Over the years people on the right (including me) have enjoyed pointing out places where Krugman contradicts himself.  He often responds by noting that people can and should change their minds when the facts change.  Thus the famous Card and Krueger study on the minimum wage revised our view of that policy option.  Or these new facts might be theoretical innovations, such as Krugman’s very own revisionist take on liquidity traps, from 1998.  These are good arguments.

But I don’t think that fully explains the contradictions.  This dismissal of fiscal stimulus was penned a year after the famous 1998 liquidity trap paper:

What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

Krugman’s later conversion to fiscal stimulus seems partly based on the BOJ’s refusal to adopt his “promise to be irresponsible” suggestion.  (Gee, I wonder why the Japanese culture would be averse to a proposal framed in that fashion?) It wasn’t until 2013 that his 1999 ideas were finally adopted in Japan, by which time he had begun assuming they would never be adopted—and hence switched to favoring fiscal stimulus.  In my view the most interesting aspect of the 1999 quote is not its conflict with his current views, but that it exposes the vacuous nature of his personal insults.  When Krugman says his opponents are knaves or fools, he’s often doing nothing more than suggesting that they disagree with his current view on some issue, at that particular moment in time. But perhaps not his view a decade ago, or a decade in the future.  By 2026 he might well be an Austrian free banking type, or an MMTer.  (More likely the latter.)

But even this doesn’t fully account for the Krugman contradictions.  The hardest to explain are those where he begins by suggesting that his opponents are morons, who lack even a rudimentary knowledge of EC101, and later comes to embrace their views.  It’s very difficult, no let’s face it, it’s impossible, for new information about the elasticity of labor demand, or new theoretical approaches to the zero bound, to overturn the conviction that someone doesn’t even understand basic ideas like comparative advantage.  Either they do or they don’t, and it’s pretty obvious to anyone who does.  Full disclosure: when Krugman was calling people ignorant in the 1990s, I generally agreed with him.  If you haven’t seen him at work skewering his opponents from the right, you really ought to read Pop Internationalism.

This is what makes E. Harding’s recent exercise in Krugman contradictions so devastating.  Harding compares then and now:

Now:

“Back in 1991, in what now seems like a far more innocent time, Robert Reich published an influential book titled The Work of Nations, which among other things helped land him a cabinet post in the Clinton administration. It was a good book for its time—but time has moved on. And the gap between that relatively sunny take and Reich’s latest, Saving Capitalism, is itself an indicator of the unpleasant ways America has changed.

The Work of Nations was in some ways a groundbreaking work, because it focused squarely on the issue of rising inequality—an issue some economists, myself included, were already taking seriously, but that was not yet central to political discourse. Reich’s book saw inequality largely as a technical problem, with a technocratic, win-win solution. That was then. These days, Reich offers a much darker vision, and what is in effect a call for class war—or if you like, for an uprising of workers against the quiet class war that America’s oligarchy has been waging for decades.”

Then:

“Intellectual arrogance, you say. Maybe so–but surely my arrogance is a puny thing compared with that of men who believe themselves able to invent a new and improved economics from a standing start, who are prepared to write books with titles like The Way the World Works or The Work of Nations without bothering to read one or two of those undergraduate textbooks first. (And don’t tell me that they do too know what is in the textbooks. The circumstantial evidence that they do not–the simple things misunderstood, the garbled statistics, the statement of both standard concepts and classic fallacies as if they were revolutionary innovations–is overwhelming.)

There’s lot’s more, read the whole thing.

There’s no doubt in my mind that Krugman still thinks that Reich is a mediocrity, lacking even a basic understanding of EC101.  Once you get to be as brilliant as Krugman, there’s no going back.  The fact that Krugman is now willing to praise Reich illustrates that he’s shifted from being an academic to being a partisan in policy street fight.  All that matters now is winning, and to do so he’ll ally himself with anyone on the same side of the policy debate, no matter how uninformed their ideas.

PS.  E. Harding really needs to take down that “Trump, Make America Great Again!” sign.  You don’t want to turn off potential readers, by making them think you are a right-wing nut.  In any case, I’ve never seen any definitive proof that Trump was born in America.  Have you?

HT:  Bob Murphy

God only knows why anyone would be interested in this post, but in an annual tradition I list the films I saw at the theater this year.  As always, don’t see films on my account.  But if you like foreign films, I’d say Winter Sleep (big screen only) and About Elly (TV is ok) are the two recent standouts.

