At times, our pundits seem like a bunch of 8th graders that over summer vacation forgot what they had learned in the 7th grade. How many times over the past decade have you heard pundits declare that the Fed was pumping up asset prices with expansionary monetary policy?

There are two problems with this view. First, our monetary policy has been slightly contractionary until roughly a year ago, with inflation consistently running below the Fed’s 2% target. Second, when the Fed did finally run a highly expansionary policy in late 2021 and early 2022, asset prices plunged.

To anyone who recalls the Great Inflation of 1966-81, none of this is surprising. The asset markets (both stocks and bonds) performed abysmally during that sustained period of extremely expansionary monetary policy.

Over the next few years, we’ll relearn many other forgotten lessons. Easy money is not a sustainable way of creating jobs. Interest rates don’t measure the stance of monetary policy. Monetary policy determines the path of inflation, not fiscal policy.

Remember this guy?

When ultra conservative Jeff Sessions turned out to be insufficiently loyal to Trump, he was replaced with a true believer—Bill Barr.

Yet according to the National Review, even Bill Barr is now suffering from Trump Derangement Syndrome:

In pre-recorded testimony played during Monday’s hearing, Barr discussed a report touted by Trump in the wake of the election purporting to show problems with voting machines made by Dominion.

“I was somewhat demoralized because I thought, boy, if he really believes this stuff he has, you know, lost contact with—become detached from reality,” Barr told the committee.

Barr said later in his testimony that he would inform Trump of “how crazy some of these allegations were,” that Trump did not appear interested in the facts of the matter.

Lost touch with reality . . .

2025 favorite . . .

finger . . .

nuclear button . . .

My mom lives in an apartment complex that caters to older people. Because many of the residents are frail, the facility provides meals in a dining room. Or at least it used to do so. Now the residents often have to make do with boxes of food delivered to their room, despite still paying a hefty rent for the formerly available restaurant style dinners.

This is just one of the many ways in which labor shortages are reshaping our economy. I see numerous similar examples when I travel and stay in hotels. A few implications:

1. Labor productivity is lower than suggested by official government data. “Output” is being credited that does not exist.

2. Real GDP is lower than the official figures suggest.

3. Inflation is higher than the official figures suggest.

Monetary policy has made this problem worse. The Fed overstimulated the economy when it foolishly abandoned its FAIT approach, and this led to labor shortages that drained workers from senior living apartments. Restaurants can lure these workers away with higher wages, and then raise restaurant prices. In contrast, residents of these senior living facilities have signed long-term contracts and the prices are extremely sticky.

PS. Timothy Taylor has a very good post discussing the current labor market. One of his graphs shows that it has never been tighter. (That’s also my impression when I travel.):

PPS. Have I ever mentioned that really bad things happen when the Fed let’s NGDP fall sharply below trend, or rise sharply above trend? So why do they keep doing it?

Politico has a piece showing how the recent inflationary surge has discredited the run the economy hot approach to monetary policy. Good riddance.

But let’s not throw out the baby with the bathwater. The recent policy errors were not due to FAIT, indeed this never would have happened if we had actually targeted the average inflation rate. So here’s my proposal (which is pretty similar to the way Jim Bullard interpreted FAIT back in 2020):

Each decade have the Fed estimate the trend rate of RGDP growth in the US. Then set an NGDP level target at 2% plus trend RGDP growth for the following 10 years.

Under this regime, the rate of inflation will average about 2% in the long run. But it’s also “flexible”, allowing for some year-to-year fluctuation in inflation due to supply shocks.

Of course I still think simple NGDPLT is better, especially if done on a per capita basis. But this proposal is 98% as effective and would not require a humiliating retreat by the Fed. They could claim they are sticking with their 2% FAIT policy, albeit with a slightly different interpretation.

PS. George Selgin has a good twitter thread on the Politico piece.

PPS. David Beckworth has a nice graph showing how the Covid inflation has gradually morphed from being a supply problem to a demand problem:

Niall Ferguson has an excellent piece in Bloomberg. Here’s an excerpt:

Detente has a lousy reputation, as we have seen. Neoconservatives continue to argue that it was a misconceived strategy that mainly benefited the Soviet Union and that Reagan was right to ditch it in favor of a more confrontational strategy.

But this is misleading. First, Reagan ended up doing his own version of detente with Mikhail Gorbachev — involving more radical disarmament than Kissinger himself thought prudent! Second, detente in the 1970s made a good deal of sense at a time when the US was struggling with inflation, deep domestic division, and a war that grew steadily less popular the longer it lasted.

If that sounds familiar, then consider how detente might be helping Joe Biden today if, instead of talking tough on Taiwan in Tokyo, he had taken a trip to Beijing — fittingly, on the 50th anniversary of Nixon’s trip there in 1972. He could have:

1. Ended the trade war with China.

2. Begun the process of ending the war in Ukraine with a little Chinese pressure on Putin.

3. Applied joint US-China pressure on the Arab oil producers to step up production in a serious way (last week’s announcement was unserious), instead of letting them play Washington and Beijing off against one another.

Would Xi Jinping take detente if Biden offered it? Like Mao in 1972, the Chinese leader is in enough of a mess himself that he might well. Zero Covid has become Xi’s version of the Cultural Revolution, a policy that is ultimately destabilizing China, whatever the original intent was. As for China’s international position, the decision to back Putin has surely weakened it.

Read the whole thing.

PS. This hilarious 15-minute video on how Taiwan sorta claims sovereignty over Mongolia (but not really) is actually pretty educational.