The sad end of monetarism

Two years ago Allan Meltzer warned that the Fed’s policies would lead to high inflation.  Paul Krugman and I told him he was wrong.  In a new article in the WSJ he repeats this warning.  But today I’d like to focus on something more disturbing, the end of monetarism as a powerful intellectual movement that addresses our problems.  Here’s how Allan Meltzer begins:

Day traders and their acolytes tried to pressure the Federal Reserve to open the money spigots wider this week. They called for QE3, a third round of unprecedented quantitative easing. Fortunately, the Fed said no to QE3, at least for now. But it did vote to continue its super-easy, zero-interest-rate policy until mid-2013, well after the next presidential election.

Alarm bells are already ringing.  This isn’t monetarism at all.  Milton Friedman reminded us that ultra-low rates meant money had been tight.  And it wasn’t just Friedman.  In this (undated) paper, Allan Meltzer argued that Japan needed easier money at a time when interest rates were near zero and banks had plenty of reserves.  The argument that money is easy due to low rates is a Keynesian and Austrian argument.  Meltzer continues:

How can the Fed know now that a zero-rate policy will be required two years from now? It can’t. Yes, economic growth has slowed, and forecasts of future growth decline daily. But the United States does not have the kind of problems that printing more money will cure.

So what kind of problem do we have?

Banks currently hold more than $1.6 trillion of idle reserves at the Fed. Banks can use those idle reserves to create enormous amounts of money. Interest rates on federal funds remain near zero. Longer-term interest rates on Treasurys are at record lows. What reason can there be for adding more excess reserves?

This is odd for two reasons.  It doesn’t tell us what sort of problem we have (demand or supply-side.)  Given that NGDP has grown 4% over three years, whereas the trend rate would be about 15%, I would think a monetarist would see the problem as demand side.  Friedman often pointed to the slowdown in NGDP growth in Japan during the 1990s.  I’m also confused by the point of this paragraph.  It seems to imply that the US is in a liquidity trap.  But monetarists like Friedman and Meltzer denied Japan was in a liquidity trap, despite large levels of bank reserves.  This sounds more like Keynesianism.  Meltzer continues:

The main effect would be a further devaluation of the dollar against competing currencies and gold, followed by a rise in the price of oil and other imports. Inflation is now at the edge of the Fed’s comfort range, which is below 2%. Money growth (M2) reached 10% for the past six months, presaging more inflation ahead.

Now I’m totally confused.  If the US were in a liquidity trap, then adding more reserves would not devalue the dollar.  In the monetarist model there is no mechanism where monetary stimulus depreciates the dollar but fails to boost NGDP.  None.  This is the sort of argument made by Joe Stiglitz.  I’m very surprised to see Allan Meltzer make this argument.

I’m even more shocked by the prediction of more inflation ahead.  Oil prices have fallen sharply.  Tips spreads are low.  Stocks are falling.  We have 9.1% unemployment.  Where exactly is this high inflation going to come from?  Gasoline prices?  Rapid growth in wages?  I just don’t see it.  M2 growth was even higher in late 2008, leading to the previous false prediction by Meltzer (of high inflation ahead.)  But at least I can’t deny that using M2 is an application of old-style monetarism.  It’s also why us quasi-monetarists now focus on other indicators.  Skipping ahead a bit:

A large part of our current unemployment problem reflects the unsold stock of housing left from mistaken past housing policies. We cannot quickly convert most carpenters and bricklayers into computer operators. Short-term policy actions will not solve that problem. But population growth, falling housing prices and rising rents will eventually help by stimulating enough new construction to put many in the housing industry back to work.

This is the sort of quasi-Austrian argument that Friedman and Schwartz severely criticized in their Monetary History.  It’s also completely false, for many reasons.  First, the job losses in housing construction were far too small to significantly impact unemployment.  Roughly 70% of the decline occurred between January 2006 and April 2008, and yet unemployment merely edged up from 4.7% to 4.9%.  The big job losses occurred in late 2008 and 2009, as the sharpest fall in NGDP since 1938 (something monetarists should be very worried about) led to a decline in commercial construction, manufacturing and services.  Eventually even state and local government jobs were hit.  Housing construction over the past 10 years is far below previous decades, the empty homes are due to poverty and unemployment caused by falling NGDP, not excess construction.  Many young adults are jobless and still living at home.  Meltzer continues:

The U.S. also has to make a major transition from a consumption economy to one that exports more and grows consumer spending more slowly. That transition has started, but it will not occur quickly. Those who look to consumption spending to recover its old path are hoping for a past that should not return.

That might be true, but wouldn’t monetarists argue that any transitions would be easier if NGDP hadn’t fallen at the sharpest rate since 1938?  Meltzer told us that monetary stimulus would merely depreciate the dollar.  That’s not a monetarist argument, but let’s say it’s true.  Why would that be bad if we need to transition from consumption to exports?  And why did Meltzer argue that Japan should engage in additional monetary stimulus to depreciate its currency at a time when rates were near zero and banks had lots of reserves?  Why was currency depreciation a useful tool for Japan, but not the US?

Meltzer goes on to make lots of sensible arguments for structural reforms to boost productivity growth.  I certainly agree we have structural problems—indeed I’m increasingly sympathetic to Tyler Cowen’s Great Stagnation hypothesis.  But we also have a demand problem, which seems obvious to me when you look at data such as NGDP growth since mid-2008.  In an earlier post Kevin Donoghue made a very astute comment:

You might ask yourself why two people who differ as much in their politics as Krugman and Sumner end up sounding so similar. Could it be that empirical evidence played a part?

I think that’s right.  We both look at lots of empirical data, including forward-looking market forecasts.  These indicators have been consistently warning of too little AD since mid-2008.

It pains me to write this because monetarism has greatly informed my worldview.  Meltzer is probably one of the three most distinguished post-war monetarists (along with Brunner and Friedman.)  But it seems to me that this type of monetarism has reached a dead end.  It needs to be reformulated to incorporate the insights of the rational expectations and EMH revolutions.  It needs to focus on targeting the forecast, using market forecasts, not searching for an aggregate with a stable velocity.  And it must be symmetrical, with just as much concern for excessively low NGDP growth as excessive high NGDP growth.  It needs to offer answers for high unemployment, and advocate them just as passionately as Friedman and Schwartz argued that monetary stimulus could have greatly reduced suffering in the Great Depression.  Just as passionately as Friedman and Meltzer argued for monetary stimulus in Japan once rates hit zero.  Unemployment is the great tragedy of our time.  History will judge the current schools of thought on how seriously they addressed this issue.

HT:  Big thanks to Lars Christensen, who supplied both articles, and some ideas.

Update:  I slightly regret the post title.  Just to be clear, I meant that it’s sad that this once proud school of thought seems to be reaching the end of the road.  Not as a sort of insult to Mr. Meltzer.  I disagree, but there is nothing “sad” about his editorial.  I just think he’s wrong.


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65 Responses to “The sad end of monetarism”

  1. Gravatar of Lars Christensen Lars Christensen
    13. August 2011 at 07:45

    Scott, you are very welcome. It is as painful for me. Allan Meltzer has always been a hero of mine. I think he has done fantastic research on the monetary transmission mechanism with Karl Brunner and on international economics. However, his latest writings is a sort of Austro-Keynesian populism which simply is against everything that is at the core of monetarism. Karl Brunner would clearly not agree with his old friend.