2105 Films

Mulholland Drive (US, 2001) 4.0 Great the first time I saw it; seemed even darker, stranger and richer the second time. (How often does that happen?) Might be my new favorite film. Until the next classic I see.

2001 (US, 1968) 4.0 One of my absolute favorite films. I saw it at age 12, then in my 30s, and then at 59. It holds up very well, but age 12 was best.

Winter Sleep (Turkey) 3.8 Another first rate film by the Turkish director Ceylan. It seemed slightly more conventional than his earlier films, but I still liked it a lot. Four or five outstanding scenes of two people arguing.

Aparajito (India, 1959) 3.8 The middle film in the Apu trilogy, and the only one I had not seen. All three are available in newly restored prints. It would be an understatement to say that they don’t make films like this anymore. The world portrayed no longer exists.

The Quay Brothers in 35 mm. (US, 2015) 3.8 Christopher Nolan put together 3 of the Quay brothers short films, and then a 10 or 15 minute documentary of them working in their studio. Includes The Street of Crocodiles, which might be the greatest work of surrealism in the 20^th century, in any medium. Nolan’s a huge fan, and so am I.

About Elly (Iran, 2009) 3.7 An earlier film by the director of A Separation. Both are excellent films, but this may be even a bit better.

Until the End of the World 3.7 (German, 1991) Captured a brief moment when there was lots of optimism about a coming global village, right after the Berlin Wall fell. The original 2½ hour film didn’t get good reviews, but the restored 5 hour version was lots of fun. Not really a great film in a technical sense, but very enjoyable, and evocative of an era. Good music too.

The Saragossa Manuscript (Polish, 1964) 3.6 A somewhat surreal film by the director Has, which has a sort of 1001 Nights feel to it. Three hours, and the last half is much better, so don’t give up at intermission. Has is another great director I had never heard of—how can I call myself a movie buff? Has Has directed anything else I should see? (Sorry, couldn’t resist)

The Long Voyage Home (US, 1940) 3.6 Really good John Ford film about sailors, with cinematography by Gregg Toland (who did Citizen Kane the following year.)

Rebels of a Neon God (Taiwan, 1992) 3.6 One of the classics of the Asian New Wave, by Tsai Ming-liang.

A Pigeon Sat on a Branch Reflecting on Existence (Swedish) 3.5 As the title suggests, it may not be of interest to those who have seen all 7 Fast and Furious films, twice. Might appeal to Jim Jarmusch fans, but there’s also a bit of David Lynch and even Francis Bacon. Another good director I’d never heard of—Roy Andersson.

Inside Out (US) 3.5 A post-modern deconstruction of the Hollywood dream factory. Both a delightful animated film (from the group that produced Wall-e and Up) and also a sort of documentary on the making of the film. I’ve always kind of wondered if the net utility in life is positive or negative, and the fact that the film had four negative emotions and only one positive emotion tends to reinforce my skeptical view of life. Or (as the film suggests) am I wrong in assuming the “negative” emotions are actually negative?

Coming Home (China) 3.5   Zhang Yimou returns to form (sort of), with another tragedy starring Gong Li. The political implications of this film may have been much more profound that the Chinese censors assumed.

Hearts of Darkness: A Filmmaker’s Apocalypse (US) 3.5 As time goes by my appreciation for Apocalypse Now keeps increasing. The highlights of this documentary (directed by Coppola’s wife) were the clips from the 1979 film. I had forgotten about all the turmoil, such as Martin Sheen having a heart attack. And BTW, Sheen’s performance is superb, and underrated in a film with more famous actors—Coppola has the ability to get the best out of actors.

The Assassin (Taiwan/China) 3.5 Hou Hsiao Hsien directed an “action” film. Naturally there is very little action. But the film is a feast for the eyes.

Hitchcock/Truffaut (US/French) 3.5 The best parts were the in depth coverage of Psycho and Vertigo (my favorite film, forget what I said above). When I haven’t seen a Hitchcock film for a while they begin to seem like light entertainment in my memory. Seeing the clips jolted me into recalling how revolutionary they actually were. Some great clips from the underrated Sabotage, a filmed based on Conrad’s Secret Agent, and one of the few films to do justice to a great work of literature. Even a few good clips from Topaz, a film I hadn’t seen since I was young, and considered a weaker film. It’s ironic that Hitchcock stopped producing great art at almost exactly the moment he became recognized as a great artist. The coverage of his silent work was (unfortunately) rushed.

