Marcus Nunes has a nice post comparing the views of Janet Yellen and Martin Feldstein.  I noticed that Feldstein is worried that we are going to repeat the mistakes of the 1960s.

Experience shows that inflation can rise very rapidly. The current consumer-price-index inflation rate of 1.1% is similar to the 1.2% average inflation rate in the first half of the 1960s. Inflation then rose quickly to 5.5% at the end of that decade and to 9% five years later.

Before we consider whether we are likely to repeat the mistakes of the 1960s era Fed, let’s review precisely what those mistakes actually were. Here’s the data as of November 1966:

Unemployment rate = 3.6%, and falling.

Inflation = 3.6% over previous 12 months.  That’s a big increase from the 1.7% of the 12 months before that, and the 1.3% inflation rate two years previous.  The “Great Inflation” began here.

The fed funds rate was 5.76%.

Hmm, what should the Fed do in a situation like this?  Inflation is beginning to accelerate.  Unemployment is near all time lows for peacetime.  Decisions, decisions.  You’ve taken EC101, what do we do next?

The answer is easy.  The Fed decided the economy needed a massive emergency jolt of easy money.  By December 1966 the fed funds rate was cut to 5.40%.  By January 1967 the rate was cut to 4.94%.  By April it was cut to 4.05%.  By October 1967 it’s at 3.88%.  Keep in mind NGDP was rising at 6% to 8% throughout the late 1960s.  If you prefer the monetary base as your “concrete steppe”, that indicator started growing much faster as the 1960s progressed.

Now read the minutes of September 2008, when the Fed refused to cut rates in the midst of the mother of all financial panics because of inflation worries, despite TIPS spreads showing 1.23% inflation over the next 5 years, and commodity prices plunging.  Does this seem like a Fed that would slash interest rates much lower when inflation is soaring above target and unemployment is 3.6%?

PS.  Keep this data in mind when some fool tells you that the Great Inflation was caused by oil shocks or the Vietnam War or budget deficits or unions, or some other nonsense.

PPS.  The economics profession (with a few exceptions) was complicit in the crime of 1966.  The Fed generally does what the consensus thinks it should do.  The “best and the brightest,” the VSPs.  Still think it’s impossible that the entire profession could have been as crazy in 2008-09 as I claim they were?  How will the Fed’s behavior in 2008 look 50 years later?  I’d say about like the 1966-67 Fed looks today. Out of their ******* minds.  And then there’s the ECB . . .

PPPS.  One economist that did understand what was going on was Friedman.  I find this (from an Edward Nelson paper) to be amusing:

From April 1966 to the end of the year, the evidence of monetary policy tightening started appearing uniformly across monetary aggregates; the “credit crunch” of 1966 is also evident in other financial indicators and is widely recognized as a period of monetary tightness (Romer and Romer, 1993, pp. 76−78). The Federal Reserve would shift to ease in 1967, and that easing marked a dividing point for Friedman. He would classify 1967 as the beginning of an extended departure from price stability, one in which monetary policy fitted the pattern he had laid out in 1954: an inflation roller-coaster around a rising trend, with the occasional deviations below that trend reflecting shifts to monetary restraint that were abandoned once recessions developed (M. Friedman, 1980, p. 82; Friedman, 1984, p. 26).

The FOMC did not, however, appreciate the scale of its easing during 1967. By explicitly associating high nominal interest rates with tight policy, Committee members and other Federal Reserve officials neglected the distinction between real and nominal interest rates. Friedman, in contrast, was pressing this distinction on policymakers. Chairman Martin could not ignore the criticism, not least because Friedman had attracted the interest of Martin’s Congressional interlocutors. Friedman’s revival of the Fisher effect was referred to when Martin appeared at a February 14, 1968, hearing of the Joint Economic Committee (1968, p. 1980):

Senator SYMINGTON. A famous economist has developed the theory that easy money creates higher interest rates. If you have not examined that concept, would you have someone on your staff do so? It is an interesting theory. I discussed it with the economist in question only last week. Would you have somebody look into it?

Mr. MARTIN. I will be very glad to. 

The “famous economist” was, of course, Friedman.

In 2008 no senator asked Bernanke to look into the theory of an obscure Bentley economist that low interest rates are often a sign that money has been tight.

Unfortunately I’m not able to keep up with all the new blogs, but I’m told that Atif Mian and Amir Sufi are brilliant new bloggers who have great ideas on debt.   Ryan Avent showed that their expertise on monetary economics is much weaker.  Here he discusses a graph they present that showed PCE core inflation has fallen below a 2% trend line since 1999:

Unfortunately, I think they’ve got this wrong in a few ways. First, the Fed doesn’t target core inflation. It targets headline inflation, but it uses core as an indicator because past core inflation is a better predictor of future headline inflation than past headline inflation. So here’s something interesting: take a look at what happens when you track headline inflation (as measured by the price index for personal consumption expenditures) since 2000.