  2. Gravatar of amv amv
    13. August 2011 at 07:51

    Scott,

    this is a great post. I totally agree. But may I ask you a question? Only to get a better understanding of your theory? I don’t want to bring up the debate on this blog that I had with George and Nick. So you may have no reason to ignore me anymore.

    The question: what do you think is the mechanism that drives down nominal yields at the long end of the yield curve, say 10-year yields, in case of markets that forecast tight money?

    I understand and agree with your approach with respect to the short end of the yield curve, say 2-year yields. AD is expected to be low and prices to be sticky. So the natural rate falls. But if the Fed would announce today that money will be ‘tight’ in ten years from now, what brings down yields given that the market has all the time it needs to adjust almost all prices? I still have problems to imagine what could cause the expected natural rate in 10 years to fall.

  3. Gravatar of marcus nunes marcus nunes
    13. August 2011 at 08:08

    Scott
    Meltzer, like Bernanke, argued one thing for Japan and something different for the US!
    I called it “A two Volume History of the Federal Reserve gone to waste”:
    http://thefaintofheart.wordpress.com/2011/08/11/a-two-volume-history-of-the-federal-reserve-%E2%80%9Cgoes-to-waste%E2%80%9D/

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2011 at 08:11

    That’s pretty weird reasoning from Meltzer all right, but to be fair, until someone can come up with a convincing argument for the peaceful co-existence of low interest rates and $1,700 oz gold….

  5. Gravatar of morgan warstler morgan warstler
    13. August 2011 at 08:50

    What is sad is that with all my yammering here about Frieman’s real approah to monetar you do not ATLEAST say wait! this is EXACTLY what Morgan says!

    The progressive gains just won by Obama MUST be given up before the Fed with truly ride to the rescue.

    REAL people who own shit have a veto on Democracy and Monetary.

    Scott you are a tool in the shed useful under only some circumstances… we will only use you when the growth we get is credited to cutting back Obama’s gains.

    This economy functions when the people who matter decide it is fair to them… we have increased gloriously the NUMBER of folks who matter and right now those people have BIGGER goals then you do Scott.

    Economics does not happen in a vacuum if are going to pretend it does yxou should at least have the courage to focus on what the opposition really means.

    It is natural for the right to view money printing right now when it is as obvious as the nose on our face that the wrong people have so tremendously altered the relationship between the private and public sector.

    This will not stand. So you got twos choices…. wait for real Fed magic OR get out there and tear Obama out of the tree. When it is obvvious our side gets the credit you will get. QE so start making it obvious.

  6. Gravatar of Jeff Jeff
    13. August 2011 at 09:26

    amv,

    If money is expected to be tight for many years, expected inflation will fall and that will bring down nominal long-term rates. To also get a fall in real long-term rates you would need the path of expected real output to be lowered by tight money, and that’s harder to figure. But you might expect that tight money will be accompanied by political pressure on the government to “do something”, and that something might be highly wasteful fiscal policy, as in Japan over the last decade. You could think of that as an adverse shift in aggregate supply, and that would lower the real long-term rate.

  7. Gravatar of amv amv
    13. August 2011 at 09:49

    @ Jeff,

    this is what exactly what I have in mind. But I’m not sure if Scott agrees (at least with respect to the natural rate).

    So I have a follow-up question: Can the Fed signal its inflation target in 10 years, if it would communicate the following statement today?:

    “Dear market,

    as all of us believe, the natural rate will be 2% on average over the next 10-15 years. And we all know that the Fed cannot alter it, at least not in the long run which we define to be 7 years and longer. We however promise that in 10 years the nominal 1-year yield will be 4%.”

    Sorry; I couldn’t resist to bring that up again. I do not claim that this is or ought to be the way monetary policy should be done. I’m just curious what you think will happen.

  8. Gravatar of Martin Martin
    13. August 2011 at 09:52

    Scott, Melzer’s article might be sad, but Romer’s article should give you some hope:

    “As I showed in an academic paper years ago, the war first affected the economy through monetary developments. Starting in the mid-1930s, Hitler’s aggression caused capital flight from Europe. People wanted to invest somewhere safer “” particularly in the United States. Under the gold standard of that time, the flight to safety caused large gold flows to America. The Treasury Department under President Franklin D. Roosevelt used that inflow to increase the money supply.

    The result was an aggressive monetary expansion that effectively ended deflation. Real borrowing costs decreased and interest-sensitive spending rose rapidly. The economy responded strongly. From 1933 to 1937, real gross domestic product grew at an annual rate of almost 10 percent, and unemployment fell from 25 percent to 14. To put that in perspective, G.D.P. growth has averaged just 2.5 percent in the current recovery, and unemployment has barely budged.

    There is clearly a lesson for modern policy makers. Monetary expansion was very effective in the mid-1930s, even though nominal interest rates were near zero, as they are today. The Federal Reserve’s policy statement last week provided tantalizing hints that it may be taking this lesson to heart and using its available tools more aggressively in coming months.”

    Via Mark Thoma http://economistsview.typepad.com/economistsview/2011/08/romer-the-hope-that-flows-from-history.html

  9. Gravatar of james in london james in london
    13. August 2011 at 10:27

    Sctt, I don’t understand why you only ever pay lip service to Morgan’s demand, like Meltzer’s, like many, that US politicians have to earn the right for greater monetary easing by demonstrating some serious fiscal prudence? All we hear is pleading frm you, Romer, et al, to give more monetary easing, and a promise to get prudent later.

    Maybe you could be trsed to deliver fiscal prudence, but you aren’t in power.

    How can the Romer, Krugman socialistic types, who are in power, be trusted? They have other agendas that are very clear.

  10. Gravatar of Benjamin Cole Benjamin Cole
    13. August 2011 at 10:55

    Sadly, Meltzer and John Taylor are putting politics ahead of bona fide economic reasoning. These guys want Obama out. I can see no legitimate reason for their gushing about Japan’s QE in 2003-5 and then bashing the Fed’s QE. Meltzer and Taylor are deeply partisan, and that is their right. But readers beware.

    As for structural problems in the US economy, I am sure there are many–but then we would have to take account of various state government impediments too, and are they getting better or worse.

    As Scott Sumner has pointed out, we have nationally deregged transportation, finance and and telephones since the 1970s, and unions now make up 7 percent of the private-sector labor force. Top tax rates have fallen from 90 percent to 34 percent. Really, this is not a bad story.

    I cannot believe that suddenly it is structural problems halting USA growth, but we had great growth in the 1980s and 1990s.

  11. Gravatar of tom s. tom s.
    13. August 2011 at 10:59

    Scott,

    “The argument that money is easy due to low rates is a Keynesian and Austrian argument.”

    Let’s call them Austro-Keynesians.

  12. Gravatar of Scott Sumner Scott Sumner
    13. August 2011 at 11:06

    Thanks Lars,

    AMV, I’m not sure I understand your question. Nominal yields could fall due to lower inflation expectations. I think the bigger mystery is why real yields also fall. I have several posts on how supply and demand shocks become “entangled,” which is the best explanation I can offer. Plus sticky nominal wage rates near zero inflation.