Kumiko, the Treasure Hunter (Japan/US) 3.4 Directed by a Westerner, and yet the movie has a very Japanese feel. Nothing special, but I enjoyed this film.

The French Connection (US, 1971) 3.4 A bit disappointing the second time around. Was there ever a bigger screw-up by film critics in the 1970s than rating The French Connection ahead of Sorcerer, which is a far superior film. But TFC wins the Best Picture Oscar and Sorcerer is forgotten. New York has never looked more run down.

Act of Violence (US, 1948) 3.4 As I get older I am increasing drawn to film noir from the late 1940s and 1950s, perhaps because as each year goes by it seems more and more like another world. One I was born into, but is now long gone.

The State of Things (German, 1982) 3.4 A Wim Wenders film about the making of a film. Or perhaps a nightmare where all attempts to complete the film are futile.

Tokyo-Ga (German, 1984) 3.3 Wenders searches for signs of Ozu in modern Tokyo. The film begins with the voice-over: “If there were still sanctuaries in our century . . . if there was something like a holy treasure of cinema, for me, that would be the work of Japanese director Yasujira Ozu.” Like Hearts of Darkness and Hitchcock/Truffaut, best when showing clips of the original.

Ex Machina (US) 3.3 Better than the average, but not as good as something like “Her.” The basic problem is that the ideas in the film are not as interesting as the director seems to assume. Still, the first 3/4^th of the film held my interest.

Mad Max 4 (Australia) 3.3 I really enjoyed the first two films in this series. I suppose this was just as good, but as I get older I tend to lose interest in non-stop action.

The Tales of Hoffman (British) 3.3   Michael Powell films are always worth seeing, although this certainly isn’t my favorite. Very colorful for 1951.

Bridge of Spies (US) 3.3   Spielberg is a very talented filmmaker, but a bit too conservative (aesthetically, not politically) for my taste. It has many of the pluses and minuses that you expect from a Spielberg film. But the performance of the actor playing the Russian spy is outstanding, and almost single-handedly carries the film.

The Goalie’s Anxiety at the Penalty Kick/Alice in the Cities/Kings of the Road (German) 3.3 Three early Wim Wenders films from the 1970s. Each was a little bit better than the one before (say 3.2, 3.3 and 3.4) His next film “The American Friend”, was the breakthrough for Wenders, and is one of my favorite German films.

American Sniper (US) 3.3 The debate over the politics is a big yawn. It’s a movie, and certainly not “pro-war.” Not one of Eastwood’s best, but fairly engrossing.

Mr. Six  (China) 3.2 A film about the generation gap among Beijingers.

Stars Wars (US) 3.2 Forget the rating I assigned, the film is essentially unreviewable. On a technical level everything seems right. Fine acting, good effects, a story very similar to the first couple films. So why does it lack the magic of the first two? I’m not sure:

1. Maybe I’m too old. In that case you’d want to ask younger viewers.
2. Maybe it’s not original enough. In that case you’d want to ask people who didn’t see the first few films.
3. Maybe too much chronological time has gone by, and the special effects no longer seem impressive.
4. Maybe it’s too full of stuff going on, lacking moments where the film would take a breath, create a sense of awe.
5. Maybe the appearance of other planets is too Earth-like, lacking the mystery of visionary sci-fi.

All I know is that the director (JJ Abrams) is no Stanley Kubrick. I was never really immersed in the film, rather I was watching it as an outsider. Don’t get me wrong, I also noticed many of the things the critics were impressed by, but a few days later the film no longer resonated with me. (I should add that I liked the first two films a lot, and the other 4 were a fairly pleasant way to pass the time. But I haven’t seen them for years, and am not a Star Wars junkie, so my opinion is pretty worthless.)

Tigrero: A Film That Was Never Made (Brazilian/Finnish 3.2) A 1994 documentary by Kaurismaki, where Jim Jarmusch interviews Sam Fuller about an unrealized film project that was supposed to be produced in the Amazon rain forest, using native tribes. Forty years later Fuller returns, and the highlight of the film is when he shows some film clips to the same tribe–how they used to live 40 years ago. It’s hard not to be moved.

