If Bernanke’s wish came true, Fed policy would fail

The Fed has adopted a policy stance expected to produce about 4.5% annual NGDP growth.  The policy might fail.  It might fail by generating 4.0% NGDP growth, or it might fail by generating 5.0% NGDP growth.  I claim that Bernanke would be very disappointed by 4.0% NGDP growth, and pleasantly surprised by 5.0% NGDP growth.  Indeed I think if God came down from heaven and told Bernanke he could have any NGDP growth rate he wanted over the next two years, he’d pick something closer to 6%, well above what the Fed expects.  At least that’s my hunch.

Have you ever requested something of someone, because you felt you had to, secretly hoping they’d say “no?”  Is that where Bernanke is?  Does he feel he must end QE2, but secretly hopes for the NGDP growth path that would result from one more dose of QE?



11 Responses to “If Bernanke’s wish came true, Fed policy would fail”

  1. Gravatar of Gregor Bush Gregor Bush
    13. July 2011 at 13:27

    Is that where Bernanke is? Does he feel he must end QE2, but secretly hopes for the NGDP growth path that would result from one more dose of QE?

    Of course that’s where he is. And the weird part is that most of the Fed hawks would probably prefer 6% NGDP growth as well, provided that 5% of it was RGDP and only 1% was prices. But they don’t think about NGDP

    On a related note, the NY Fed has an interesting short piece on the unusually large decline and non-existent recovery in discretionary service spending. I thought the final paragraph was interesting as it is consistent with the Michigan survey data which show that household expectations of future nominal income growth have remained at a record low (near 0%) for the past 30 months. Here’s the NY Fed:

    “Households may remain wary about their employment and income prospects, suggesting that they may have lowered their future income expectations.”

    If you look at the Michigan chart (I wish I could post charts here) you can see the dramatic difference from prior recessions when nominal income expectations did not decline to the same extent and rebounded very quickly.

  2. Gravatar of Silas Barta Silas Barta
    13. July 2011 at 14:00

    I think I know how you and I can fix this problem and restore NGDP to its desired 4.5% growth. Hear me out:

    How about you and I buy “friendship units” from each other back and forth, for like $100 each? Every purchase counts toward NGDP, so we can keep buying friendship from each other until the aggregate NGDP is at its desired level.

    Seems like it could work. Let’s give it a go. (Since you don’t trust me, I’ll buy friendship first.)

  3. Gravatar of Indy Indy
    13. July 2011 at 14:23

    I still say all this absurdly necessary Kremlinology on Bernanke’s inner motives and the other “Secrets of the Temple” is the best political-philosophy-based rationale for an objective and fixed monetary goal like level-targeting-NGDP-futures.

    My own sense of things is that Bernanke wants to do more proactively, but believes he needs the cover of a pending crisis to justify further exceptional interventions and mitigate the predictable political pressures. I’m convinced we’ll look back on this and conclude that the biggest mistake of QE2 was announcing it’s size and end-date at all. It should have just been “the beatings purchases will continue until morale the NGDP growth rate improves”.

    @Silas: But, you’d have to pay income taxes on the difference between the average costs of producing friendship units and the $100, (and maybe sales taxes on each exchange $100, but we’ll ignore that). If you and I pass the $100 back and forth ten thousand times in each direction then we’ll each have to report $1 Million in income and owe over $300,000 each – but there will be no cash in either of our hands to pay it.

    What we would argue in tax-court wearing our handcuffs is that, since an exchange of a me-to-you friendship unit could never occur before a reciprocal you-to-me friendship unit, that the cost of production was also $100 – and so the total profits for both of us were $0 – yielding a zero increase in GDP.

  4. Gravatar of Scott Sumner Scott Sumner
    13. July 2011 at 14:23

    Gregor, I saw that Michigan chart and may do a post.

    Regarding Bernanke and the hawks, Bernanke would do the deal not knowing the P/Y split, the hawks wouldn’t.

    Silas, I have confidence more NGDP would help because I know that on average it’ll be spent on real stuff, that Americans are too smart to pass friendship papers back and forth.

  5. Gravatar of Scott Sumner Scott Sumner
    13. July 2011 at 14:24

    Indy, I agree.

  6. Gravatar of Indy Indy
    13. July 2011 at 15:06

    Now Fisher, on the other hand

  7. Gravatar of Benjamin Cole Benjamin Cole
    13. July 2011 at 15:28

    Bernanke needs to get tough. Start wearing a fedora, have some straight whiskey, and loosen up–the money supply with it.

    A guy like that should say, “If they boot me out, they do. I can go back to teaching and writing, not so bad. In the meantime, damn the torpedoes, QE straight ahead.”

  8. Gravatar of Gabe Gabe
    13. July 2011 at 18:04

    Even you guys admit it now? The Federal Reserve is not acting in our best interest, they are acting in their own best interest, bringing about a crisis in order to have cover when they experiment on the economy some more.

  9. Gravatar of Morgan Warstler Morgan Warstler
    13. July 2011 at 18:19

    As I said a year ago… since we are all 100% SURE Ben will do QE in the face of deflation, then the VERY BEST strategy is to gut Federal Spending.

    The more we cut Federal Spending, the more productive government becomes and the more QE, Ben delivers.

  10. Gravatar of Silas Barta Silas Barta
    13. July 2011 at 19:42

    @Scott_Sumner/Indy: But is the Fed smart enough not to technically “achieve” its target by buying $100 billion worth of friendship units (aka helicopter drop), which would likewise be a non-value-producing transaction that is nevertheless counted toward NGDP?

  11. Gravatar of Scott Sumner Scott Sumner
    14. July 2011 at 08:01

    Indy, Yes, I saw that too.

    Silas, I have no idea what you are talking about. The Fed doesn’t do helicopter drops. They make large profits.

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