    Marcus, Yes, similar to Bernanke.

    Patrick, Low real rates can lead to high gold prices, as the cost of holding gold (op. cost) is lower.

    Morgan, Yes, you’ve said that before. See my answer to James, below.

    Jeff, We think alike.

    amv, I suppose they could make that promise for 10 years out, but why would they want to? The more you target i-rates, the less control you have over the things you really care about.

    Martin, Just to clarify, the war fears didn’t cause much expansion in the US. It was dollar devaluation. The actual “hot war” began in the spring of 1940, and led to a rapid recovery from the Depression over the next 18 months.

    I certainly agree that monetary stimulus would help right now–I just don’t see any.

    James, I am not calling for monetary policy to bail out the fiscal policymakers. I just want stable money, described as stable NGDP growth, regardless of who’s in power or what’s going on with fiscal policy. It’s not the Fed’s job to punish millions of workers with job losses because it doesn’t like Obama’s fiscal policy.

  13. Gravatar of David Pearson David Pearson
    13. August 2011 at 11:08

    Scott,

    I have accepted your depiction of Friedman’s views in the past without question. Now, after looking at your previous link to his 1998 “Reviving Japan” article, I’m not so sure.

    In the article, Friedman clearly implies that low interest rates are indicative of tight money when coupled with flat or shrinking money growth. He cites the high interest rates of the 70’s, which were accompanied by high money growth, as indicative of excessively easy policy; he says the opposite about the Great Depression.

    Maybe the focus on money growth is just “old monetarist” thinking, and economists now know better. I wonder, though, if Friedman would be happy having half his formulation (low rates=tight money) taken as dogma while the other half (high money growth=easy money) is dismissed.

    I don’t claim to be an expert on Friedman. Reading that brief piece, though, I can’t help but wonder what Friedman would conclude if presented with the following facts about how our economy now differs from Japan’s in 1998:

    -s.t. real interest rates are strongly negative
    -the real yield curve is negative to ten years
    -inflation expectations are at normal levels
    -money growth has been healthy and M2 has recently spiked
    -commodity prices are enjoying a strong multi-year rally

    Would he say, “none of that matters: because rates are low, money is tight?” I can imagine your response, but based on that one article, I don’t think one can be sure. Perhaps there are more definitive Friedman comments on the issue.

  14. Gravatar of Scott Sumner Scott Sumner
    13. August 2011 at 11:10

    Ben, Yes, it can’t just be structural issues, especially with unemployment at 9.1%

    Tom, I don’t think either side wants to be connected. :)

  15. Gravatar of Scott Sumner Scott Sumner
    13. August 2011 at 11:21

    David, A couple points:

    1. In this post I conceded that the 10% M2 growth was a respectable monetarist argument. But it really bothers me when people point to low interest rates as evidence of easy money–it isn’t.

    2. Later in his life Friedman endorsed a policy of increasing or decreasing the money supply to offset shifts in velocity. I think he would still endorse that view if he were alive today. Indeed he made that argument with respect to both the Fed and the BOJ. That view suggests we need easier money. Many others have looked at the evidence and reached the same conclusions. I have lots of posts that make this argument citing numerous statements by Friedman.

    3. I don’t agree about inflation expectations. I’d be slightly happier if Bernanke announce tomorrow “we are going to peg the price of a 2 year forward futures contract for CPI core inflation, at a level 4% above today (i.e. 2% per year.)” That would require much faster NGDP growth to hit, in my view, as core inflation is likely to be below 2% for the next two years. Even more so if he did “level targeting,” making up for the shortfall in core inflation since 2008.

    Then I’d say “AD problem solved, cut payroll taxes on employers and UI and the minimum wage rate.” Then see how much money you need to pump in to hit the core target.

  16. Gravatar of marcus nunes marcus nunes
    13. August 2011 at 11:51

    The topic “Monetary policy in a low inflation environment” has been the subject of many papers and conferences over the last decade (including Bernanke´s famous “A case of self-induced paralysis”). Now Japan is turning into the paradigm for the US!
    It´s the perfect time to throw the IT framework away:
    http://thefaintofheart.wordpress.com/2011/08/13/usjapan/

  17. Gravatar of David Pearson David Pearson
    13. August 2011 at 11:53

    Scott,

    “But it really bothers me when people point to low interest rates as evidence of easy money-it isn’t.”

    I agree with that view.

    Could we also agree on this one?

    “But it really bothers me when people point to low interest rates as evidence of tight money-it isn’t.”

    Sorry to be glib, but from what I’ve seen, Friedman clearly implies low rates don’t equal tight money in the presence of healthy money growth.

  18. Gravatar of David Pearson David Pearson
    13. August 2011 at 11:56

    BTW — I’m not countering your second point above. Friedman might well have argued we need easier money today. Its just that he is not likely to have made that argument based on our level of nominal rates.

  19. Gravatar of amv amv
    13. August 2011 at 12:18

    Scott,

    thanks for your response. I agree with everything you said. But note that my questions were not concerned with real-world policy. I just tricked you to side with me in the debate I had with George and Nick, since you concede that “I suppose they could make that promise for 10 years out”! This is all I wanted to hear. 😉

  20. Gravatar of MTD MTD
    13. August 2011 at 12:27

    Scott – Your view of interest rates reflecting weak future nominal growth expectations in the wake of the Fed announcement is reflected in the term structure of interest rates, which have been collapsing. If the Treasury market expected the Fed’s two year (conditional) commitment to keep short rates at zero profoundly ‘stimulative’, the 10 year note yield should have surged. Instead, the 2s to 10s spread collapsed briefly to 192 bps this week. This looks like Japan right before the recession in the second half of 1997, when the same spread on JGBs collapsed to 175 bps. Then, the BoJ failed to check a collapse in the velocity of money associated with the Asian financial crisis. So, your motto ‘never reason from a price change’ is supported by the contemporaneous action in the US yield curve, which has collapsed 100 bps since February, and high yield debt spreads, which have widened nearly 4x over that time. Low rates aren’t bullish; they’re a reflection of collapsing future NGDP growth expectations, which doesn’t bode well for RGDP in 2H11, either.

  21. Gravatar of David Isaacs David Isaacs
    13. August 2011 at 12:32

    Professor,

    I’m relatively new to the site, but have done my best to read archives, the “About” and “FAQs”. Do you have any old posts that explain exactly why maintaining NGDP growth within a certain range is critical? I thought we should always be more concerned about RGDP.

    Thanks,
    David

  22. Gravatar of TheNumeraire TheNumeraire
    13. August 2011 at 12:40

    “Sadly, Meltzer and John Taylor are putting politics ahead of bona fide economic reasoning. These guys want Obama out. I can see no legitimate reason for their gushing about Japan’s QE in 2003-5 and then bashing the Fed’s QE. Meltzer and Taylor are deeply partisan, and that is their right. But readers beware.”

    There are legitimate, non-political reasons why conservatives oppose another round of QE.

    In Japan, the GDP deflator was negative on a consistent basis, making observation of tight money more obvious and therefore supportive of the need for added yen liquidity.