The Hateful Eight (US) 3.2 The first half was very amusing and enjoyable, but after intermission it became a long slog through multiple bloodbaths. I lost interest.   Tarantino’s weakest film (and I’m a big fan of his films).

Mission Impossible: Rogue Nation. (US) 3.0 The second half of the film was actually pretty decent. Of course it was still an utterly forgettable piece of Hollywood fluff. Tom Cruise may be losing his edge; he no longer seems to have that aura.

Love and Mercy (US) 2.9 As a drama it’s not all that impressive, but if viewed as a documentary it was kind of interesting.

Mockingjay, Part 2. (US) 2.8 I’m too old for this sort of film.

Shanghai (China, 2010) 2.8 Wonderful actors and nice cinematography, but a very lame effort by the director. See it for Gong Li, Chow Yun-fat and Ken Watanabe (Plus John Cusack, the “star”).  Or better yet, don’t bother.

Spectre  (UK) 2.8  Lots of sound and fury, signifying nothing.  Some of the individual scenes were handsomely filmed, but otherwise utterly forgettable.

The New Rijksmuseum (Dutch) 2.8 More pictures! Show more pictures in the film, and also show more in the actual museum, (which somehow shrank after a $500 million renovation.) Depressing.

The Left Ear (China) 2.5 Routine coming-of-age drama. If you want something in that genre, see Summer Palace.

Goodbye to Language (French) 2.0 I never really cared about anything in this Godard film. In 3-D. It probably went over my head.

On TV our whole family watched the entire Twin Peaks on Blue-ray, which was even better than the original. My all-time favorite TV show (especially the parts filmed by Lynch, as you’d expect). Episode 1 is a masterpiece. After Twin Peaks I tried Breaking Bad, but gave up after the first two episodes. I just can’t get interested in TV, except for a few comedies. TV is mostly about people, which tend to bore me. I’m interested in visual images. That’s why I like film better.

I no longer have much time to read books, but did read a few.  In social science I read the Hive Mind, which I liked a lot, and The Moral Foundation of Economic Behavior, which had some very interesting ideas.  For pleasure I read lots of books that were loosely related to Japan, including as Seiobo There Below, Glimpses of Unfamiliar Japan, Kissing the Mask, and Eleven Dark Tales.  Among other books my favorites were Bartleby & Co. by Enrique Vila-Matas, and The Lycian Shore by Freya Stark.  It was my first book by each author, but I’ll certainly read more.  And of course Knausgaard, who I can’t get enough of.  I love travel writing, and Shadows of the Silk Road was another masterpiece by Colin Thubron.  Biggest disappointment was Ghost Train to the Eastern Star.  What once was a lovable curmudgeon has turned into a grouchy bigot.  I also read a few books by R.L. Stevenson that I’d never read before (The Wrecker, The Wrong Box, and the Ebb Tide.)  My vision of retirement has always been to move someplace hot, and sit out on a patio reading (or re-reading) 19th century Anglo-American books (Stevenson, Melville, Conrad, Hawthorne, Kipling, Chesterton, etc.)  That’s all I want to do.

Benn Steil and Emma Smith have a new post on the Big Mac Index:

The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.

But burgers travel badly.  So in 2013 we created our own index—one that better meets the condition that the product can flow quickly and cheaply across borders.

The Geo-Graphics Little Mac Index compares the price of iPad minis across countries. iPad minis are a global product that, unlike Big Macs, do in fact travel the earth with their owners.

.  .  .

Overall, the Little Mac Index suggests that the dollar has become slightly more overvalued (up from 5 percent) since the beginning of 2015.  The euro is undervalued by 11 percent, and the yen by 10 percent.  Having been fairly valued at the beginning of last year, the renminbi – following on the heels of China’s large devaluation in August – is now 5 percent undervalued.  This compares with an implausible 46 percent undervaluation on the Big Mac Index.  Maybe Congress is Lovin’ It, but we think the Economist needs to hold the mustard.

Given recent events, only a complete moron, or Donald Trump, would claim the yuan is undervalued.  So that’s a point in favor of the Little Mac Index.  But let’s step back and think about what terms like ‘overvalued’ and ‘undervalued’ actually mean.  Do they mean the exchange rate is artificially set at a different level from the black market rate?  Perhaps in cases like Venezuela, but in most cases these are actual market exchange rates, where you can freely buy and sell the currency in question.  So clearly that’s not what the creators of the Big Mac and Little Mac indices have in mind.

