anything about V to be interesting–it completely depends on which M you use.

    I have an open mind on the question of whether public employee unions will be weakened or not.

  99. Gravatar of The Fed and the Ratchet Effect The Fed and the Ratchet Effect
    7. September 2010 at 07:45

    [...] policy, without anyone blinking an eye. In fact, the usual suspects — on both the left and the right — are upset at the Fed’s timidity. No Responses to “The Fed and the Ratchet [...]

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