    During the recent QE2, inflation expectations and headline inflation did indeed rise and RGDP did not. This is the source of much debate between the quasi-monetarists and the “inflationistas”; one side says QE was ineffecive in promoting growth, the other side says that supply-side factors like geopolitical duress and the Japanese earthquake created friction that limited QE2 during the brief period it was implemented.

    Most conservatives (especially supply-siders) also view gold as an important monetary indicator; in fact, up until a half-dozen years or so ago it appeared to be an excellent indicator (gold’s real price appears to have risen some in recent years). Supply-siders like David Malpass, Alan Reynolds and the late Jude Wanniski all supported QE in Japan on the grounds that the yen/gold price had fallen sharply from its late 1980’s level. Wanniski and Reynolds in fact pointed out the yen deflation long before Krugman or Friedman. These same folks also supported aggressive monetary easing in the U.S. ten years ago, when the “strong dollar” appeared to be pushing the U.S. towards deflation (prompting Bernanke’s famous “helicopter” speech). Using the gold signal was more right than wrong looking back ten years and beyond, so it is understandable why some economists might still use it as an anchor.

    “As Scott Sumner has pointed out, we have nationally deregged transportation, finance and and telephones since the 1970s, and unions now make up 7 percent of the private-sector labor force. Top tax rates have fallen from 90 percent to 34 percent. Really, this is not a bad story.”

    The world today is far more globally competitive than it was even 10 years, Benjamin — you can’t just measure U.S. policy today vs. U.S. policy in the good ‘ol days.

    Most regions of the world have been sharply reducing tax rates on capital income and corporate tax — the U.S. still clings to a territorial corporate tax system and a high MTR.

    Everywhere from emerging Asia to old Europe it is common to find capital income taxed at lower rates than labor income — the Obama adminstration sees this as a giveaway to the rich and is eager to end this portion of the Bush tax cuts.

    Regulation and capital controls put it place during the statist era of the closed global economy have been peeled away. Foreign-direct investment is growing exponentially in places where it was once completely prohibited. World GDP just finished its fastest decade of growth on record, although US GDP growth was below average, even during the years prior to 2008.

  23. Gravatar of Benjamin Cole Benjamin Cole
    13. August 2011 at 12:56

    BTW, Scott Sumner was too nice to Meltzer, Here is what Meltzer wrote in the pdf cited. It is almost embarrassing to read Meltzer now. Really, who funds these guys?

    “I believe that Japan’s economic problem requires both: (1) banking reform
    to remove weak and failed banks and (2) monetary expansion and lower sales taxes. Some banks now lend in part to keep lenders from defaulting. Unless recovery starts, these loans must fail as the present value of the borrowing firm approaches zero.
    I am skeptical that banks are as reluctant to lend as is widely believed.
    Given past losses, weak equity positions, and a declining economy, bankers are more concerned about risk and less willing to accept risky loans that they would have taken in the 1980s. The more important change, I believe, is that fewer firms and households want to borrow, given the common anticipation that recession will continue and deepen.
    Monetary expansion would encourage recovery and make more lending
    possible. It would also increase the stock of bank reserves, inducing expansion of money and bank credit. Together, economic expansion and higher growth of bank reserves would increase borrowing and lending.
    Japan has a quasi-fixed exchange rate. Ministry of Finance officials insist
    frequently that they will not permit the yen to devalue. If the yen does not
    devalue Japanese prices must fall to equate the nominal prices of tradable goods in world markets. That is consistent with what has happened in Japan. Producer and consumer prices (net of sales tax) have fallen; nominal wages declined 2.4% in the most recent twelve months.
    Monetary expansion would increase the base and devalue the yen.
    Devaluation and money growth would end deflation. I believe that the proper policy for the Bank of Japan is to continue monetary expansion and yen devaluation until asset prices began a sustained increase and output prices stop falling.”

    Now explain the above writing, and why Meltzer does not want QE or NGDP for the USA.

  24. Gravatar of Martin Martin
    13. August 2011 at 13:14

    Scott:

    “Just to clarify, the war fears didn’t cause much expansion in the US. It was dollar devaluation. The actual “hot war” began in the spring of 1940, and led to a rapid recovery from the Depression over the next 18 months.

    I certainly agree that monetary stimulus would help right now-I just don’t see any.”

    Thanks, the article was more to show that people like Romer were now pushing the Fed, by showing what could be done, even at the zero bound. At least some good news.

    “Later in his life Friedman endorsed a policy of increasing or decreasing the money supply to offset shifts in velocity. I think he would still endorse that view if he were alive today.”

    I actually graphed GDP/M# = V# (% year-to-year) and M# (% year-to-year), having read Nick’s thermostat post I wanted to see how the fed did, and I believe you can actually see the Fed tightening in 2001-2008 already when compared to 1994-2001. I am not too sure however whether this (% year-to-year) is the correct way of going about it, but it makes sense to me.

    If you’re interested I can send it to you.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2011 at 13:51

    ‘Patrick, Low real rates can lead to high gold prices, as the cost of holding gold (op. cost) is lower.’

    That sounds like an inflation argument. Real rates are low (even negative) because inflation reduces real rates (versus nominal). ergo, buy gold.

  26. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2011 at 13:56

    BULLSHIT. And totally illogical. You better dig deeper.

    “It’s not the Fed’s job to punish millions of workers with job losses because it doesn’t like Obama’s fiscal policy.”

    OBAMA’S POLICIES CAUSE JOB LOSSES. Period. The end. YOU have admitted you think so as well.

    So, the correct way to say it is: it is not the Fed’s job to bail out Obama’s policies.

    Scott, you can’t play mealy-mouth passive aggressive with me – I’m relentless and logical as hell. ANSWER MY REAL POINT: until you personally NEVER throw in your lot with DeKrugman, until you routinely do Obama sucks posts, you are just a mile wide and an inch deep.

    We judge passion by what people are wiling to do to get what they want. You have no passion.

    We judge invention, not by when it was thought of, but when it was delivered.

    Note: The events of the day will NEVER get you out from under my point. Every week, every month things are only going to get worse, the Tea Party angrier, the public employees more violent, the Fed more cautious – it is all about getting past November 2012….about seeing who gets their way based on politics.

    Reminder: You still haven’t answered the question.

  27. Gravatar of ezra abrams ezra abrams
    13. August 2011 at 16:45

    i read you, and Bdelong, and krugman and thoma, and a bunch of others, and if economists can’t agree (eg, with lucas) among themselves on basic stuff, what is the average educated reader to think ?
    tell, me how am i to decide which set of nobel prize winning economists is right, or maybe it doesn’t matter (scary thought – economists have nothing useful to contribute

    I gotta say, I would be a lot more impressed if just one economist said, we need jobs, try everything and anything till we find somethign that works.

  28. Gravatar of johnleemk johnleemk
    13. August 2011 at 16:51

    Morgan,

    The Fed’s explicit mandate is to control both inflation and unemployment. From a normative standpoint, I think most people would agree that central banks should aim for these two goals. The Fed is completely failing at controlling unemployment. Yes, Obama is doing a shitty job. That doesn’t excuse the Fed from doing its job either. The Fed is ****ing up, plain and simple.