But then what does it mean to say an asset price is under or overvalued?  Does it mean the market is in some sense wrong, as when there is a bubble?  Perhaps, but then why would you expect these “Mac” excises to find the right exchange rate? Yes, PPP predicts a certain relationship between prices, but we have very good economic theories, such as Balassa/Samuelson theory, which explain why we should not expect PPP to hold for all goods.  So a deviation from the prediction of PPP actually tells us nothing about under and overvaluation.

Nor is it clear why Steil and Smith think it’s better to use a traded good than a non-traded good.  Let’s take that to the logical extreme, and use a good that is so easily traded that the law of one price holds, say gold.  AFAIK, the price of gold in New York, London, Hong Kong, Tokyo, Zurich, etc., is virtually identical, when measured in a common currency.  So Steil and Smith have picked a good that is more easily traded that Big Macs, but less easily traded than gold.  But why is that optimal? Using gold, PPP would always seem to hold true.  Even worse, a sudden adjustment in the exchange rate (such as Switzerland’s 15% appreciation a year ago), would leave the price of gold in Zurich exactly the same as before, when measured in dollar terms.  In other words, if they had chosen a very easily traded good like gold, instead of Little Macs, Steil and Smith would have found the Swiss franc to be correctly valued right before, and right after, a sudden 15% adjustment.  Does that make sense?

It seems to me that if you really want to look for exchange rates that are out of line with PPP, you’d use non-traded goods like Big Macs, not traded goods like gold. Little Macs fall in between, and offer no obvious advantage over either extreme.

In my view all of these exercises miss the point.  Exchange rates should not be set to make PPP come true. Nor should exchange rates be set to generate a current account balance of zero.  Trying to set rates to make these equalities hold would create a macroeconomic disaster.  Exchange rates should be set at a level that provides macroeconomic equilibrium, something like low and steady growth in NGDP.  The only meaningful sense that an exchange rate can be said to be overvalued is if it leads to below target NGDP growth (or inflation, if you prefer.) For instance, despite falling from 80 to the dollar, to 120 to the dollar, the yen is still overvalued, as most experts forecast about 1% inflation going forward, which is below their 2% target.

This sense in which an exchange rate can be overvalued is exactly the same as saying the short term interest rate is too high, or the TIPS spread is too low, or the nominal price of zinc is too low.  A counterfactual monetary policy that produced on target NGDP growth, would (by assumption) lead to a lower short-term nominal interest rate, a higher TIPS spread, and a higher nominal price of zinc.  And a lower domestic currency value in the forex markets.  That doesn’t mean the market is “wrong” in a “violation of the EMH” sense, rather it means monetary policy is too tight to achieve macroeconomic equilibrium.

So far I’ve talked about nominal exchange rates.  But what about real exchange rates, can they also be overvalued or undervalued?  Elsewhere I’ve argued that real and nominal exchange rates are so different that they should not even be discussed in the same course.  And yet many people foolishly talk about them synonymously. What would it mean to say the China’s real exchange rate is undervalued?  In that case you’d be arguing that China’s government policies encourage too much saving, too little investment, or both.  In other words, the policies encourage too big a S-I gap, which of course is the current account surplus.  I’m not saying that’s true (I doubt it) but that would be the argument.  In that case it would be stupid to adjust the exchange rate (doing so would produce a depression) you’d want to change the saving/investment policies.

Off topic, I love the ambition in this post by C. Harwick, where he derives NGDP targeting from first principles.  I don’t know anything about this blogger, but based on this post he seems much younger and much smarter than I am.  However I disagree with the final two bullet points in item #13.

PS.  I have a new post on IS shocks, over at Econlog.

Kevin Dowd, one of the early proponents of using futures markets in monetary policy, has a new paper on the (global) war on cash:

One of the most significant but least noticed developments in recent years has been a gradually escalating government war against cash: in fact, this war has already escalated to the point where the abolition of cash is now a very real possibility. At first sight, one might think that there is nothing too much to worry about: we are merely talking about technocratic issues related to payments technologies and the implementation of monetary policy, and cashless payments systems are already both commonplace and spreading. The reality is rather different: the issues at stake are of the most profound importance. The abolition of cash threatens to destroy what is left of our privacy and our freedom: we wouldn’t be able to buy a stick of gum without the government knowing about it. Besides making us all entirely dependent on the whim of the state, it would also undermine economic prosperity and literally devastate the extreme poor. Quite simply, the government’s war against cash is the state’s war against us.