Finally everything is clear: the Great Recession was a necessity engineered by the Fed in order to disinflate back to the 2% trend. I’m kidding, of course. In fact, this is the wrong period to consider entirely, because the Fed didn’t adopt an official inflation target until January of 2012.

Why did Mian and Sufi do a study of actual inflation compared to target inflation?  Here’s why:

The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999. The blue line is consistently below the red line, the gap has only diverged further since the Great Recession. The cumulative effect is that today the price level is 4.7% below what it should have been had the Fed achieved its long-run target…

What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent.

So their study was aimed at establishing whether the Fed is able to hit its 2% inflation target.  They found it was not, on the basis that core PCE fell 4.7% below trend over 14 years.  (Put aside the fact that in the 1970s, before they were inflation targeting, inflation often overshot the target by 4.7% in less than one year.)

If you are a sweet, naive, trusting, honest, idealistic soul, you will naturally assume this story has a happy ending.  Ryan corrected the data error.  With the correct data the study shows the Fed in fact hit its target almost perfectly in the long run. Great news!!  So Mian and Sufi will naturally change their conclusion to fit the actual outcome of the study that they themselves thought provided a window into whether the Fed was able to successfully target inflation.  Just as Paul Krugman changed his mind about MM after the results were in from what Paul Krugman himself said would be a 2013 test of MM. They will print a retraction, and change their forthcoming book to show the conclusion that is in fact correct.  The Fed can target inflation at 2%.  Because we are all scientists, aren’t we?  We learn from the results of our tests.  I very much hope you are right, but just in case they do not change their conclusions regarding the ability of the Fed to hit a 2% inflation target, let me explain why.

Most economists are not interested in finding the truth; they are interested in using ideas to advance their career.  Empirical studies become swords in the battle, to be used when effective and thrown away when they are found useless.  I sincerely hope Mian and Sufi are not like most economists.  (And to be fair, there have been times when I slip into bad habits as well, so perhaps I should not be throwing stones here.)

Ryan Avent was actually pretty kind to Mian and Sufi, as he overlooked this:

What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent.

First of all, price level targeting is not at all NGDP targeting.  I apologize if this sounds snarky, but they really need to get up to speed on the 2014 blogosphere debate over monetary policy.  After everything that has happened you simply cannot still be arguing that monetary policy is ineffective at the zero bound, and use as “evidence” the fact that low interest rates have failed to push the rate of inflation higher. That would be like claiming that the fact that; “more police patrol high crime areas proves that police patrols are ineffective.”

Fiat money central banks can debase their currencies if they chose to.  So far as I know none of them really deny this.  You can’t be a serious monetary economist in 2014 and claim that a fiat money central bank can’t debase its currency.  You can claim there are political barriers.  Savers would be upset.  Or foreign countries would complain if you depreciated the yen in the forex markets. Or you’d have to buy so many assets that the central bank would be uncomfortable with the size of its balance sheet.  Don’t get me wrong, I think even those arguments are wrong, but they are defensible.  But in 2014 one simply CANNOT any longer argue that the fact that low rates and QE have been accompanied by low inflation proves central banks are out of ammo.  Too much has happened, the debate has moved on.

If you don’t trust me and the MMs, read Ben Bernanke, Michael Woodford, Christina Romer, Bennett McCallum, Milton Friedman, etc, etc.

PS.  I promised a friend that I would do a April Fools post.  I apologize, but I simply couldn’t think of one that was plausible.  Nobody would believe it if I claimed to have converted to MMT.  And then I tried to come up with whacky news stories, a la The Onion.  Like a story that the IRS ruled that Bitcoins were property, so if you used Bitcoins to buy a Coke from a vending machine, you had to file a tax form for the capital gains on the difference between the 90 cents you paid for the Bitcoin, and the $1.25 is was worth when you bought the Coke. Or that the IRS offered me $10,000 per year to divorce my wife, continue living with her, and continue to tell all our friends that we were married (establishing common law marriage.) But every time I thought up a whacky story like those two, I realized it was true.  I feel I live a sort of Groundhog Day film, where every day is April 1st.  Where very day someone repeats that low interest rates show easy money doesn’t “work.” Where high interest rate show that money was “tight” during the German hyperinflation.  I can’t keep up with reality.

Update:  Marcus Nunes also has a good post on Mian and Sufi.