    Think about it. You’re saying it’s more important to toss a mildly left-leaning president out of office than it is for people to have a decent living. Let people starve, as long as we kick Obama out. We may have to agree to disagree, but I find that a morally repugnant point of view.

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. August 2011 at 16:53

    Scott wrote:
    “This is the sort of quasi-Austrian argument that Friedman and Schwartz severely criticized in their Monetary History.”

    Meltzer has gone totally Austrian on us.

    Monetarism is alive and well. Austrians are absorbing more and more flakes (no matter what their previous competence might have been) in their wake.

    I’m tired of humoring the Austrians. They are the problem. Let’s declare war and our independence.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. August 2011 at 17:08

    johnleemk wrote:
    “You’re saying it’s more important to toss a mildly left-leaning president out of office than it is for people to have a decent living.”

    In order to understand what Morgan writes I normally have to ingest a few grams of hallucinogenic mushrooms.

    But mostly what I think is that Morgan’s Hollywood livelihood depends on certain interests having their correctly labeled @$$wipes in charge. When that occurs he gets a boost in his paycheck. It really doesn’t matter what happens to the country. That’s totally besides the point.

  31. Gravatar of John John
    13. August 2011 at 17:19

    Melzer isn’t making any type of Austrian argument. Austrian Econ makes this issue very simple where the other schools make it very complicated. Prices will rise if the supply of money increases without a corresponding increase in the demand for money or a fall in the demand for money without a corresponding fall in the supply of money. Supply and demand analysis absolutely works for determining the purchasing power of money and inflation is always a monetary phenomenon. If oil supplies are restricted, the price of oil will rise and people will have less to spend on other goods. It really couldn’t be much simpler. Since 2008 we’ve seen huge increases in both supply and demand for money. Huge increases in supply did drive many Austrians to erroneously yell “inflation”! But economics is not a science of predicting the future.

  32. Gravatar of John John
    13. August 2011 at 17:23

    I should add that according to Rothbard’s definition of inflation, an increase in currency not backed by specie, inflation has already happened whether prices rise or not because of the increase in monetary aggregates.

  33. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2011 at 17:27

    “Think about it. You’re saying it’s more important to toss a mildly left-leaning president out of office than it is for people to have a decent living. Let people starve, as long as we kick Obama out. We may have to agree to disagree, but I find that a morally repugnant point of view.”

    johmlemeek, I think you confuse my straightforward brutal step 1, step 2 descriptions with the logic of what I’m saying.

    First, we can agree monetary policy DONE SUMNER’S WAY means the Fed would have only one focus: level NGDP.

    and in REALITY: It is a big ask, a HUGE change, a Sumner can win a fancy award BIG, and to get it done, the left has very little say…

    Let me repeat the word REALITY. The kind of reality where Scott’s not some peanut gallery theorist, and instead the Federal Reserve Bank owned by the biggest banks on the planet is going to change deeply how it runs policy.

    In that REALITY the left has very little to say. DeKrugman could hate it. Stiglitz and Reich and poo-poo it. A bunch of Demnocrat Senators can hold hearings… but IT THIS IS GOING TO HAPPEN…

    THEN the right will be making the decision. IF the GOP wants to see the Fed do this, make no mistake it will happen.

    I hope this makes sense to you now, but if not let me repeat this:

    You people don’t LIKE to grasp that the kind of people who OWN STUFF are the kind of people who inform Fed thinking.

    John, you scream unemployment is 9.2% and Ben will look you right in the face and BELIEVE when he says he’s fulfilling his dual mandate. Is he LYING?

    No he’s not, and right there in “big explanation” of how Ben describes that his policies are legal, and believes he’s totally doing what he’s supposed to do… you HAVE TO ADMIT the natural bias I’m talking about exists.

    And if it exists, you aren’t allowed to wave it a way. Not and call yourself a realist.

    And as such, maybe now you know deep inside, that if the rights BELIEVES it will see the amazing growth Scott’s promising… we are going to make sure everyone know Obama’s stimulus and Obamacare and the newly aggressive EPA, FCC, and everything else FAILED, before we sprinkle magic dust on the economy.

  34. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2011 at 17:43

    Sadowski,

    to understand what I’m saying you just have to close the damn econ text book and LOOK at what actually happens in the real world.

    Whenever I push the resident liberals’ buttons into finally cracking and saying you wonder if the Fed is biased…

    That’s when the good conversation can finally happen. And it doesn’t. By the next post, we’re back to talking about slopes and walrasian auctions and EMH and whatever other egghead thing comes up.

    But the fact is I can’t get ANYBODY to contemplate that we can cut public employee pay 25% (back to 2000 levels at inflation) and pay 16M unemployed $25K a piece a year to give the private sector tax payers:

    1. free massages
    2. free baby sitting
    3. free laundry service.

    AND THAT would be no new AD (in the short term), it would be bigger government, and super popular with the Tea Party.

    And if you need to eat mushrooms to wig out on that simple observation, then dude you need to eat more mushrooms.

    But Mark, the fact is my math is right – and IF I can solve the problem with that napkin math, it means BEFORE we print money, we’re going to kick the shit out of public employees.

  35. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. August 2011 at 17:49

    The keyword is Realism. You want a recovery? Then vote for a BOG that votes for monetary stimulus.

    Did you think that Obama was in favor of monetary stimulus? Then why have so many BOG seats been empty during his term?

    Maybe he didn’t know better. Maybe he did and he chose not to do something. Go figure.

    Maybe there’s another reason. Go figure.

    The keyword is Realism.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. August 2011 at 18:01

    Morgan (or should it be Warstler),

    Your knapkin math is absolutely wrong. And, moreoover, your benefactors are wrong. But mostly I look forward to the day when the whole bunch of you lamebrain Hollywood nitwits are swept under the rug of public policy history. (And, it won’t be long.)

  37. Gravatar of flow5 flow5
    13. August 2011 at 18:45

    Friedman was no monetarist. Almost everything he ever wrote was wrong.

    Allan Meltzer is also wrong.

    Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long and variable”. The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, and for (2) inflation indices, have always been fixed in length