The proposal to abolish cash has been supported by a number of prominent economists, including Harvard economist Ken Rogoff, Citi chief economist Willem Buiter, Paul Krugman, and Peter Bofinger, a member of the German Council of Economic Experts. Then, on September 18th, in a speech to the Portadown Chamber of Commerce in Northern Ireland, another prominent economist – Andy Haldane, the chief economist of the Bank of England – announced that he too was in favour of abolishing cash.

I don’t agree with all of Kevin’s views on monetary policy, but the second half of the paper (which criticized proposals to abolish cash) is excellent.  Unfortunately, I expect that we will lose this battle.  We are moving toward a “1984” type society, and it’s very clear that the public (on both the left and the right) is willing to trade in our freedom for the illusion of protection against all those scary “terrorists” in our midst.  The good news is that I won’t live long enough to see currency abolished—it’s still several decades away in the US.

On other topics, we saw another strong jobs report today.  I wonder if I am reading the linked document correctly.  It seems to suggest that we saw a huge upsurge in the number of people holding two jobs in 2015.  Is that correct?  With powerful growth in jobs during Q4, and anemic growth in output, expect more horrible productivity numbers ahead.  The Great Stagnation continues, and it’s not a demand-side phenomenon.

Let me also address some comments I have received about China.  I’m certainly no expert on the Chinese economy, but from the outside it seems like they have an excessively tight money policy and an excessively easy credit policy.  And indeed these two failures are related.  To ease monetary policy they’d have to let the yuan depreciate significantly (although not the 30% figure you see tossed around.)  But they are not (yet) willing to do this.  So instead they’ve run an expansionary credit policy, piling up debt.  I think they’d be better off with a tight credit policy and an easier monetary policy–say 7% NGDP growth for 2016.  Under current policy, there may well be a debt crisis at some point during the next decade.

I frequently argue that inflation doesn’t matter, and that NGDP growth is usually a more appropriate variable to use when you need a nominal indicator.  One commenter recently argued that inflation is useful in calculating real interest rates, and that real interest rates determine whether people are motivated to borrow and lend.

I certainly understand that real interest rates are often better indicators of credit market conditions than nominal rates, but is the nominal rate minus inflation necessarily better than the nominal rate minus per capita NGDP growth?  To think about this issue, let’s consider an extreme case, where the rate of inflation is very very different from the rate of NGDP growth.  Then think about which variable seems more meaningful to people making decisions whether to borrow or lend.

In my example, I’ll assume a stable population, no inflation and 18% NGDP growth.  Let’s assume a 7.2% interest rate, although the exact number doesn’t matter.  I want the interest rate to be much higher than inflation and much lower than NGDP growth, to see which one seems to matter more.  Now consider someone who earns $40/hour contemplating the decision to save $40, by lending it to someone for 20 years.  What does this look transaction like in real terms?

Since the real interest rate is 7.2% (due to zero inflation) the money will double every 10 years, or quadruple over 20 years. That means you’ll get back 4 times more goods and services than you lent out.  Seems like a pretty good deal for savers, right?

But let’s think about this in terms of a loan of work effort.  At 18% NGDP growth, and no inflation, real GDP will double every 4 years, and increase 32-fold over 20 years.  In 20 years, you will be able to produce as much in 2 minutes as you now produce in one hour.  So that 4-fold real rate of return is actually just 8 minutes of output in the year 2036.  You are giving up one hour’s worth of output, and getting back 8 minutes of future output.  That doesn’t sound very appealing.  Your rate of return in terms of goods able to be purchased in an hour’s worth of work is negative 10.8%.  Instead of lending the money out, why not just work an hour less today and 8 minutes more in the future?  Or alternatively, work just as much today and don’t worry about 20 years from now, as you’ll be really rich by today’s standards.

What this example tries to illustrate is that the real interest rate that matters to savers is not the nominal rate minus price inflation, it’s the nominal rate minus wage inflation.  Which is roughly the nominal rate minus growth in NGDP per capita.

So once again we find that inflation doesn’t matter.

PS.  In about 30 minutes I’ll have a new post at Econlog, on the recent market gyrations.