  38. Gravatar of Forty Twice Forty Twice
    13. August 2011 at 20:12

    I am just a Texas Aggie engineer reading this site for the first time at the beginning of my second six pack. Maybe you can think of me as a Joe Six Pack who never intends to pray with Rick Perry. Props to Inca Kola News for pointing me here.
    Anyway, it feels like we have a demand problem. Us Joe Six Packs can’t sell our time on the world market any more. But we still have to pay off mortgages we got at 3% down when our debt to incomes were far too high to allow such a thing.
    I can’t tell what Obama is doing which has some powerful faction upset and withholding QE3. He seems just like George Bush III on the important stuff. Nothing in Washington is happening that makes it easier for us to innovate and create new enterprises. To compete internationally. All changes for the past 10-30 years have increased regulatory burdens and dependence on government. No measures in Washington actually make it easier for a small business to operate. I think we are repeating the Great Depression policies Amity Shlaes talks about in The Forgotten Man. We add regulation just to increase price levels. Nothing lessens the pressure of the boot on our throats.
    I’m just shooting from the hip, but what about easing immigration restrictions for those who can afford to buy our houses? I know we need a bunch of illegal Mexicans to do our dirty work, but there’s lots of credit-worthy folks around the world who would love to buy a house in LA in exchange for immigration papers.
    We have more natural gas than we know what to do with thanks to the horizontal drilling/frac technology innovators. And the US does not have a monopoly on recoverable shale plays. There’s a whole lot of energy out there we didn’t know about five years ago. Problem is it costs $10,000 to convert your car to natural gas in a way that pleases the EPA. In S. America, they drive cars converted to natural gas for $700. Compressed natural gas costs about 1/3 of gasoline on a per-mile basis. But with such a burdensome cost to switch to natural gas, nobody will do it. Are their cars that much more dangerous? Or are we protecting oil companies who can pay Senators to prevent free-market competition. Think about filling your SUV for $25 before you discount what I say.
    Down at Joe Six Pack’s level, this is the least free market in the world. I don’t care about these Krugman vs Meltzer debates. I think they are missing the point. Joe Six Pack has been regulated out of the market place. On top of that, I am not better than 10 Indian, Chinese, or Colombian engineers and am damn lucky to still be making money at my profession. Truth be known, we are probably pretty equal to each other. I doubt the US will be a good place for engineering much longer. I see us being to the world as California is to the US. A nice place to live if you can afford it. Is that what we really want? Is that the grand design of Meltzer and Krugman’s puppeteers? If it is, just let me know so I can get the hell out now. I think a lot of you on this board know your puppeteer’s intentions. You corrupt, soul-selling sons of bitches.

  39. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2011 at 20:53

    “Your knapkin math is absolutely wrong.”

    Mark, cite please. I’m dying to hear this.

    BLS data says F, S, & L public employees non-military went from $900B to $1.7T over like the last 11 years. At inflation that should have been a bit over $1.2T.

    That 25% cut didn’t come from my ass, that’s me saying public employees haven’t made any productivity gains since 2000, so there was no reason to bump their pay.

    So that’s not just close to $500B this year, that’s $400B wasted last year, and $350B the year before. Added up PLUS interest I figure $5-6T of our $14T debt is this mistake since the late 1990’s.

    Let’s just say it: you got nuttin. You don’t like thinking in real “what gets paid for what” terms, there’s probably a reason for that.

    Remember, I CAN END UNEMPLOYMENT for 16M people and give the private sector:

    1. free babysitters.
    2. free massages.
    3. free laundry service.

    for the tax dollars they are spending now.

    And you, you twisted greedhead, REFUSE to care whether that $500B a year was a good deal for tax payers.

    This is exactly why I say you and your ilk don’t count. You don’t think the tax payers are going to CHOOSE my analysis over your money printing?

    Gah. Look around.

    Monetary policy is not for public employees, its for the holder of hard assets.

    Now that the reality, if you tacitly accept it, the advantage is you won’t have to give up the whole ball of wax, just set PE back to say their 2005 earning level plus inflation. Cap it and grow it at inflation, and condition raises on productivity gains (headcount reductions).

    You’ll soon be running government like a business, not as a business, but like one – and voters will LIKE gvt. more.

  40. Gravatar of Browsing Catharsis – 08.14.11 « Increasing Marginal Utility Browsing Catharsis – 08.14.11 « Increasing Marginal Utility
    14. August 2011 at 04:04

    […] Sumner on the end of old monetarism in the face of the current crisis. He briefly attacks the empirical relevance of ABCT, which I think is a bit simplistic. […]

  41. Gravatar of Jeff Jeff
    14. August 2011 at 05:02

    Old-line monetarism was predicated on the idea that there was a stable demand for a particular monetary aggregate. For the younger (and middle-aged) Friedman, that aggregate was M2. The 1991 AER “Pstar” paper by Hallman, Porter and Small, was the last hurrah for this notion. That paper demonstrated that log M2 velocity had been stable in a statistical time series sense called stationary, while log nominal M2 and log nominal output were not. This meant that nominal GDP and M2 were cointegrated, and the paper went on to show that this fact could be exploited to give inflation forecasts that were superior to forecasts from other kinds of models and forecasters.

    Unfortunately, in a vivid demonstration of Hallman’s First Law of Econometrics (i.e, The data are out to get you!), the relationship fell apart almost immediately after. M2 velocity trended up in a most nonstationary way until it leveled off in the late 1990’s, then it shifted partway back down in the early 2000’s, and finally fell like a rock with the latest recession. It’s now back about where it was back when we thought it was stationary.

    Since no one anticipated that velocity would take a 20-year hiatus from stationarity, we no longer believe there is a stable and predictable demand for M2. But most of us quasi-monetarists would argue that that does not mean monetary policy cannot work. It only means that M2 is not the great indicator that we thought it was. Friedman lived long enough to see this as well: as noted by Beckworth and Ruger:

    In his 1992 book Money Mischief, Friedman called for legislation requiring the Fed to stabilize the spread between the nominal yield on regular Treasury bonds and the real yield on inflation-protected Treasury bonds (TIPS). This spread is the market’s estimate of future inflation.

    Friedman wanted the Fed to target expected inflation, and to promote price stability. As a forward-looking approach, this would also avoid the “long and varying lag” problems associated with backward-looking monetary policy.

    This is not far off from our host’s advocacy of targeting a market-based measure of nominal GDP.

    Meltzer, on the other hand, thinks the Fed has gone too far already. He believes that once the recovery picks up, the pressure on banks to lend out their excess reserves will be overwhelming, and that the Fed will not drain reserves fast enough nor be willing to raise interest rates high enough to stop a big jump in inflation. He may be right about this. Paul Volcker has said that if the Fed had been using the federal funds rate as it’s policy instrument during 1979-1982 rather than the nonborrowed reserves target, he probably would not have been able to pull it off, as he could not have gotten the votes on the FOMC to raise the funds rate as high as it actually went.

  42. Gravatar of Jeff Jeff
    14. August 2011 at 05:08

    The Pstar link didn’t work.

  43. Gravatar of W. Peden W. Peden
    14. August 2011 at 05:31

    Jeff,

    Interesting link. Presumably, the change in expectations under inflation targeting has an effect on the velocity of money?

  44. Gravatar of Doc Merlin Doc Merlin
    14. August 2011 at 05:35

    Sorry Scott, but politics drives economics and politics says that monetarism is dead.
    The left wants excuses to only use fiscal power, and the right wants excuses to use fiscal power (in different ways).
    The far left wants socialization of the economy and the far right wants to eliminate the central bank.
    The corrupt center wants fed power to remain 100% discretionary.

    The best a monetarist can do now is hope for competitive currency or free banking or something like that, because the fed as an institution won’t give up power in half measures so taking power away from it, as monetarists want to do, will require completely disassembling it.

  45. Gravatar of Doc Merlin Doc Merlin
    14. August 2011 at 05:43

    @Jeff:
    Yah, Goodhart’s law states that when you target an indicator it ceases to be a useful target. Its one of the reasons I am leery of Scott’s NGDP targeting plans, or really centrally planned currency altogether.

  46. Gravatar of Doc Merlin Doc Merlin
    14. August 2011 at 06:21

    @Patrick R. Sullivan

    “That sounds like an inflation argument. Real rates are low (even negative) because inflation reduces real rates (versus nominal). ergo, buy gold.”

    Sigh, macroeconomists.
    NO NO NO! Gold and other currencies have a high substitutability for large financial transactions and for banking purposes (for large financial institutions and central banks gold is like a currency, for us little folks it doesn’t quite work the same way).

    Price inflation has to do with money demand versus money supply in that currency.

    Gold demand, on the other hand, has to do with expansion of money supply in non-gold currencies even if the other currencies relative price to some large basket of goods (like CPI) remains unchanged. This is why you can get massive gold price increases due to the substitution effect without high CPI increases, even when gold supply is also increasing (just at a slower rate). because substitution is making the gold demand increase faster than the gold supply is increasing

    I hope this makes sense, if not I can clarify.

    Note: This is separate from when Scott talks about NGDP. NGDP growth path is what determines overall “aggregate demand” (that word bothers me, but I won’t explain why here) in an economy. So, when he talks about “money tightness” its different from just monetary supply, its changes in the path changes between money supply and money demand in a particular currency.

  47. Gravatar of Morgan Warstler Morgan Warstler
    14. August 2011 at 07:02

    Guy reread Forty Twice. He’s of course right.

    On this: “I can’t tell what Obama is doing which has some powerful faction upset and withholding QE3.”

    The powerful faction are engineers from Texas A&M and every other SMB owner. They are he power brokers here. We call them the Tea Party.

    When the SMB players get this angry, the bankers and the rest of the GOP HAVE TO SIT IN THE PASSENGER SEAT – and they KNOW IT.

    The LA Times says that Obama no longer gets a daily briefing on the economy. The NLRB decision on South Carolina is ALL HE’S GOOD FOR.

    You people are retarded if you think with a huge angry Tea Party on one side and shit like the NLRB on the other, the Fed banksters are going to go big before 2012.

  48. Gravatar of Scott Sumner Scott Sumner
    14. August 2011 at 07:22

    Marcus, Good post. I agree.

    David, A few points:

    1. Friedman’s views differed over time.

    2. The quote I use isn’t taken out of context.

    3. I think Friedman would distinguish between transitory movements in short rates, with persistent movements in short rates (or current levels of long rates.) He was a big believer in the Fisher effect. I’m confident that he would view persistently low rates as evidence that “money has been tight,” albeit not necessarily evidence that money is tight at this moment.

    4. I don’t agree with all of Friedman’s views, especially the focus on the aggregates in the first 3/4 of his career. But I am free to cite quotations from late in his career, when he had begun to advocate things like targeting inflation forecasts, rather than targeting M2.

    amv, I probably would agree with Nick and George, although I haven’t followed the debate closely. I’m not even sure I understood your question. I don’t believe the Fed could target rates over the next 10 years at an arbitrary level, but that’s not what you asked. You asked if they could momentarily set rates at a given level 10 years from today. Yes, they could probably do that for 5 seconds, using OMOs.

    MTD, Good point. I should have clarified that when I seem to reason from a price change I am always looking at more than one variable.

    David, I do, but unfortunately I always forget where those posts are. Maybe someone else can find it. I have nearly 1000 posts.

    The Fed can’t target RGDP, it leaves the price level indeterminate. That’s why NGDP is better. It reduces the business cycle and still allows you to keep inflation fairly low.

    The Numeraire, Excellent point about taxes. Regarding QE2, unfortunately NGDP growth did not pick up, hence we haven’t yet tested the hypothesis that faster NGDP growth will lead to faster RGDP growth.

    Inflation is meaningless.

    Ben, Good point about Metzler and Japan.

    martin, Thanks for clarifying that, and your comment about NGDP growth slowing sounds right.

    Patrick, No, real rates aren’t low because of inflation (which is low) but because of a weak economy, which reduces real demand for credit.

    Morgan, Answer me this, what did the last conservative Texan do for our economy? Didn’t he leave office during a period of economic collapse, after a big growth in the welfare state? You want me to trash the economy so we can try that again? No thanks.

    erza, Economists agree on far more than you’d think, it’s just that the press focuses on the disagreements. Monetary policy is a big issue, but it’s utterly trivial compared to what we all agree on. In any field there will be differences of opinion. In physics there are huge differences of opinion on very fundamental theories (anthropic principle, QT, string theory, inflation, multiple universes, etc.)

    Mark, Yes, it sounds Austrian.

    John, You said;

    “Austrian Econ makes this issue very simple where the other schools make it very complicated. Prices will rise if the supply of money increases without a corresponding increase in the demand for money”

    That’s pretty much a tautology, as money demand is generally defined in real terms.

    You said;

    “But economics is not a science of predicting the future.”

    You got that right, at least if you mean unconditional predictions.

    flow5, You said;

    “Friedman was no monetarist. Almost everything he ever wrote was wrong.”

    Yes, and Mother Theresa was no Catholic, and almost everything she ever did was evil.

    Forty Twice, Yes, I’ve been screaming about our demand problem for three years.

    Jeff, Good analysis. By the way, I had given up on M2 long before 1991. The first paper I ever wrote (in 1986-published in 1989) I advocate targeting NGDP futures prices.

    W. Peden, Probably technology. By the mid-1990s I had no bank account. You don’t need one anymore, as even companies like Fidelity offer checks and ATM cards.

    Doc Merlin, You said,

    “Sorry Scott, but politics drives economics and politics says that monetarism is dead.”

    It’s dead, but not because of politics.

    And once again, Goodhart’s law does NOT apply to NGDP futures, because it’s not an intermediate target, it’s the goal variable.

  49. Gravatar of james in london james in london
    14. August 2011 at 09:11

    Scott, you said: “The Numeraire, Excellent point about taxes. Regarding QE2, unfortunately NGDP growth did not pick up, hence we haven’t yet tested the hypothesis that faster NGDP growth will lead to faster RGDP growth” Maybe the fact that NGDP didn’t pick up showed that QE failed its first test.

  50. Gravatar of james in london james in london
    14. August 2011 at 09:15

    Quasi-monetarism is monetarism without the morality. A sad end indeed. Why can’t you answer Morgan’s question: it may be easier to deal with fiscal imprudence when NGDP growth is roaring but is it right to do it without a guarantee of fiscal prudence, and thus increase the risk/moral hazard of no fiscal prudence?

  51. Gravatar of Jon Jon
    14. August 2011 at 09:24

    Scott, so where do I fit in your classification? I’d see the Fed take measures like level targeting or negative IoER, but I have reservations about it’s balance sheet. The idea that positive IoER will allow the balance sheet to be unwound in the future while sustaining an inflation targeting regime is unprecedented.

    When I hear others lament QE, I tend to assume it’s from that same perspective. QE poses any inflation risk eventually.

    As I’ve said before, I would have preferred the fed had dropped IOR before strting QE, QE started from a misidentification of the doldrums as stemming from liquidity issues in the banking sector only. If only that had been true.

    Indeed, rather than more QE, I’d rather they just announce that a portion of the balance sheet expansion will be permanent, introduce negative IoER and otherwise undo QE.

  52. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. August 2011 at 10:41

    ‘Patrick, No, real rates aren’t low because of inflation (which is low) but because of a weak economy, which reduces real demand for credit.’

    That wasn’t the point I was making. You were trying to explain high gold prices in conjunction with low interest rates (both nominal and real, the difference between them being the inflation rate, by definition). I still don’t see how your explanation is useful.

  53. Gravatar of flow5 flow5
    14. August 2011 at 11:09

    “Yes, and Mother Theresa was no Catholic, and almost everything she ever did was evil”

    No, Milton Friedman was flat out stupid. Income velocity is a contrived figure. The monetary base is not a base for the expansion of new money & credit. Monetary lags are not long & variable. Friedman didn’t know the difference between money & the supply of loan-funds, between our means-of-payment money & liquid assets, between financial intermediaries and commercial banks, that aggregate monetary demand is measured by money flows not nominal gDp.

    He never represented monetarism.

  54. Gravatar of Morgan Warstler Morgan Warstler
    14. August 2011 at 11:58

    Scott, more and ore folks will ask you why you can’t answer my question…

    You toss out throw away answers and it is obvious to all involved you find it distasteful.

    Your last joke of an answer acted like the Fed and those that inform it should have no opinion on massive increases in government and regulation.

    Which is a joke. You know it. I know it. Everyone else knows it. The DeKrugman liberals here know you are against “big government”in theory, but IF you tied your NGDP to pairing back government – they would leave you in droves.

    That’s neither here nor there, the real issue is that LOGICALLY I am correct that you stand no chance of getting NGDP targeting UNLESS you convince the right to give it to you.

    It is not a non-partisan decision. So it is one thing for you to say the Fed should be non-partisan.

    It is quite another you for let your baby suffer because you refuse to admit the most realistic path to achieving your goal.

    We both know you went away and came back determined to be more confrontational with the left – and there’s a reason why.

    Look, you can ALWAYS go back and make up as friends… you OWE IT TO YOUR BABY, to do whatever it takes to get it the best possible chance of being instituted, and we both know that means appealing strictly to the one group of people who can make what you want happen.

    ——

    On Perry, REALLY?? How many times have I told you:

    1. Bush failed because he GREW the public sector in both # and pay per employee.
    2. No matter what Bush DID have to spend all the money.

    So if you are going ask me a question about Texans, START with what you know about my argument, what you know about my thinking… not some generic MSM talking point.

  55. Gravatar of Jeff Jeff
    14. August 2011 at 12:26

    flow5, do you really expect to persuade anyone here of anything by insulting their intelligence? Do you really think Milton Friedman, one of the greatest economists of all time, was stupid? And you, presumably, are smarter? When you find yourself in violent disagreement with someone universally acknowledged as one of the smartest social scientists of all time, does it not occur to you that maybe, just maybe, you may have missed something? Are you really so certain your understanding of monetarism exceeds that of the man who was almost single-handedly responsible for reviving it in the 1950s and 60s?

    Who do you think you’re impressing?

  56. Gravatar of flow5 flow5
    14. August 2011 at 14:44

    If the hat fits wear it. I can prove everything I said. Milton Friedman is dumber than a rock.

  57. Gravatar of Jim Glass Jim Glass
    14. August 2011 at 15:37

    The price of gold, as has been well noted by others here, is quite interest rate sensitive being that it earns no income.

    I just put the annual numbers for real gold price and real interest rate (one-year T-bill minus one-year CPI change) from 1970 to 2008 in a spreadsheet to see with my own lying eyes.

    In ten years real interest rates were negative, as they are now, and real gold price rose an average of 23% over the prior year. OTOH, in the ten years where real rates were highest, real gold price fell an average of 12%.

    Coincidentally or not, today’s gold price after three years of negative real rates is, inflation adjusted, very close to the average price for 1980, also after three years of negative real rates.

    How much this correlation results from investors using real rates to predict inflation verus the opportunity cost real rates impose on holding gold, others can decide for themselves.

    For the record, the peak price that gold reached in 1980 inflation adjusts to $2,328 today, so we’ve still got a way to go to match it.

  58. Gravatar of Jim Glass Jim Glass
    14. August 2011 at 19:19

    As an afterthought, maybe a naive question about gold as an inflation predictor.

    If the largest market for gold is China and Asia, why assume gold price moves are speaking to our anticipated inflation instead of theirs? Maybe its price is telling us something about what is going on over there?
    ~~~~

    “Milton Friedman was flat out stupid … Milton Friedman is dumber than a rock.”

    I don’t often miss usenet, but the killfile feature was nice.

  59. Gravatar of marcus nunes marcus nunes
    14. August 2011 at 19:21

    And the semi official “birth of QM”. Hot of the FT:
    To make the case for new stimulus, the Fed needs better arguments. The past few weeks have settled, to my satisfaction at least, a long-running debate on this very topic. Rather than targeting inflation, central banks should keep nominal incomes growing on a pre-announced path: say 5 per cent a year. Nominal gross domestic product is the sum of inflation and growth in real output – and is the variable that monetary stimulus directly drives.
    And there´s much, much more:
    http://www.ft.com/intl/cms/s/0/ac5804a6-c413-11e0-b302-00144feabdc0.html#axzz1V3wdI2MD

  60. Gravatar of Doc Merlin Doc Merlin
    15. August 2011 at 07:22

    @Scott:
    RE: Goodhart’s law
    NGDP is only the global variable in the current system, because we don’t target it. Its easy to come up with systems where it isn’t. Just one example: lets say that TIPS became more popular than TBILLS, then NGDP doesn’t matter quite as much as it used to, and inflation rate matters a lot more.

    If we did target NGDP, then other macroeconomic variables would become more important.

  61. Gravatar of Doc Merlin Doc Merlin
    15. August 2011 at 07:22

    In the above statement, that should be “unexpected inflation rate matters a lot more”

  62. Gravatar of Doc Merlin Doc Merlin
    15. August 2011 at 07:24

    @Jim Glass:
    Gold isn’t a predictor of /price inflation/ its a predictor of monetary expansion. While the two are linked, they aren’t exactly the same thing. You are right however that its not local expansion that matters so much as global expansion.

  63. Gravatar of Scott Sumner Scott Sumner
    15. August 2011 at 10:17

    James, Market responses to rumors of QE2 suggest that it increased NGDP growth expectations. That means NGDP would have done even worse without QE2.

    James, You said;

    “Why can’t you answer Morgan’s question: it may be easier to deal with fiscal imprudence when NGDP growth is roaring but is it right to do it without a guarantee of fiscal prudence, and thus increase the risk/moral hazard of no fiscal prudence?”

    I’ve answered his question 100 times, in every way I know how.

    Jon, I agree that lower IOR is better than QE, and NGDP targeting (level targeting) is better than both.

    Patrick, It’s useful because it predicts that if real interest rates fall, gold prices will rise, even if inflation doesn’t rise.

    Jim, I’ve asked the same question about Asia and gold.

    Doc, I have no idea what you are talking about.

  64. Gravatar of James in London James in London
    16. August 2011 at 03:21

    I guess it comes down to whether you trust the current bunch of US politicians to do the right thing. Morgan and I don’t, you do.

  65. Gravatar of Scott Sumner Scott Sumner
    16. August 2011 at 07:19

    James, No I don’t. Nor do I trust the other side.

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